There’s nothing better than being punched in the face to awaken the senses. And it doesn’t matter how many martial arts books that you read or how many boxing matches that you watch on YouTube, the only way to really know what it feels like to be punched in the face, is, well…to be punched in the face.
The reason I say this is because last Sunday morning whilst the Sun was shining (yes, unbelievably it was) and the birds were singing, I was getting punched in the face. Bizarrely enough it is a monthly ritual that I choose to endure entirely voluntarily, as part of my Krav Maga sparring class. Thankfully I find that you only need to be spiritually awakened for the first few times and then after that you soon learn to move your head out of the way pretty damn quickly.
It’s the same with the stock market. It doesn’t matter how many reports one reads about the impending market crash, about a weakening economy, about falling corporate earnings or about record levels of cash being stock piled by hedge funds as they de-risk their portfolios and prepare for the worst – none of that matters. The only thing that an investor pays attention to is when they get punched straight in the nose. In other words, an investor only feels the pain if they don’t move their head out of the way; it’s the equivalent of not moving their portfolio out of the way of a stock market crash where they end up losing 20%, 30% or more. It happened in 2008 and it’s going to happen again.
I don’t know exactly when but we all know that the market will at some point crash. It’s a case of when, not if.
That said and for the time-being at least, I am glad to say that there appears to be a temporary respite as demonstrated by the plentiful number of good trading opportunities. In fact, at London Stone we have been enjoying a fantastic start to the year as have our clients because of the volatility that is giving rise to short term trades. I know that short term trading is not for everybody but it would be crazy not to take advantage of something when it presents itself.
After all, there’s nothing worse than a dead market for an investor who wants to make money, and right now the stock market is anything but dead – it is very much alive and well, and by all accounts kicking the sh*t out of some investors whilst showering others with gold.
A stock market game of two halves
That’s because some companies are being squeezed and on the verge of collapse whilst others are taking up the slack and offering the kind of explosive growth that has been unseen for almost a decade. It’s a beautiful thing to watch and it’s an incredible thing to be a part of.
Take Patisserie Valerie for example. The bakery chain’s shares were suspended last October after accounting irregularities were discovered and just a few weeks ago it officially collapsed into administration, bringing down with it an estimated 3,000 jobs. The fraudulent book-keeping will no doubt be investigated further by the administrators KPMG and other interested parties. in the meantime, the 121 profitable stores from a total of 200 will continue to trade, at least in the short term whilst the business desperately seeks a new buyer.
And it’s not just businesses that are in trouble. Personal insolvencies rose by more than 16% last year to a staggering 115,000 which is the highest level since 2011. Furthermore, consumer borrowing is also waning which is another sign of future contraction, with consumer credit growth rising by only 6.6% in December; that’s down from 7.2% from the month before.
Add to this a slow-down in credit card spending which is now just £100m, and at its lowest level for more than 4 years, and you can see that people are clearly shifting into a lower gear and this is why one needs to be careful. This is a sign of what will eventually feed into corporate profitability and share prices.
Golden Trading Opportunities
Equally however, there is also plenty of gold being sprinkled on the lucky ones. Therefore, on the flip side, we are also witnessing significant spurts in short term growth in key sectors. Housebuilders for example have enjoyed their single best month in January for several years.
The sharp and devastatingly fast sell-off in companies like Taylor Wimpey, Barratt Development and Persimmon to name but 3 FTSE100 shares, was one borne out of extreme panic. As a result, their respective dividend yields quickly accelerated to double-digits, which in turn attracted large scale purchases by investors back into these previously out of favour stocks.
As a result, we have seen investors now reaping the rewards of 10% or higher dividends PLUS capital appreciation of 20% or more since Christmas. As I say, it’s a lovely thing to see, but it’s a much better thing to be a part of it. And there is no reason why you shouldn’t be a part of it too.
Let’s face it. The punches will keep coming whether you like it or not. This means that if you are an investor with a share portfolio and you don’t want to lose any (more) money, then you had better learn quickly to duck, bob and weave. It’s a part of the game unfortunately. After you have mastered this, the next lesson is learning how to punch back – and that’s where the fun comes in. In the stock market world, it is the equivalent of you winning. The harder the punch, the bigger the win and thankfully nobody gets hurt.
Avoid the Big Red nose
When you are punching, the good news is that right now there is plenty to aim for. Did you know that dividends from the FTSE100 for this year are expected to hit a record high of £90 billion? However, one still needs to exercise caution because even with such a big target if you don’t know how to punch, you could still make a mess of it.
Allow me to explain. Just because a great big shiny nose presents itself to you, this doesn’t mean that this should be your target. In fact, if it’s too good to be true it probably is.
Take one of the traditional dividend payers, Vodafone, for example. The company seems so tempting to buy right now, too tempting in fact you might think. This means that you need to be careful. That’s because the company in its current state and after the release of recent data now runs a real risk that it may not be able to sustain future dividend payments. And if that happens that would send shock waves across the markets.
Revenue for the company’s services has fallen by nearly 4% year on year whilst group revenue has fallen by nearly 7% to £9.5billion for its 3rd quarter to December 2018. As a result, the share price continues to come under renewed selling pressure to the point that a modest dividend cut may well have already been priced in.
The point that I am trying to make is that this is a great time to be alive, a great time to be investing and a great time to be punching (and not being punched). For the first time in at least a year there are now very clear opportunities and threats ahead – less fog and mist, but clear skies ahead.
That is not to suggest that the threats don’t still exist, they do. In fact, the threats still overwhelmingly exceed the opportunities in my opinion but that is not to say that the threats can’t be avoided, and the opportunities can’t be exploited. Of course, they can.
You just need to learn how to throw a punch and make sure that you move your head out of the way when a punch comes your way. And no, it’s really not that difficult.
The only reason that most investors fail is because they never see the punch coming in the first place. Being aware is 50% of the whole task, the other 50% is taking preventative action. That’s pretty much it – the secret sauce, the winning formula.
In summary, the first month of 2019 has proven to be a real eye-opener for those who were expecting the worst, myself included. However, and even as a stock market pessimist, I believe that if the rest of the year is even half as good as month one, we could be in for a great 11 months ahead, even with the prospect of being punched in the face.
Risk Warning - All investments carry risk and prices may change quickly. The value of your portfolio can go down as well as up. Past performance will not necessarily be repeated and is no guarantee of future success. You should carefully consider in light of your financial resources whether investing in stocks and shares is suitable for you. This notice cannot disclose all of the risks and other significant aspects of investing in equities, derivatives, bonds or any other investment product. A full list of risks will be provided for the products which you are interested in. For more information please contact one of our team.