[B]e aware that the market does not turn when it sees light at the end of the tunnel. It turns when all looks black, but just a subtle shade less black than the day before.
Jeremy Grantham, Reinvesting When Terrified
That quote is branded on my brain. It was March 2009 and, by coincidence, Grantham had picked the absolute bottom of the market to make his point. The world economy at that time was staring down the prospect another great depression.
Just six months later, well before the risk of meltdown had abated (some would say it still hasn’t), the S&P 500 index of US listed stocks was up more than 50%. Australia’s All Ordinaries Index had risen 50% as well.
I write this today because of the stunning rally we have seen in the share prices of mining stocks over the past month or so.
The two companies impacting our portfolios are South32 (ASX:S32) and Whitehaven Coal (ASX:WHC)*. South32 shares hit a low of $0.87 on 13 January this year. Yesterday it closed at $1.65, up 90% in less than two months. Whitehaven’s nadir was $0.355 on 11 February. It’s up 110% from there in little more than a month.
For all I know it could be a false dawn. I attended a breakfast briefing with South32’s CEO Graham Kerr a couple of weeks ago and he said the last thing he needs is prices to rise in the short term. His comments were to the effect that we need another 12-18 months of low prices to permanently remove oversupply from key commodities markets.
And the China resurgence thesis doesn’t give me any confidence either. Giving up on rebalancing their economy and returning to the bad old ways of debt-funded infrastructure spending is hardly a recipe for long-term success.
But that’s the whole point. Whether this is a false dawn or the real one, you don’t get to wait until the sun comes up and still get to buy cheap stocks. It is uncertainty that creates the opportunity and, the second the uncertainty abates, the opportunity disappears with it.
*Whitehaven was a new investment for the Forager Australian Shares Fund. Highly unusually for us, we have bought and sold the stock within the past quarter. We’ll write more in the next quarterly but we made an investment at $0.385, intending to hold for a few years at least. It subsequently doubled to a level at which we weren’t as keen on the risk/reward tradeoff. For the record, we first bought a small holding in South32 north of $2 a share. Timing is not our forte, but sometimes we get lucky.
4 thoughts on “The Dark Art of Buying Bargains”
Fantastic work Steve and exactly why I have a portion of my wealth under your management. Love your work and will take all the luck we can get on timing!
My sentiments too. I don’t have the mental fortitude (was going to say “balls”) to buy the stuff Steve does, so I’m happy to leave him to it. Nice jump in the unit price too.
I find that focusing on demanding a very large margin of safety is often enough. It is impossible to pick the bottom – you are never able to tell if this is the point of maximum pessimism or whether people will get more pessimistic – so you really have to focus on some other measurement standard. For me, that’s very large discounts to IV.
steve, keep looking for those darkest blackest holes in the dog house of tunnels
long term maintenance tunnels with no tolerance/interest for short running culverts
woof woof, you black dog s-j