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Question: “Professor Arnold, with the current market jitters and uncertainty in the markets, I sold some of my shares and was thinking about buying some more Connect as a defensive stock with potential in the longer term. Would be grateful for your view on this course of action, or even suggestions which of the shares you have talked about in your newsletters might be better suited to current times.
N Brown is currently down to less than 120, could this be an opportunity to buy, or is it too risky?
My reply
Holding lots of cash at times like these is good. Any one or a combination of the following might happen in the next few months:
- The Strait of Hormuz is closed, war with Iran and a doubling of oil price, leading to higher inflation and interest rates and tumbling stock markets.
- The Chinese banking/shadow banking system implodes leading to recession there, stock market falls.
- The trade war triggers negative thinking in the business community, reluctance to invest, lower aggregate demand, recession feeding on itself.
- Inflation rises in the USA due to over-stimulus of Trump tax cuts and general exuberance (unemployment now 3.7%), Fed puts up interest rates, junk bonds default, lots of companies default on other loans equity investors realise they have only been looking on the bright side and sell shares into a falling market – algorithmic share trading triggers make things even worse.
- Brexit is chaotic (loss of frictionless trade with EU – 48% of our exports) leading to severe UK recession, house prices fall and shares fall.
- Emerging markets crisis due to over-borrowing in dollars and shift in FX rates …….
Some of these are pretty high probability events. They are certainly high impact events.
If one or more occur then shares will fall a lot. Thus, my UK share portfolio will go down for a while. But I’m not selling because (a) I don’t know any of this will happen (b) my companies are sound and expected to ride things out (subject to Pateserie Valerie risk of course!) (c) I’ve already bought insurance in the form of puts on the Dow Jones, (d) I’m mostly in cash.
If the stock market slumps it is time to celebrate (assuming a Depression is not looming) because we’ll be able to buy portions of good companies at price half of today’s. I’m looking forward to that.
With regards to which of my companies can best ride out short to medium-term downturns I cannot say. Perhaps the way to think of it is to project forward 5 years. Look at each one and see if they are st
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