Scottish Mortgage (LSE: SMT) shares were walloped in trading yesterday (5 August). As a long-time holder, I wasn’t surprised in the slightest. The investment trust has big positions in many tech-related stocks. And these are exactly what traders were dumping en masse.
Sure, this fall made me curse and grumble. It’s the the second biggest holding in my Stocks and Shares ISA, after all.
But I can think of three reasons why now could be a great time to increase my stake.
Reason 1: interest rate cuts ahead
One reason for buying more is that we could see the Federal Reserve opt for an emergency cut to interest rates. Such a decision would likely lead stocks to rally across the board but particularly those that the Baillie Gifford-run fund likes.
Even if the Fed didn’t rush in to reassure the market, recent US jobs data and the possibility of a recession suggests it’s looking increasingly likely that a first cut will finally come in September. Analysts are also optimistic that we’ll see a few more before the end of 2024.
As a rough rule of thumb, companies of the sort Scottish Mortgage holds tend to be in demand when interest rates go down. This is because many rely on debt to bring their growth plans to fruition. When borrowing becomes easier, the outlook for these companies improves and investors become more risk-tolerant.
Reason 2: big discount
A second reason is that Scottish Mortgage shares still trade at a smashing discount to net assets. To me, this is akin to having a ‘bargain sticker’ slapped on an investment trust. It’s certainly in sharp contrast to the premium I was being asked to pay for so many years.
It goes without saying that things can always get worse before they get better. So, that discount could actually increase from here. The stock has already given up all the gains it had made in 2024 so far.
However, I struggle to believe firms like Nvidia, Amazon and Tesla are doomed and I’d much rather raise my stake when it looks like the trust is temporarily hated.
Buying at a discount also feels prudent given that Scottish Mortgage invests a good dollop of my cash in private companies. The fact that they aren’t listed makes them a lot harder to value.
But if just one or two evolve into tomorrow’s stock market titans, I’ll be glad I bought when others were selling.
Reason 3: long-term focus
My third reason is more to do with the philosophy we adopt here at The Motley Fool UK.
When Fools buy, we do so with the intention of staying put for a long time. Jumping in and out just isn’t our bag. At the very least, this incurs transaction costs. But it also implies that we know something those in the City don’t.
Spoiler: no-one knows where markets are heading next. But academic research has consistently shown that shares provide the best return over all other assets if holders are patient. Think years, ideally decades.
Knowing this, I’m asking myself whether I still want exposure to some of the most promising growth stocks around the world.
The answer remains a wholehearted, ‘yes’!
Now I just need to find the cash to buy more in August.
