The US and UK stockmarkets seem to be rather jittery – so should I sell all my shares and wait until a market upturn looks as if it might be sustained?
Back in the 1980s, after a decade of investing, I came to the view that a share in a company is generally worth whatever someone is prepared to pay for it. I had seen people flock to buy shares in companies that I had shunned because I thought they had poor management and few assets. Yet the sheer pressure of buyers propelled the shares ever higher. Eventually a number of those companies collapsed when they were found to be just as bad – or worse – than I had thought.
Similarly, I carefully researched companies and backed a number where their assets were worth far more than their share price. Surely they were a bargain? But, for some of them, the share price moved downwards or remained fairly static for years until other investors – sometimes a takeover bidder – shared my views, bought shares and the price moved upwards.
Of course, it is possible to buy shares in companies where the dividend yield is good so, if the dividend looks as if it will be maintained or increased, then the share price performance may be less important.
It is people’s perceptions of particular companies – and the market as a whole – that influences their dealing decisions. Right now, I feel many people are nervous and do not know what to do.
However, fund managers – especially hedge fund operators – cannot just do nothing if they are to justify their fees.
If recent falls in share prices continue, how many companies will increase their level of share buybacks on the grounds that the directors feel the shares are undervalued?
Interestingly, during the “dotcom boom” in the US, companies heavily bought back their shares and this activity reached a peak in the first quarter of 2000. Soon after, the US stock market fell and buyback activity dwindled. It was not until the fourth quarter of 2004 that US buybacks exceeded the peak quarter of 2000.
Last year also saw a high level of buyback activity both in the US and the UK. I have always been wary of buybacks, especially if company directors’ bonuses are based on price earnings ratios and other financial factors which have improved largely due to buybacks reducing the number of shares in issue rather than by any outperformance.
However, if buyback activity again drops sharply, then there will be even less support for certain companies’ share price levels.
If interest rates rise, how many over-leveraged hedge funds and companies that have been “taken private” will find difficulties in meeting their financing obligations? It is for these concerns that I am currently not interested in investing in the banking sector.
My self-invested personal pension scheme (Sipp) has more than 25 per cent of its assets in cash but, unless I spot what I hope will prove to be a longer-term “bargain”, I will not be rushing to make any major new investments. I will also be keeping a more careful watch on my Sipp’s share portfolio and will seek to take appropriate profits and/or reduce potential losses.
For example, on May 15 my Sipp sold its shareholding in wallpaper firm Walker Greenbank for 27p per share. In early January the shares had been 19p, but the price jumped sharply following Walker’s results in April when it announced its “first full-year pre-tax profit since 2000”. Although the directors viewed “the future with increasing confidence” and looked forward to “delivering substantial shareholder value”, I erred on the side of caution and, looking back, may well have sold too soon.
My Sipp portfolio also contains a number of “special situations” and shares in companies which, despite market uncertainties, I feel have good long-term value. For example, both Associated British Ports (which I first bought in 1991 at 240p) and photo-booth operator Photo-Me have assets which would be difficult to replace and have attracted takeover interest.
Platinum mining group Lonmin also still has potential, I hope, although its share price this year has been, at times, rather bumpy, trading between £16.15 and £31.38. If various currencies come under pressure, will there be increasing demand for platinum as a “store of value” like gold?
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