It is often better to be lucky than good.
Recently, I warned of a coming market crash. That was just a few weeks ago on 22nd January and since then the FTSE has fallen 5%.
If I were a different type of guy I might claim I was a genius and that I made a great market call.
However, if you read my article then you would know I wrote:
“Now, I’m not a soothsayer and I’m definitely not a doom monger. I’m still investing my money in the market and I personally expect to see another year of positive returns in 2014.”
Who’s the genius now?
I’m the first to admit I had no idea we would see the market drop the way it has during the past two weeks. My timing was purely luck – as evidenced by the fact that I didn’t act on my warning and didn’t save my portfolio from a harrowing fortnight.
However, I’m a long-term investor not a market timer – I don’t bounce in and out of shares based on short-term bearishness or bullishness.
In fact, I’d argue that most people that try to time the market are relying mostly on luck.
While I enjoy being lucky, I don’t like to rely on it when investing because luck is completely out of my control – and eventually luck runs out.
I’d rather invest like Roman philosopher Seneca.
“Luck is what happens when preparation meets opportunity.” – Seneca
It is important to know what to watch for… and be ready to act
While Seneca may have been playing a little fast and loose with synonyms (I can’t think of an opportunity that didn’t involve a bit of luck) I take the man’s point.
As such, I’m constantly cultivating my investment watch list. I look for companies that I think have the characteristics of greatness – those that have strong, durable competitive advantages.
Then when the market offers me an opportunity, I pounce.
And we could be seeing one of those opportunities right now.
He’s just spent $1 million on his company’s shares
Diageo (LSE: DGE) (NYSE: DEO.US) – the proud owner of some of the world’s best spirits brands – has seen its shares slide more than 11% since 22nd January. The fall has been partly due to the general market slide, but also because the group’s interim numbers revealed weaker-than-expected sales growth in China and Nigeria.
Slowing growth may be a concern, but short-term news such as this needs to be considered in the right context.
Diageo is one of the bluest of the blue chips. The company consistently boasts enviable operating margins – averaging nearly 30% during the past ten years.
The company’s global distribution network and marketing prowess allow it to sell what are essentially commodity items – the vodka Jay-Z or P Diddy drinks is distilled from the same grains as every other vodka out there – at premium prices and makes the entry of competitors very difficult.
Those are some very attractive characteristics, which are unlikely to be erased by a few slow months of growth in select markets.
A company with those characteristics is made even more attractive when we see its chief executive – Ivan Menezes in this case – spending $1 million of his own money to buy shares of Diageo following the slide.
It is never too late to start preparing
Now, I must be honest with you – I still think Diageo’s shares look a little expensive. While free cash flow of £1.4 billion last year is an impressive number, the shares are trading at over 30 times that amount.
That’s still a top-shelf valuation for what is admittedly a top-shelf company, but I prefer to do my drinking during happy hour and I prefer to buy my shares at a discount!
So while I think Diageo has a great business, I’m placing the shares on my watch list for now – preparing for the opportunity that a further market slide could provide.
If you haven’t yet built a watch list of your own, I highly recommend you start one today. When we’re in the midst of a turbulent market it just makes sense to have your ideas – and your money – ready so you can act quickly when the bargains arise.
After all, a market slide can turn into a rebound rather quickly!
> Nate does not own shares in Diageo.