A member of the Champion Shares community asked me this recently on the discussion boards:
"I continue to follow your tips and value your insight - I must admit to being really scared sometimes not enough though to start selling even if I am on a huge paper loss. I comfort myself by refusing to mark to market - I keep saying am in this for the lt - I am adding CLIG and some big caps and dare I say even banks - that is real courage.
It will help though - to shae your your experience in servere bear markets from time - in times of severe volatility this will be a source of some comfort to some."
I thought I'd share my answer of this blog. Here it is:
Thanks for the note. Here are some thoughts:
* These are the worst market conditions I have experienced. For background, I am 37 and started buying individual shares around 1994/95. I have witnessed three downturns first-hand i) 1998, when shares fell 25% in three months caused by the economic collapse of Russian and a spectacular blowout of a US hedge fund; ii) 2000-03, the dotcom bust, when shares fell 50% from top to bottom, and iii) the 2007-? credit crunch.
* The 1998 slump was brutal for me. My portfolio was largely small-cap growth shares (based loosely on Jim Slater's Zulu Principle) and they were absolutely hammered. I had bought JJB Sports in 1995 and watched them five-bag in three years. I lost just about all those gains in the space of six months. I was distraught. But I maintained some composure. I thought the economy was not going downhill and put more money into JJB and other small-caps in early 1999. I think they all doubled in value in less than a year. That taught me three good lessons: markets go down :-), great buying opportunities can occur when markets collapse, and don't be afraid to lock in super profits when times are good.
(Footnote: I don't think JJB ever regained its 1998 high though and I am amazed it appears to be on the brink of going bust judging by the recent share-price action. Ten years ago JJB was a quality growth share rated highly by many commentators -- just goes to show how things can go wrong at individual businesses long term. That's lesson four)
* The 2000-2003 crash was not so bad to me. The carnage here was mostly limited to technology, media and telecom shares. I had been dubious about valuations for 'TMT's for some time before then and had little direct exposure to them. Many shares actually went up during the dotcom slump, notably 'old economy' shares such as tobacco, drinks, etc, as investors did an about turn and sought refuge in reliable dividends. You can see how I fared during this time through my old Qualiport articles. The portfolio performed relatively well in 2001 and 2002, when shares lost 17% and 25% respectively:
http://www.fool.co.uk/qualiport/qualiportintro.aspx?terms=qu... * There were always people ready to argue shares would fall further right at the bottom:
http://boards.fool.co.uk/Message.asp?mid=7702990&sort=wh...http://boards.fool.co.uk/Message.asp?mid=7791946* It is always difficult to spot the bottom of the market (e.g. March 2003), even a month after the event.
http://boards.fool.co.uk/Message.asp?mid=7828826&sort=wh...http://boards.fool.co.uk/Message.asp?mid=7829291* You know how I have performed during the 2007-? credit crunch through the CS scorecard. I have had some disasters, Jarvis, i-mate, Johnston Press etc, but at least I have avoided banks and builders. I am also pleased to have expressed some caution about the market (e.g.
http://www.fool.co.uk/news/investing/investing-strategy/2007... and
http://www.fool.co.uk/champion-shares/watchlist/article.aspx...) and tipped Personal Assets Trust in 2007.
http://www.fool.co.uk/news/investing/investing-strategy/2007... If there is one regret I have, it was to take too much notice of the feedback on this board with the PAT tip. The punters wanted share tips, not stay-in-cash tips, and I obliged. At least now there is an ETF that shorts the market and an ETF that tracks cash. Next time the market looks toppy, I'll tip them.
* I think my 2008 tips have coped relatively well in this market. As at 8th October 2008, the average loss from my 24 tips this year is 13%*. That compares to an average loss from the All-Share of 21%*. Overall since the service started, the average CS tip is showing an 11%* loss versus a 13%* loss from the All-Share at 8th October 2008.
* This is the worst market since 1974, when shares fell 50%. So far we're down about 38% with the FTSE 100 at 4,000. Indeed 98 shares in the FTSE 100 have lost money this year. In short, everyone in shares has lost money this year and everyone in shares is in unchartered territory. I'm having to re-read up about the 70s crash. The best book I've found is mentioned in this article:
http://www.fool.co.uk/news/Comment/2005/c050223c.htm I'd thoroughly recommend a copy if you can get hold of one.
* We're back to where we were in September 1996 -- twelve years of no capital gains! At March 2003 when the FTSE hit 3,287, investors were back to 1993 and suffered 'only' ten years of no capital gains.
* The bank bailouts and partial nationalisation of the clearers in particular are seismic events that I feel will have major repercussions on the banking and financial services sector for the next decade or two. Banking I feel will not be as profitable, dividends will be much lower and, barring HSBC, I doubt we'll ever see UK bank shares regain their highs.
* I'm sticking with cash-rich shares for CS. The portfolio is dominated with such shares for good reason and I am confident they can prove to be winners over time:
http://www.fool.co.uk/news/investing/2008/09/24/cash-rich-ba.... I am sure customers and suppliers of companies now look closely at whose on the other end of the transaction and whether they will be able to provide payment or goods. Companies with proven leadership and cash-rich accounts will be favoured I think.
* Multibaggers: Potential multibaggers are out there right now waiting to be bought:
http://www.fool.co.uk/news/investing/investing-strategy/2008.... After the bottom of the 2003 tech crash, the following shares all ten-bagged or more by the 2007 market peak: Charter, Ashtead, JKX Oil, Tarsus, Axon, Hyder Consulting, Manganese Bronze, WSP, SDL, SCi Entertainment, Xstrata, Hunting. I was buying the London Stock Exchange in the latter stages of 2002 for the Qualiport at about £3. The shares touched £20 last year. It can be done.
* Forced sellers: I think this market collapse has prompted a few forced sellers. Mr Tchenguiz (sp?) has lost £1b apparently by being forced to sell stakes in M&B and J Sainsbury and I am sure he is not alone in having to dump shares as banks call in their loans. In this sort of market, some people have to sell at any price. In addition, insurers must abide by capital ratios and the 2000-2003 downturn saw them as forced sellers as the market headed towards bottom. That could happen again.
* Pension timebomb: Pension deficits could prove a real headache. Equities are down and gilt yields are down, which means pensions assets are down but discounted future liabilities are up. In effect, pensions deficits will have widened and 2008 year-end pension statements will be bleak reading for many trustees I feel. With their new powers, trustees may be pushing for extra contributions to shore up their schemes. That's the last thing a hard-pressed company will want to hear. Should current market levels persist, I expect these pension issues could start to emerge early next year when the year-end accounts are being drawn up. You will note all my CS tips have little or no pension issues. That is not by luck.
* Oils and miners: They have been thumped of late. BHP, Kaz and the rest are on P/Es of 5 or less as the price of gold, copper and oil all go down the toilet. So much for super cycles, peak oil and all the rest of the 'new commodity era' guff. Could be worth a punt, but I am dubious oils and miners will lead the recovery. Techs never really recovered from the dotcom slump and miners have now had their years in the sun. Time now for something new to drive the market higher. I have tipped biotech as the next speculative mania, but it could be anything (bar commodities).
* The economy is in bad shape: House prices will certainly fall further. The 90s collapse saw the average home priced at 3x earnings at the bottom and 3x £30k now would see a £90k average price for a UK home. The current average is about £160k. I reckon the top-to-bottom fall for house prices could be 50%, with the resultant effect on the economy. Next year I think is going to be a disaster for indebted retailers, media and housebuilders and I feel big names will go bust in these areas before the crunch is resolved. In terms of their share prices, sure some may become spectacular recoveries, but most may muddle through and it will take a very long time, if ever, for them to recapture the market's trust (i.e. they will always look cheap).
* I'm still buying the market: I'm still contributing to my index tracker every month:
http://www.fool.co.uk/news/investing/2008/10/08/the-market-s... I'm still contributing to my son's tracker as well. He's just five so I hope when he comes to retirement and looks back at his 2008 statement, he will be amazed at how low the market was now :-)
* Don't forget this bear market will end:
http://www.fool.co.uk/champion-shares/updates/article.aspx?a... I sense capitulation must be near -- the FTSE 100 has lost 1,000 points in a week -- 20%! Hang in there. Good luck... and happy investing!
Foolish Best
Mayn
* Champion Shares returns are based on mid prices taken at the time of publication and include due dividends but exclude costs. FTSE All-Share returns are based on the FTSE All-Share total return index, which includes re-invested dividends and excludes costs, taken at the time of recommendation of the buy/sell advice.
