The full fallout from Brexit is likely to take a number of years to come to the fore. That’s because the UK leaving the EU is a slow process that hasn’t yet even begun. When the new Prime Minister invokes Article 50 of the Lisbon Treaty, a two-year negotiation process will start that could lead to great uncertainty for UK companies and their share prices. Following that, more uncertainty is almost inevitable because at that point the UK will go it alone for the first time in over 40 years.
Of course, Brexit may present a buying opportunity, just as every period of uncertainty during my investment career has done. Events such as the 1987 crash, Britain leaving the European Exchange Rate Mechanism (ERM) in 1992 and the dot.com bubble of 2000 all caused share prices to come under pressure. As did the tragedy of 9/11, the credit crunch and, more recently, the commodity crisis.
All of these events have a number of things in common. They caused significant falls in the prices of shares, whether this was an entire market or just a specific sector of it. This inevitably provided bold investors with a buying opportunity, but another thing that all of these events had in common was that they took time to fully shakeout.
This means that markets were extremely volatile, often for a sustained period, and the outlook for the stock market changed on a week-to-week and sometimes day-to-day basis. Therefore, investors had time to carefully consider which stocks offered the best long-term opportunities, and where the widest margins of safety were on offer.
Buying opportunity
Of course, by focusing on margins of safety it was possible in all of those difficult periods to buy high quality companies at discounted prices. Clearly, no investor has ever got it right 100% of the time and mistakes are inevitably made, but it really has been the case for me over the last 30 years that the best times to buy have been when the outlook has been highly uncertain.
With that in mind, a strategy that could play out well for long-term investors is to keep a substantial pile of cash at the ready, so as to deploy it as and when challenges such as those highlighted above come into play. This will require a significant amount of patience and the requirement to overcome the fear of missing out on rising share prices (which was very hard during the dot.com era when technology valuations went through the roof).
However, by being patient, it’s possible to lock-in superior buying prices and over a long period, such as 30 years, this can make a huge difference to overall returns. Brexit may not have caused the FTSE 100 to fall, but a number of UK-focused stocks that offer sound long-term outlooks are now trading on low valuations. As I said, the worst may not yet be over as the process of the UK leaving the EU hasn’t started, but through gradually buying stocks with a wide margin of safety, investors can set themselves up for a successful investing career.
