DEFEND YOUR PORTFOLIO IN TOUGH TIMES
MANAGING DIRECTOR, ARTEMIS
SO NOW we know. The economic environment is “unusually uncertain”, apparently. Ben Bernanke, chairman of the US Federal Reserve, has confirmed what everyone knew already.
Reform – in particular the discharge of debt – has to take place in the midst of the western world’s inevitable and longstanding entanglements, obligations and historical inhibitions. This was never going to be a straight, Roman road. The FTSE 100 has already seen a high this year of 5,825 and a low of 4,805. We expect the summer trading range to continue.
Yes, there are short-term opportunities, but these are unpalatable, even Ocadian – and imprudent. The better ones lie in stock selection. I’ve been looking this week at the stunning performance delivered by Berkshire Hathaway and the renowned Sequoia Fund between 1975 and 1982. Despite the S&P index going nowhere in the 1970s, 39 per cent of the stocks in that index doubled in price. So which stocks should investors choose with such care?
Well, Rome rose on the gladius, the legionaries’ brutal, short, stabbing sword. When the empire passed to defensive descent before its reincarnation in the east, the long sword (spatha) steadily took the place of the gladius: the former was a weapon for keeping the enemy at bay, or for reaching him from a defensive position. For the time being at least, defense is the best form of offence. Stick to the basics. One criterion is cash. Investors should seek out stocks with money on their balance sheets. There are many good companies out there – I am of course too compliant to name them – which have cash equivalent to half or more of their market capitalisation. And yet, often these stocks are trading, if you strip out the cash, on price/earnings ratios as low as 7 times earnings.
M&A is another theme. Most recently Reckitt Benckiser has bid for SSL, and a consortium has set its cap at Tomkins. Businesses are rightly unsure about the outlook and they hesitate to build, say, a new factory. But buying another business that has ballast is quite another thing. Macro matters will meander. Some companies will continue to thrive.