Buy! Buy! Buy! Why I'm investing again
After a hiatus to rebuild my cash reserves, it's time to start taking risks once more.
In this article, I’m going to explain why I’m aggressively buying shares again. I’m also going to let you know which share is my current favourite (*please see the important disclaimer at the end).
Before I get into that, I want to let you know that I’m going to be back in London in just two weeks for Mello 2023, the excellent two-day investment conference that tends to have higher-quality companies presenting. I have some special news that I’ll be announcing there, in addition to providing thoughts on some shares of course, and it would be wonderful if you could join me!
If you are interested to attend Mello 2023, either for one day or for the entire event, I’d be very grateful if you could use the coupon code Neary50 when purchasing your tickets. This gives you a 50% discount from the headline price, and it also gives me a small commission! Thank you very much and I look forward to seeing you there for what promises to be the best conference of the season.
And now let’s turn to the main point of this article: why am I aggressively buying shares again?
For a start, let’s remind ourselves of where the S&P 500 is trading, with the help of a long-term chart:
It has been a dramatic few years, to say the least!
The Covid shock initially produced a sharp fall in risk assets, and then we had the famous stimulus-induced Covid rally.
When 2020 was all said and done, the index was up 16%, despite the global catastrophe.
The euphoria continued in 2021, with the index gaining another 27% (compounded on top of those 2020 gains!)
But 2022 was the year that saw central banks, including the Fed, respond to runaway inflation. The Federal Funds effective rate, starting at about 0%, made it up to 4.1% by the end of the year. It is now around 5%.
The Bank of England was no slouch either:
Rising rates had devastating consequences for a variety of sectors. The UK small-cap market dried up completely, with zero IPOs taking place and new fundraisings being impossible to get away at previous valuations.
Bitcoin dropped below $20,000 in June 2022 and by the end of the year, the major crypto exchange FTX had collapsed, leaving one million creditors exposed to losses.
The S&P ended the year down by 20%, giving back nearly all of the gains it had made in 2021.
2023 has seen a continuation of these disturbing trends with mid-sized and regional US banks now under pressure and in a few cases, collapsing.
What I’m buying: passive and active
Doom and gloom always makes me want to start buying shares again, and I’m pleased to report that I’ve been an eager buyer in recent months.
Starting last year, I began accumulating a passive ETF in my new personal retirement account - the Irish equivalent of a UK SIPP or US 401(k).
My ETF of choice is the iShares MSCI ACWI ETF. As the name suggests, this tracks the MSCI All Country World Index. It charges 0.2%, which is more expensive than some other ETFs I might have bought, but it covers large caps and mid caps in both developed and emerging markets.
This means I don’t have to worry about ever being tempted to buy a separate ETF to get exposure to China, India, etc. Instead, I am covered with a single instrument, and don’t need to buy anything else in this account!
It is nearly 60% invested in the US markets, so I still get plenty of S&P 500 exposure. But I can do fine even if the US underperforms:
Which is just as well, because the S&P arguably offers only modest value at these levels (data from Stockopedia):
Importantly, this ETF reinvests all dividends - so it should be an automatic compounding machine, like Berkshire Hathaway ($BRK.A), the second-largest holding in my single stock portfolio.
However, despite the reinvestment of dividends, the fund is trading at a level it first reached in January 2021. So for the best part of two and a half years, all of the reinvestment that takes place in global equities - both of dividends and by the underlying companies - has been unable to yield any return for investors. For me, that’s a nice indicator of the de-rating of equities:
Therefore, from a value perspective, I think it’s reasonable to be dollar-cost-averaging into these markets. Of course I’m still a little nervous about the continued richness of the S&P 500, but I’d probably be more nervous sitting in cash while inflation eats away at my purchasing power. As investors, we always have to pick our poison!
Back in the active investing business, too
I have also started buying individual shares again, in my taxable investment accounts. These are the accounts where I have Volvere, Berkshire Hathaway, etc.
I kicked things off last week with an initial purchase of Hargreaves Lansdown (LSE:HL.).
This is currently my highest-conviction stock, based on both its value and its quality, and I explained my rationale to subscribers on my Patreon.
HL is a component of the FTSE-350 Index, the UK index including both large caps and small caps.
If you’re willing to accept lower EPS growth, then this index offers much tastier value metrics than the S&P 500. Indeed, one of the major themes of recent months has been the acquisition of UK companies by those who perceive their value more keenly than stock market investors do:
My current strategy is to look for quality income and to build a new portfolio (alongside my existing portfolio) around this objective - investing in the UK but also in the US and other developed markets. Wherever there is value, I’ll be interested!
The UK stocks which have been thrown up by my filters so far are:
Unilever
GSK
Hargreaves Lansdown (I own)
IG group (I own)
Computacenter
Britvic
Victrex
Savills
4imprint
Impax Asset Management
Morgan Sindall
SThree
CMC Markets
Foresight group
ME International
PRS Reit
Investing for dividends is a fine objective but it must be done carefully, as a high yield can often be a trap. With the filters I’ve chosen, I think that I can reduce the risk of dividend cuts and value traps. But of course that is easier said than done!
I’m excited to build a new portfolio with the objective of long-term income that should hopefully increase and compound. We shall see!
I look forward to sharing my progress with you and perhaps also to meet some of you in a few weeks at Mello, when I will also be sharing a special announcement. Cheers!
Best regards
Graham
*Important disclaimer: this content is for general educational and informational purposes only. It may include errors and is not intended to be relied on for investment decision-making purposes. Graham Neary is not authorised by any regulatory body to provide financial advice.