Buying into a market crash

[rb]

I understand beer. I like the beer space a lot. Just not sure whether BUD is the best quality out there in the beer space. Was wondering whether you had some thoughts about that.

[SharperDingaan]

I understand beer. I like the beer space a lot. Just not sure whether BUD is the best quality out there in the beer space. Was wondering whether you had some thoughts about that.

 

Assuming this isn't about the taste.

With the SAB Miller acquisition they now have material global diversification, and less reliance on the US market.

It's also liquid, it's unlikely to change, and it's pretty much a institutional necessity - no value investors chiselling the price down.

 

SD 

[scorpioncapital]

Question: Even Graham wrote that in a crash, everything drops, the good, the bad, and the ugly. But in a case like we might have in the years ahead of a re-rating of the discount rate, does it now become more of a discriminating crash? I.e. if you bought something today at a 10% yield vs something at a 5% yield, would you expect, all things being equal, for the lower yielding stock to drop more while the higher one may not move at all as the risk free rate increases?

[petec]

Question: Even Graham wrote that in a crash, everything drops, the good, the bad, and the ugly. But in a case like we might have in the years ahead of a re-rating of the discount rate, does it now become more of a discriminating crash? I.e. if you bought something today at a 10% yield vs something at a 5% yield, would you expect, all things being equal, for the lower yielding stock to drop more while the higher one may not move at all as the risk free rate increases?

 

I would, but all things aren't usually equal and most of what you can buy at a 10% yield today is lower quality than you can buy at a 5% yield (obviously).  That's one of the things I liked about the Canadian rate reset prefs - high yields and positively levered to a rising discount rate (assuming interest rates are correlated to discount rates). 

[scorpioncapital]

Nice, sounds like private-issued TIPS :)

[petec]

Better, since if you buy below par the impact of rising rates is levered (the dividend is calculated as a % of par value, not your purchase price).

 

Then again, higher risk of bankruptcy than TIPS ;)

[petec]

Al, it occurs to me that I would add high quality emerging markets banks with big market shares, high roe's, conservative regulation, solvent sovereigns.  E.g. BSAC, BAP, AVAL, ITAU.  Buy any of those in a crash at 1x book or cheaper and you'll do well.

 

Not quite the same thing but I also wondered about the US preferred shares ETF - these are 80% financials so it's a chicken way to buy US banks when no-one wants them (and just before they get bailed out by the government again).

[Jurgis]

to buy US banks when no-one wants them (and just before they get bailed out by the government again).

 

It's almost guaranteed that the next crash won't involve US banks. Everyone is usually fighting the last war and US banks are overcapitalized and derisked like heck.

 

Which doesn't mean that they won't trade way below 1xbook, since investors are also fighting last war and may sell of banks even if it's not warranted.

[Uccmal]

I have restaurant brands international up above.  A very minor regret of mine is not buying Tim Hortons in spring 2009 - it still looked expensive. 

 

Anyone think McDonalds is worth considering. 

 

Is Dunkin Donuts publicly traded - Now I am just lazy :-)

[CorpRaider]

Well, there's also all the compounders at 1x book or less, but they don't tend to fall that hard and are pretty obvious. 

 

BRK

MKL

FFH

BAM

etc.

 

Sheesh, I would be happy to get some MKL at ~1.3x.

 

They did hit 1.0x book value in 2010 on the Reinsurance acquisition, but not many opportunities like that.

 

Yeah, I probably wouldn't have been able to pull the trigger then, but I'd like to think I would pull it and hard if like MKL got to book because of a general market sell off or like uber, et. al. blew the hell up.

[petec]

to buy US banks when no-one wants them (and just before they get bailed out by the government again).

 

It's almost guaranteed that the next crash won't involve US banks. Everyone is usually fighting the last war and US banks are overcapitalized and derisked like heck.

 

Which doesn't mean that they won't trade way below 1xbook, since investors are also fighting last war and may sell of banks even if it's not warranted.

 

Agreed on both.  Wouldn't stop me buying the prefs if they sold off hard!

[rkbabang]

Is Dunkin Donuts publicly traded - Now I am just lazy :-)

 

DNKN 

 

I didn't know it was public again either.  I remember it being public and being taken private.

 

[Spekulatius]

Is Dunkin Donuts publicly traded - Now I am just lazy :-)

 

DNKN 

 

I didn't know it was public again either.  I remember it being public and being taken private.

 

The quality stocks like V, MC or even Apple may not go down that much. I think there will be quality stocks that not that many investors now about (in more cyclical industries) that will sell of way more than warranted and those may be the best buys. Think Chemicals, machinery, semiconductors, car suppliers, electrical equipment, distributors and similar business.

 

The highest returns will be from sub $1stocks that make it through the downturn.

[jmp8822]

Is Dunkin Donuts publicly traded - Now I am just lazy :-)

 

DNKN 

 

I didn't know it was public again either.  I remember it being public and being taken private.

 

The quality stocks like V, MC or even Apple may not go down that much. I think there will be quality stocks that not that many investors now about (in more cyclical industries) that will sell of way more than warranted and those may be the best buys. Think Chemicals, machinery, semiconductors, car suppliers, electrical equipment, distributors and similar business.

 

The highest returns will be from sub $1stocks that make it through the downturn.

 

Too elaborate on your point (I agree), the home runs in my experience are stocks that maybe were $10 per share, now trading at $1 or $2 per share, so many of the institutions said goodbye. Couple that with large insider buying in a company that you think will be fine in a couple years, can make for explosive upside. The insider buying provides a great filter when markets look their worst.  Apologies for the deviation from the original post.

[Uccmal]

Is Dunkin Donuts publicly traded - Now I am just lazy :-)

 

DNKN 

 

I didn't know it was public again either.  I remember it being public and being taken private.

 

I looked it up after this post. Anyway, the reason I thought of it is that I was in a DD in Lima a long time ago and one in Reyjavik this summer so they are spread out like McDonalds.  DD is like Sbux or Tim Hortons in same store sales and simplicity. 

[Uccmal]

Is Dunkin Donuts publicly traded - Now I am just lazy :-)

 

DNKN 

 

I didn't know it was public again either.  I remember it being public and being taken private.

 

The quality stocks like V, MC or even Apple may not go down that much. I think there will be quality stocks that not that many investors now about (in more cyclical industries) that will sell of way more than warranted and those may be the best buys. Think Chemicals, machinery, semiconductors, car suppliers, electrical equipment, distributors and similar business.

 

The highest returns will be from sub $1stocks that make it through the downturn.

 

Apple, probably not.  I figure a credit card company going on sale in a market crash/correction is a given, even without excessive defaults. 

 

[rb]

I hear the appeal of buying crap in a downturn, but I think there are serious issues with that thinking.

1. Some, maybe a lot will not make it through. When you look at stock charts there's some serious survival bias in there.

2. Once everything rebounds u sell the crap to take your money out but the good stuff is expensive again so you're stuck with non productive cash waiting for the next crash while the good stuff keeps appreciating in value.

 

When stuff goes on sale you go to buy that car or tv or whatever that you've always wanted. What not go get what you've always wanted when stocks go on sale

[Uccmal]

I hear the appeal of buying crap in a downturn, but I think there are serious issues with that thinking.

1. Some, maybe a lot will not make it through. When you look at stock charts there's some serious survival bias in there.

2. Once everything rebounds u sell the crap to take your money out but the good stuff is expensive again so you're stuck with non productive cash waiting for the next crash while the good stuff keeps appreciating in value.

 

When stuff goes on sale you go to buy that car or tv or whatever that you've always wanted. What not go get what you've always wanted when stocks go on sale

 

Precisely.  Had I just kept sbux, home depot, amex and ge since 2009 I would have been up:

Sbux: - 600% plus a growing dividend

HD: - 600% + > 16$ in dividends

Amex: 400% +'14$ dividends

Ge:' 300% + 6$ dividends

Also bought wells fargo: which would have returned 300% plus dividends.

 

To top it off the positions I had were via Leaps, so the gains were huge.  Exercising the options would have saved me a bundle in taxes as well, as oppose to selling. 

 

There is simply no way I could duplicate the long term outperformance buying "lesser" companies. 

 

Then there is the psychology of the moment.  In 2009 things were not rosy.  We had no idea if things were going to back pedal anytime - they didn't - but we didn't know that at the time.  The best place to be was the companies that would still be around, making at least some money.

 

It amazes me how easily people forget trying to pull the trigger during a severe market downturn.  Its real easy to sit here right now and say "just buy crap"..... it'll go up by 10 times.  Try visualizing actually pulling the trigger in 2009 and then trying to hold onto your "crap" after it has gone up 1.5x.  I will wager almost no one can do it.  I know I cant.  But I do know that If I have a plan in place to buy certain companies that are absolute top seed, then I will be able to pull the trigger, and more importantly hold them through the inevitable market gyrations as things slowly recover. 

 

[jmp8822]

I hear the appeal of buying crap in a downturn, but I think there are serious issues with that thinking.

1. Some, maybe a lot will not make it through. When you look at stock charts there's some serious survival bias in there.

2. Once everything rebounds u sell the crap to take your money out but the good stuff is expensive again so you're stuck with non productive cash waiting for the next crash while the good stuff keeps appreciating in value.

 

When stuff goes on sale you go to buy that car or tv or whatever that you've always wanted. What not go get what you've always wanted when stocks go on sale

 

1. Generally I agree - however following insiders who are buying can be a good place to look. Alternatively, what kind of signal does it send if an insider isn't buying in 2009? Scary. Also, doesn't need to be a heavily levered company for it to drop like a rock, especially if it started at a $1B or so market cap. Lots of things to look at in that space. IDT was 10x in 15 months after April 2009. Howard Jonas took his next 5 years of salary in common stock right around that time. Great time to be buying.

2. There is always "crap" to buy. I rotated to financials a few years after 2009 and am now in energy. I felt comfortable going into the carnage without the expectation of permanent loss by picking carefully. My comfort zone is cheap with some distress, compared to rosy and higher priced.

[frommi]

It amazes me how easily people forget trying to pull the trigger during a severe market downturn.  Its real easy to sit here right now and say "just buy crap"..... it'll go up by 10 times.  Try visualizing actually pulling the trigger in 2009 and then trying to hold onto your "crap" after it has gone up 1.5x.  I will wager almost no one can do it.  I know I cant.  But I do know that If I have a plan in place to buy certain companies that are absolute top seed, then I will be able to pull the trigger, and more importantly hold them through the inevitable market gyrations as things slowly recover.

 

Hindsight bias? What if in the next decade "value" comes back in style and "growth" companies just get no love?

If we talk about crap we should probably define "crap". For me "crap" is a shitty business attached to a treasure box and i just pay 50-75% of the price of the treasure box and i get the shitty business for free. This looks a lot safer to me than buying a compounder in the hope it compounds further. The funny thing is even today in this overvalued market there are companies in the world that trade at such ridiculous prices. But of course if you manage >10 million dollars you won`t find enough of them today.

[jmp8822]

There is simply no way I could duplicate the long term outperformance buying "lesser" companies. 

 

Funny you say that - I feel the exact opposite. But obviously there is more than one way to make money in stocks.

[wachtwoord]

It amazes me how easily people forget trying to pull the trigger during a severe market downturn.  Its real easy to sit here right now and say "just buy crap"..... it'll go up by 10 times.  Try visualizing actually pulling the trigger in 2009 and then trying to hold onto your "crap" after it has gone up 1.5x.  I will wager almost no one can do it.  I know I cant.  But I do know that If I have a plan in place to buy certain companies that are absolute top seed, then I will be able to pull the trigger, and more importantly hold them through the inevitable market gyrations as things slowly recover.

 

Hindsight bias? What if in the next decade "value" comes back in style and "growth" companies just get no love?

If we talk about crap we should probably define "crap". For me "crap" is a shitty business attached to a treasure box and i just pay 50-75% of the price of the treasure box and i get the shitty business for free. This looks a lot safer to me than buying a compounder in the hope it compounds further. The funny thing is even today in this overvalued market there are companies in the world that trade at such ridiculous prices. But of course if you manage >10 million dollars you won`t find enough of them today.

 

"Some may call this junk. Me, I call them treasures." ;)

 

Plenty of them in my signature.

[tengen]

My suggestion: Accenture (ACN). Don't have a specific price target. There's a small thread in the Investment Ideas section with a few good posts.

[Uccmal]

There is simply no way I could duplicate the long term outperformance buying "lesser" companies. 

 

Funny you say that - I feel the exact opposite. But obviously there is more than one way to make money in stocks.

 

You cherry picked one piece of my comment.  The whole context is: a serious downturn which I defined above as 30-50% market drop S&P.  I was there in 2009.  The backdrop was so difficult to operate in. 

 

I have bought hundreds of "lesser" companies over the years with varying results, but the most consistent hits have come out of market corrections when even great companies sell off.  I did this, this year in Canada, and aim to repeat it during the next S&P crash. 

 

[jmp8822]

There is simply no way I could duplicate the long term outperformance buying "lesser" companies. 

 

Funny you say that - I feel the exact opposite. But obviously there is more than one way to make money in stocks.

 

You cherry picked one piece of my comment.  The whole context is: a serious downturn which I defined above as 30-50% market drop S&P.  I was there in 2009.  The backdrop was so difficult to operate in. 

 

I have bought hundreds of "lesser" companies over the years with varying results, but the most consistent hits have come out of market corrections when even great companies sell off.  I did this, this year in Canada, and aim to repeat it during the next S&P crash.

 

Sorry if I misunderstood you - I was more comfortable not owning SBUX, HD, etc in 2009 because I thought the next few years of returns would be worse than buying other stocks that were down 80-percent as an example. Perhaps we have a different risk-tolerance. I try to maximize long-term returns without much concern about how I might feel in the process. But what's wrong with owning stocks (SBUX, etc.) that went up several times since 2009? Nothing wrong with that if you're good in that space.