I've Been Panic Buying

Published in Investing on 18 May 2012

There's something of the "kid in the candy shop" feel about UK blue chips today.

For the first time since the depths of despair on the "glorious 12th" last year, I now find myself close to being fully invested again.

Just two days earlier, I asked the question: if you don't buy shares when they're cheap, when do you?

One of the best comments that followed read: "In answer to David's question, - ‘when they are cheaper still'. They are going down again this afternoon."

So it proved to be. Having opened at 5,165, the FTSE 100 closed at 4,991. It had reached its absolute low the previous day at 4,791. Since then, it's flirted tantalisingly with 6,000 peaking on 14 March, before those dastardly Greeks and other eurozone laggards have dragged it all the way back to 5,286 at the time of writing -- easily its lowest point this year. The peak came exactly a week after I explained why I'd been selling after the market rally.

This may look like I'm trying to time the market. I'm not. Instead, I'm doing my best to place my own version of accurate value on companies and acting accordingly -- while apportioning a sensible proportion of my overall capital to stocks. But I still see cheap shares as being essentially good news, if you have any cash left to invest.

Blue-chip bargains abound

Anyway, for better or for worse, I now find myself almost fully invested again. Unfortunately, the Fool's trading rules don't allow me to tell you where I've been putting my cash, but it isn't difficult to guess.

There are a lot of blue-chip bargains around at the moment; FTSE 100 companies supplying essential goods and services with solid balance sheets, a good international mix, paying very health dividends and on forward and back price-to-earnings (P/E) ratios that make you think your calculator is misfiring!

So perhaps "panic buying" is the wrong phrase to use here. But I have been mopping up a few of these bargains, having found myself with a lot of dry powder at what seems an incredibly short two and a bit months ago. In short, equities now seem to be pricing in a lot of woe.

The dilemma will now come, of course, if markets continue to crash. And this is the problem a lot of private investors will also face. But I'll do my best to take advantages of any further falls by gradually introducing more cash as and when possible.

Who knows anything?

It seems to me that the market is a better buy below 5,300 than it was at a shade shy of 6,000. This may seem naïve. There are genuine concerns out there at the moment, but I deliberately don't really "do" macro stuff. Instead, I believe in the idea of buying good value during pessimistic times and letting individual valuations do the talking rather than guesswork commentators.

Of course, I may be wrong this time, but it's important to realise that no-one really knows anything. There are always two sides to a story, and so to the market. But as my favourite investment great Ben Graham said: "…the chief losses to investors come from the purchase of low-quality securities at times of favourable business conditions." So today, again, we may be seeing the opportunity to do exactly the opposite. There is little that is favourable about current business conditions.

But it's hard to take the emotion out of things and work out your own fair valuations. Personally, I find having a watchlist very helpful. When shares fall significantly below my own perception of a reasonable value, I buy. You rarely time it to perfection, and that's not the idea anyway. This is essentially a bottom-up approach.

But if you want to mix in some top-down thinking, and would like to read some really well-informed debate on the macro picture and the eurozone situation, then go to the Fool's "Bert's Investor Sanctuary". You may feel like the class dunce, but it's well worth a read.

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Comments

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AleisterCrowley 18 May 2012 , 11:47am

Whenever I think the market has bottomed and I buy..it goes lower
When I think it's got lower to go and I sit on my cash ..it starts going up rapidly.
I should post all my 'buys' as a community service, so people can short them and make some cash. At least I might get bought a drink occasionally.

apprenticeDRL 18 May 2012 , 12:20pm

There are a lot of opportunities at the moment. Unfortunately I am pretty much fully invested but have a large commission cheque due at the end of the month so have to wait.

Actually this has taught me a valuable lesson as I would under normal circumstances have topped up on BP last week when they dropped to 405. Having had to wait they are now at 395 (as I write) so my wait has taught me a valuable lesson in patience.

Personally I think there will be months of pain to come as the Euro zone unravels so heres to lots of good buying opportunities for blue chips in the comming months.

Rotation96 18 May 2012 , 12:24pm

Hi Aleister

I have had those kinds of thoughts many, many times myself. However, in my case I have found keeping a diary very helpful. If you record your thoughts at the time of a buy or sell decision (or the reasons for putting a company on watchlist, rejecting an investment, or anything else) then you'll be able to refer back to them without the fuzziness of memory. Not only that, but you'll also get reminded of when decisions you've made have gone well. Jason Zweig's 'Your Money and Your Brain' is really helpful and insightful around this kind of thing.

Most value investors (including people here at The Fool) will tell you that it is very rare to hit the exact bottom of the market and an investment will often drop before recovering, so you also have to have a patient mindset and wait for something to 'out' the value of your investment (in this case its the UK market as a whole, I believe that once Greece and anyone else leave the Euro and this settles down, which it eventually will, investors will realise that there is a big market out there without worrying about Southern Europe and that equities are incredibly cheap, re:yesterday's article about bonds being for losers).

For full disclosure, I bought quite a bit in Janurary as the market was improving. This clearly wasn't the best timing but I haven't changed my mind about anything I bought. Do I believe RDSB was worth the £23 I paid for them? Or BHP the £21 I paid? Definitely yes, and more, despite the recent drops (about £20.50 for Shell and £16.50 for BHP). So I won't be panic selling and I can afford to wait, and top up. My only regret is not thinking a bit more about the obvious flaws in the Greek bailout and the inevitable market reaction that's followed and keeping a bit of powder dry as the author did. I have diary entries where I debate it and decide against because I'd found several good value companies. Live and learn.

Rotation96 18 May 2012 , 12:27pm

Appentice, I'm in a very similar position. Will have some money built up just after the Greek election on the 17th of June though. Patience and a bit of spare cash are very useful resources!

AleisterCrowley 18 May 2012 , 1:13pm

@Rotation96
Yes, I find it very difficult to sit on my hands and do nothing. The majority of my shares are in an ISA and I've got about £1.5k left to add this year and additional £1.5k in the ISA in cash. I was *planning* to spread purchases across the year and already I've already used up the majority of the allowance and its only May !! This trigger-happy approach isn't working. I did the sums yesterday after the recent drops and my return (IRR) since 2009 when I moved into indivdual shares is less than 1% with dividends reinvested .... I'm not going after small caps and risky plays, it's all stuff like AV, BP, BA, CHG, AZN etc

dpeddlar 18 May 2012 , 1:37pm

Aleister your trigger happy approach probably is working - it just needs time to play out. You need to be looking at a longer time frame with a 5 year minimum and ideally 10 to 20 years to get the full effect of compounding divi's.

The sooner you buy into a company the sooner you start to collect the dividends, so the time for me to buy is the second I get the money. I'm not so worried about the capital value because in 10 years will it really matter if I brought RDSB at £23 (which I did) or £20, over that time I would have had 50% of my original investment back in dividends (10 x 5%).

I bet the people who missed the December to March rally while waiting for lower prices were feeling very sore as the ftse went from 5000 to 6000 and they are lucky they have another chance now to buy at these lower levels.

For me the time to buy is 'as soon as you have the money' - look at AMEC a FTSE 100 stock trading on the lows but with a very strong order book, buying back shares and even after a big increase in the dividend say's it still has enough for aquisitions, the x-div date is 30th May. I would rather get my money in to that stock and collect the dividend than wait for even lower prices!

AleisterCrowley 18 May 2012 , 1:52pm

My criteria for 'success' are;

(a) Don't lose money
(b) Beat inflation
(c) Beat a passive FTSE tracker

So by my measures that's PASS/FAIL/FAIL
Not good ! I could have put all my subs into an uncompetitive savings account and got a better return.
On the plus side (if there is one) I've got all those subs into an ISA wrapper, there are a few divis due, I have paid all the dealing and stamp, and I'm slightly ahead of cash under the bed in a biscuit tin...

AleisterCrowley 18 May 2012 , 1:53pm

...obviously I'm behind when inflation is taken into account.

Cyfran101 18 May 2012 , 2:11pm

I'm finding that there are too many opportunities now, i'm suffering investment parylsis. Before I was struggling to find any real value gems now there's over 10 that have triggered on my watchlist. I only want to make 3 investments so which ones! Is this the best time with Spain showing signs of severe stress and bank runs speculated about too. I remain poised :)

dpeddlar 18 May 2012 , 2:14pm

If you had made this analysis a month ago with the ftse at 6000 you would have a much better looking set of figure's - who is to say that in 1 month, 1 year or 5 years it will not be higher again or even much higher!

A ftse tracker will always be tricky to beat but it is much more interesting and exciting to select your own stocks, it is not all about financial return.

I would stop measuring yourself against short term criteria and keep selecting big companies that are likely to be around for years to come and relax knowing that stocks outperform in the long term.

AleisterCrowley 18 May 2012 , 2:26pm

it is much more interesting and exciting to select your own stocks, it is not all about financial return
The cynic in me says yes, it IS all about finacial return! : but I guess I can consider mself in the learning phase, and I might settle down to a sucessful style in the long term. It's certainly more 'instructive' to watch real money appearing/disappearing.

jackdaww 18 May 2012 , 6:15pm

aleister

it's all stuff like AV, BP, BA, CHG, AZN etc.

youve got all the wrong shares !

Rotation96 18 May 2012 , 7:49pm

@dpeddler - your advice to just buy something good at a good price when you have the money is what I (and it seems like Aleister) have been doing. I reckon on the whole its the right thing to do, but this year has been quite interesting (I won't say different) and the relapse of the Euro crisis and the subsequent market reaction were fairly easy calls to make, and were therefore a bit of an open goal that I was a bit too impatient to take full advantage of. Your point about divis couldn't be more right in my opinion though, they really have been the cornerstone of my portfolio this year and as its early days I haven't even got any advantages from compounding yet. I also agree that it is far more fun to pick your own stocks and at least try to beat the market (I have exactly the same criteria for success as Aleister, though I know you have to look to the long term).

@Aleister, I reckon not having any disasters early doors (which we have both avoided so far), not panic selling in market conditions like we're seeing now and learning all the time is decent enough for the time being, keeping your cool until the dividend compounds and the market corrects itself for this fear/the companies you pick have their value outed. My picks aren't a million miles from yours either, my favourite big caps would be RDSB, VOD, BLND and BHP, though I only hold 2 of them (plus AZN which I like less and RSL which I regard as kind of a litmus test for value/contrarian investing). I actually like the small caps though and have diversified by market cap as well as industry (1/3 FTSE 100, 1/3 FTSE 250 and 1/3 small caps of £230m right down to £5m). Small caps do outperform the big ones over the very long term (see Dreman Contrarian investment strategies) but I figure the big caps give a bit of protection. Everything has to have a decent dividend though.

DirtyDollie 20 May 2012 , 9:54am

It's a bit worrying that the article contains: "I deliberately don't really "do" macro stuff".

Any investment needs to have all things considered to be a sensible purchase. If you don't understand why the market or an individual share price has dropped then it is impossible to value the shares.

costcutter1 15 Jun 2012 , 9:33pm

I think its always a good idea to keep an eye on the money supply figures. Printing tends to increase prices.

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