The Scottish Mortgage Investment Trust (LSE: SMT) has been a favourite of mine for years, but I’ve never bought it. The main reason was that I thought I had missed the boat.
The investment trust has delivered incredible performance. At one point it had generated a total return of almost 500% in five years. I didn’t want to hop on board just as it ran out of steam.
It’s in a very different position today. The Scottish Mortgage share price has now crashed 40% measured over six months. Somebody who bought it five years ago would still be 142% up, so long-term investors have no reason to despair. Yet this big drop could be the opportunity I have been waiting for.
This investment trust’s bubble has burst
I prefer buying stocks after their share price has fallen. Scottish Mortgage is now trading at a 3.5% discount to its net asset value. Buying cheap stocks doesn’t guarantee success, though. Just because this investment trust has fallen 40% doesn’t mean it cannot fall another 40%. Or 80%. Or whatever.
In previous articles about Scottish Mortgage, I repeatedly warned it was heavily exposed to US tech. It delivered its astonishing return by investing in companies such as Tesla, Amazon, and Microsoft. This worked during the stock market bull run, when growth stocks soared on the back of near-zero interest rates and limitless stimulus. Those days are now gone.
When investors buy growth stocks, they are chasing future profits. Inflation upends this strategy. That’s because it erodes the value of those profits in real terms. Another reason for the Scottish Mortgage slump is that investors have been in risk-off mode lately. Supply chain shortages, Russia’s war in Ukraine, and China’s strict Covid lockdowns are spreading angst.
Scottish Mortgage should have seen the tech reversal coming. Tesla, Nvidia, and Amazon still number among its top 10 holdings. As do Chinese tech firms Alibaba and Tencent.
Here’s how I’d buy Scottish Mortgage
So if I bought Scottish Mortgage today, it would be on the assumption that the tech sector sell-off is largely over. That’s a big call to make, with the US Federal Reserve expected to hike interest rates by 0.5% in May. Some analysts reckon it could hike in both June and July, by 0.75% each time, to crack down on inflation that hit 8.5% in March.
A newly hawkish Fed will hit economic growth and further undermine sentiment towards big US tech. So I think Scottish Mortgage could fall further. However, I also know that it is impossible to accurately time share price purchases in this way.
So here’s what I’d do. I would build a position in Scottish Mortgage, by investing a smaller sum, say, £500 right now. Then I’d feed in similar sums over time, taking advantage of any further dips. So yes, I would buy it. But slowly.
