According to American writer Mark Twain, the author of Tom Sawyer and Huckleberry Finn, October is one of those peculiarly dangerous months in which to speculate on the stock market. The others, he added, are July, January, September, April, November, May, March, June, December, August and February.
Nearly half a century after I first read those words, they still elicit a wry smile. And certainly, it’s not difficult to see that the New Year hasn’t got off to a particularly reassuring start.
As I write these words, the price of a barrel of oil is below $50, dragging the FTSE 100’s mining and oil stocks down. Down, too, are the share prices of companies that serve those industries, adding gloom to industries as diverse as engineering, support services and consulting.
And despite last week’s bullish news in terms of new car sales, it’s not difficult to spot economic headwinds, too. The eurozone, for instance, is officially in deflation. Worries surround China — and in particular, the Chinese financial system. Greece, too, is back on the agenda, with renewed speculation about a Greek exit from the euro.
Buy when markets are fearful…
All in all, then, much for the inimitable Mr Twain to warn us against. Buy shares now, you might well ask? You’d need to be barking, surely? No wonder the FTSE 100 is 400 points down from its recent 52-week high of 6,878 on 4th September!
Except that those ‘peculiarly dangerous months’ are also the very months when the market can dangle its tastiest bargains in front of your eyes.
For, as Warren Buffett famously observed, the time to be greedy is when others are fearful. And make no mistake: markets are fearful. The FTSE doesn’t drop over 2% in a day, as it did last Monday, for no reason at all.
That said, fearfulness is relative. And with the FTSE at 6,437 as I write, investors are clearly more sanguine than they were in the dark days of early 2009, when the market plunged to an intraday nadir of 3,461 on 9th March 2009 — almost three thousand points lower than it is now.
Cheap or expensive?
On their own, of course, such numbers tell us little. To know if a given market is cheap or not, we need to know something about earnings and company profits.
Because with the global economy going into meltdown, investors five years ago were rightly concerned as to corporate profitability. Indisputably, where we are today is a very different place — economically speaking — from where we were back then.
And in fact, despite trading within 500 points of its all-time high, the FTSE today trades on around 16 times earnings — a figure very close to its long-term average of 14 times earnings.
Put another way, the market as a whole is neither cheap nor expensive: in short, it’s a ‘Goldilocks porridge’ sort of market, as I read somewhere the other day.
Beaten-down bargains
Which isn’t to say that individual shares aren’t cheap or expensive. And while I’ve little interest in expensive shares — except as potential investments to avoid — I’m deeply fascinated by shares that are cheap.
Especially when those shares are in what I consider to be decent, well-managed businesses that just happen to have been laid low by the vicissitudes of the global economy.
Such as? Well, in terms of my own portfolio, I’ve been topping up my stake in AMEC Foster Wheeler, down 24% since this time last year against the FTSE’s more modest decline of 5%. I’ve also last week bought into Fenner, where the decline has been even steeper, at 60%.
Both businesses have been affected by what’s been happening to mining and oil stocks but are, I think, decent businesses. Which isn’t to say, of course, that their shares can’t go lower still.
Mining giant BHP Billiton is another stock temporarily laid low, and where the shares could also yet head lower still. Here, too, I’m mulling topping up my existing stake in the weeks ahead.
Seize the moment
In short, despite the market’s nervousness and undoubted economic headwinds, there are opportunities. Today, it’s the fallout in mining and oil that is creating some of those opportunities. Next month — or next year — it might be Europe, or Asia, or the sort of global economic implosion we saw in 2008-2009. Or something else altogether.
The point is, it’s very difficult to predict these things ahead of time. If I’d told you six months ago that the price of oil was about to collapse by over 50%, you’d have laughed at me.
But it’s happened, and as investors our job is to size up such opportunities and look for bargains. Because when they’re gone, they’re gone.
