Quick Note 05-Oct-23

OUCH!

Yeap! That was my reaction after waking up in the morning looking at this chart.

So what is it? What is a market selloff?

A market selloff is a significant and rapid decline in the prices of stocks and other financial assets in a particular market. It is often characterised by increased selling activity, declining investor confidence, and a negative sentiment prevailing in the market.

Selloffs can be triggered by various factors, including economic data releases, geopolitical events, changes in interest rates, or specific company news.

While I don't claim to possess expertise in macro factors influencing stock markets, I believe the recent market selloff can be attributed to several key factors:

1. Economic Concerns - There have been growing concerns about a slowdown in global economic growth, driven in part by inflationary pressures, and the potential for central banks to further tighten monetary policy which could potentially cause recessions.

2. Interest Rates - Rising interest rates, which are expected as central banks respond to inflationary pressures, can lead to higher borrowing costs for companies and higher required rates of returns in riskier assets which reduce the present value of future cash flows, impacting stock valuations.

3. Bubbles? - In the semi-annual letter I wrote a few months ago, I mentioned the following:

“Generally, my view is that the overall market is currently priced above its intrinsic value – or fair value, particularly in relation to blue-chip securities. If my viewpoint is accurate, there is a possibility of a significant decline in stock prices, affecting both undervalued and other stocks.”

My view is that many big tech and AI companies have been trading at insanely high valuation multiples. This exuberance has been driven by strong investor interest in the potential of artificial intelligence to transform industries and create significant value. However, it worries me when I think about the sustainability of these valuation levels, as they often outstrip current revenue and earnings.

In other words, everything has to be inch-perfect for these prices to make sense but sadly, I don't think we live in such a universe.

This phenomenon reminds me of the term “Mr. Market” – coined by the godfather of value investing Benjamin Graham. An ever-helpful fellow, Mr. Market stands ready every business day to buy and sell a vast array of securities in virtually limitless quantities at prices that he sets. He provides this valuable service free of charge.

Sometimes, Mr. Market sets prices that are neither appealing for buying nor selling. However, he tends to behave irrationally quite often. On occasion, he exhibits optimism and is willing to pay significantly more for securities than their actual worth.

Conversely, there are instances when he turns pessimistic, offering to sell securities for much less than their underlying intrinsic value.

WHAT TO DO?

Things will get tough from here (to say the least).

For Oceanside partners, I want to reassure you that regardless of whatever happens, my approach and investing philosophy remain unchanged. While short-term market movements can be unsettling, I will stay focused on our long-term investment goals.

I will keep a close eye on developments of the fundamentals and underlying economics of businesses that we own and consider opportunities that arise during this selloff to potentially allocate more capital to quality businesses at more attractive valuations.

For the general public, I encourage you to stay the course and keep investing anyway. I understand how disheartening it can be to witness your favourite investments plummet and how scary it is to think about the uncertainty that lies ahead.

Revise your investment thesis and make the hard call if it turns out to be wrong; dollar-cost-averaging down on index-tracking ETFs; or whatever it might be. Stay rational! I genuinely believe that when you reflect on this period a decade from now, you'll regret not having invested more. Stay the course and keep your long-term goals in sight.

“Successful investors tend to be unemotional, allowing the greed and fear of others to play into their hands. By having confidence in their own analysis and judgement, they respond to market forces not with blind emotion but with calculated reason. Successful investors, for example, demonstrate caution in frothy markets and steadfast conviction in panicky ones. Indeed, the very way an investor views the market and its price fluctuations is a key factor in his or her ultimate investment success or failure.” – Seth Klarman – Baupost Group’s CEO

Please feel free to reach out to me at admin@oceansidefamilyinvestment.com if you have any questions.

Hobart

October 5th 2023