Every single major equity market is down in 2016.
China, the Nasdaq, Italy, Brazil, Malaysia, Japan… are all down double-digits.
We’ve had people write in and tell us their spouses are “panicking with financial markets”.
We’ve had readers ask if they should just “dump everything”.
With that in mind, you’ll probably recoil at the idea of buying stocks right now.
I completely understand.
You also know that bear markets and panics create some of the best opportunities to bag great companies at bargain prices.
And you also know that when everyone else is panicking, then it’s time to start hunting.
But we only want to be looking at the very best-in-class blue chips.
Why? Because when buying in a bear market, we’re always concerned about “catching a falling knife”. I want to catch quality, and I want to catch it with limited further downside.
Let me explain.
A couple days ago we talked about one potential hunting target in “China Bloodbath Continues… Opportunities Lie Admist the Wreckage”.
The company is Sun Hung Kai Properties (16 HK).
It’s one of the largest real estate companies in the world and a stock Peter’s been covering for over two decades.
It’s run by one of the shrewdest tycoon families in Hong Kong… (although one of the former co-Chairman sons was a little too crafty and is serving 5-years for corruption).
As we mentioned earlier in the week, this company now trades at HALF its book value.
Take a look at the chart below. The current price-to-book is a massive 2 standard deviations from the longer term average.
The only other time we saw anything like this discount was in the Asian Financial Crisis and the Global Financial Crisis… real market armageddons.
And when we’ve seen these huge discounts in the past, big gains have frequently followed.
We saw subsequent equity returns of 32%, 80%, 107% and 195% from the points highlighted in the chart.
So once we’ve identified our target, what do we do next?
Do you go out and bet the ranch?
Do we just open a regular sized position in the stock?
The market is clearly still in bad shape and looks like it’ll stay that way in the short-term at least.
So what we want to do is think about dollar cost averaging in to the stock.
This is when we break up our selected position size into smaller bites, and then we begin to take periodic nibbles.
Let’s say a full position size is US$10,000.
Instead of buying ten grand of Sun Hung Kai today, we undertake to put US$2k a month spread out over 5 months.
And I still employ a trailing stop-loss on each ‘bite’ to further reduce my risk.
Please note, this is NOT the same as averaging down. That’s when you already hold a position and you add to it as the price falls. The idea being that you reduce the overall average cost of your position.
This is analogous to “if you like the stock at US$100 you should love it at $60”.
We can argue all day long about that strategy, but we don’t do it.
I remember sitting on the derivatives desk at JPMorgan during the GFC and watching a colleague of mine average down into Citibank stock.
He did it at least 3 times if I recall correctly. The more the stock fell, the more he bought… no prizes for guessing how that one worked out.
Some call it averaging down. I call it doubling down.
In my opinion the advantages of dollar cost averaging in to a great company when markets are like this are as follows:
- I don’t need to pick the bottom! I’m just looking to be vaguely close. I can spread the averaging in over a year if I like. It’s totally up to you. There’s no ‘taking the plunge’ here… I’m just dipping my toe.
- It allows me to build equity at historically low valuations slowly whilst at the same time limiting my downside risk. My trailing stop-loss on each ‘nibble’ ensures that.
- I’m already buying a dollar of assets for fifty cents. I know cheap can get cheaper, but I like my margin of safety here. Remember, we use this technique at this point in the cycle for top quality stocks only.
- Finally, I like the idea of already being in a regular equity buying mindset for when a market recovers.
And you know what? Guess who else is using this kind of strategy?
Take a look the newsfeed on Sun Hung Kai Properties from my Bloomberg terminal.
Look who’s buying Sun Hung Kai stock at these prices.
The Chairman Raymond Kwok, bought at total of 600,000 shares on the 19th and 21st of this month.
That’s around US$6.25mn worth of stock.
And who’s Kwong Siu Hing you ask?
Well, that would be Mummy… also known as the matriarch of the Kwok family and former Chairwoman of the company.
She also bought herself a cool US$14mn worth of stock as well.
Just so we’re clear, I’m using Sun Hung Kai Properties purely as an example here to explain how we can implement this strategy.
We do not provide individual stock recommendations in Peter’s Perspectives, only in The Churchouse Letter.
So start looking for those beaten-down opportunities and consider dollar cost averaging in for when you want to start dipping your toe back into the markets.