THINKING OUT LOUD

Overreactions Equals Opportunity

February 4, 2020

by Rob Zdravevski

 

Does Newton’s third law of “For every action, there is an equal and opposite reaction” apply to asset prices ?

so I’m pondering current overreactions in todays markets.

The current decline seen across assets in the global capital markets is what I call the “short game”.

I am reminding clients and investors that we are focused on the “long game”.

So when the short (sighted) end of the market throws away their shares and equity due to overreactions, whether it’s flu outbreaks, political outcomes, military conflicts or natural disasters, that is when opportunities arise.

I’m looking for bargains and opportunities amongst solid companies where shareholders have exaggerated an event’s effect. My interest doesn’t lie in buying shares of companies selling face masks and anti-septic wipes.

A starting point to assessing an “overreaction” is when you compare the value of market capitalisation lost to the actual material cost or loss that the company may suffer from the event.

A simple example may be to ponder whether the $20 billion decline in market cap, seen by luxury goods house, LVMH over the past 10 days equals a potential and corresponding operating loss commensurate to this reduction of company worth.

The recent action and reactions in the markets include;

The Shanghai stock market re-opened yesterday 8% lower following its multi-day closure in observance of Chinese New Year.

The CRB (commodity index) has fallen 10% in the past month

The FTSE 100 has declined over 5%, prior and subsequent to the final Brexit decision.

The U.S. Banking index is down more than 8% in the past month.

Iron Ore has fallen 17%

Oil’s price has collapsed 20% in a month

Copper has fallen 11% in the past 2 weeks

And on the stock front, (only to mention a few)…over the past 2 weeks,

in Australia;

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And internationally;

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All of these securities have registered oversold readings.

Interestingly, the obvious companies whose shares should be affected by the Coronavirus such as airlines, Macao casino operators etc, haven’t fallen anymore more than the businesses mentioned above.

I’m reminding investors, that it’s important to keep your head, while others are losing theirs.

With that said, It’s time to do a little shopping !

Keep in mind, this is General Advice and Commentary. Please see my disclaimer, so that no one gets hurt.

http://karriasset.com.au/disclaimer/

Until next time,

Best Wishes, Rob

 

If you’d like to have a chat to me about some of our best stock ideas for your portfolio, feel free to call me on 0438 921 403 or email rob@karriasset.com.au

To read about how I do business, visit www.karriasset.com.au where you can also find my blog.

Rob Zdravevski is the proprietor of Karri Asset Advisors, a specialist in the provision of investment advice and equity recommendations for clients’ portfolios.

Mayfield Green Pty Ltd (trading as Karri Asset Advisors) is the holder of an Australian Financial Service License, the company is located at Shop 14, 34 Dunn Bay Road, Dunsborough, WA 6281, AUSTRALIA