The recipe to beat the bear

17 January 2016

 

Dear Fellow Investor,

 

We are facing a storm of negative news and events.  Since the beginning of the year world stock markets have lost over 5.2 Trillion USD in value.  

 

They include the oil price collapse, expected US interest rate rises, China Yuan devaluation, collapse of commodities, Middle East violence. Junk Bond collapse in the US especially the under capitalized smaller oil companies, mining companies and commodity producers.

 

Many household names have been hard hit including  Amazon, Google, Apple, Intel, GM, Wells Fargo Bank,  Wall Mart, etc.  

 

The bulk of the onslaught of mindless selling by machines has taken place in the US, Europe, Japan and China. Asian markets are also effected.

 

The catalyst for the asset market turmoil was the interest rate rise in the US on 16  December 2015 and tightening of liquidity which resulted in the slow down of credit growth.  

 

Since 1950, every recession in the US was precipitated by a drop in credit growth below 2 %- no exception. Today credit growth has slowed to 2.2 % but if inflation adjusted would be less than 2 %

 

The recipe to beat the bear :

 

How do we protect ourselves ?  Reduce exposure to large cap popular shares.
Avoid companies with high debt and high PEs.  Look for small to mid cap companies off the radar screen that consistently have shown increased sales and earnings, have a market niche and a management focused on increasing returns for shareholders.  

 

They must pay a dividend but retain at least of 30 % of their earnings for growth.

If executives hold shares in their company that is a plus.  Try to visit the company you are interested in to understand what they do.  That is what we do.

 

This is how we survived the 48 % drop of the KLSE in 2008-2009 and earned positive returns after the bull returned.  We did not sell or panic but waited for recovery using this strategy.   This is what investors such as Warren Buffet and Larry Fink CEO of Blackrock do. Fink manages over 1.2 trillion USD in his equity funds.

 

For 2016 there is a high probability of a positive year.  Since the inception of the KLSE there has never been 3 consecutive down years. 2014 and 2015 were down years so the odds favour 2016 will be up.

 

High probability of a positive year in 2016

Valuations have become attractive
Inflation low
Value cap likely to support market
No recession likely

The US election is in November 2016  and Obama controls the US Fed and Treasury. To keep his party in control and avoid recession   he is unlikely to raise interest rates and might even lower them and restart QE. All he has to do is pick up the phone as he is the Emperor. World equity markets will reverse

 

His main objective now is to stop Trump from winning and taking over.  If Trump takes over, Obama’s  party and his cronies  will go down in flames. 

 

Invest well and grow your wealth

Bill

 

 

Charlie Russell with his companion, a grizzly bear in Russia. Charlie has lived with bears for over 20 years and even written a book on bears. Contrary to what most think, bears are very intelligent, loyal and not as fierce as most think. As investors we need to learn understand the nature of bears and how to coexist with them as the bears have emerged in the markets .