What investors can learn from Groundhog Day
While most South Africans won’t know it, the 2nd February marks the quaint North American holiday called Groundhog Day. The groundhog is a large furry rodent and folklore has it that if it emerges from its hibernation burrow on 2nd February into sunshine and sees its shadow, it takes fright and dives back inside for another 6-week nap to wait out the rest of winter, which will surely follow.
If, on the other hand, the groundhog doesn’t see its shadow because it is cloudy, the prognosis is for the early ending of winter and the onset of spring. Movie buffs will have seen the comedy Groundhog Day starring Bill Murray and Andie MacDowell. In it, Bill Murray’s character is fated to repeat a particular 2nd February ad nauseam until he learns some important lessons about himself and about life.
For investors too, there are certain lessons which will be repeatedly delivered by history until they have been properly learned. Perhaps the most important of these is: Buy assets when they’re cheap - while avoiding what’s deservedly cheap.
In this regard, attached is a chart of asset class valuations for the past several years. Each coloured line represents an asset class’s degree of expensiveness or cheapness compared to its own history and compared to a low-risk cash investment.
GRAPH 1
(clcik on image to enlarge)
It’s immediately apparent that local bonds and listed property seem particularly expensive (the orange and green lines). It’s also clear that local and international equities are in the aggregate looking enticingly cheap (the red and blue lines). Local equities in particular seem on this simple measure as cheap as they did near the start of the previous market upswing. The caveat about avoiding what’s deservedly cheap must, however, be borne in mind. A very cautious increase of equity exposures, and the careful selection of individual securities, is appropriate as the current deep economic recession runs its course.
The second chart shows the expensiveness or cheapness of the main sectors of the JSE relative to the All Share Index (the black line).
GRAPH 2
(click on image to enlarge)
It shows clearly that financial stocks (the lighter orange line) have bounced back from a fantastically cheap buying opportunity last year, to more neutral valuations.
The year-end then saw resources (the red line) looking somewhat attractive after their decline, and industrials (the darker orange line) even looking marginally expensive. Importantly, these graphs show matters in the aggregate. In an asset class or sector which looks expensive, there may of course be individual securities which look quite enticing (and vice versa).
I still believe that it would be myopic to expect an immediate, smooth or sustained recovery in economies or markets. However, investors should be mindful of the insidious risk of “reckless conservatism”. Holding too much in cash and too little in equities, for too long, will not see most investors meet their investment objectives.
Given the dictum about buying assets when they’re cheap, we believe that now may be the time to start doing exactly that, while avoiding what’s deservedly cheap.
