Just A Setback Or More?

Thousands of stocks in a bear market! Time to cash out? Readers of the Gutmann Viewpoint newsletter have already guessed that this is the wrong question to ask.

In fact, recently, thousands of stocks have more than halved in value; measured from their 52?week? high to the current price. This extraordinary situation is only now coming to general attention.

The Gutmann equity strategy, on the other hand, is only down a few percent this year - after an exceptionally good year in 2021. How can that be?

Loss and stability

A few days ago, the U.S. bank, Bank of America reported that 2,648 of the total 3,682 Nasdaq stocks were in a bear market. Almost half of them had fallen more than 50%. The biggest members of this U.S. index are familiar names: Apple, Microsoft, Amazon, Tesla, Alphabet (Google), Meta (formerly Facebook).

Larger companies could be affected, as well as those found in diversified portfolios. At Gutmann, we also felt the correction. It is reassuring that our equity team was not surprised by this recent development and our portfolios are invested quite differently from that of the Nasdaq index.

Gutmann's equity strategy is focused on quality, with strong business models established at its core, complemented by regional accents. These elements contribute to stability. Of course, we do not know how deep this correction in the stock markets will go. Meta's (formerly Facebook) daily loss of more than 25%, after unexpectedly weak quarterly results, raised eyebrows. [1] So cash out after all? This is still the wrong question to ask.

Not difficult, but impossible

Would it not be wonderful to sell near the highs and then get back in at a lower price? After all, at Gutmann, we are at the source and have access to professional financial information systems; it cannot be that difficult to execute!

Philip A. Fischer, the author of one of the best-selling books in the field of private investment, “Common Stocks and Uncommon Profits,” wrote about this back in 1958. He argued that an investor should never sell because he is afraid of a bear market. This is because if the company is well setup, the stock price will see new highs in the next bull market, far above the current ones.

In short, it is theoretically possible to buy back a sold share at a lower price, but this almost never works in reality.

One in ten

How does the investor know when to buy back? Here is Phil Fisher’s answer:

“Theoretically it should be after the coming decline. However, this presupposes that the investor will know when the decline will end. I have seen many investors dispose of a holding that was to show stupendous gain in the years ahead because of this fear of a coming bear market. Frequently the bear market never came and the stock went right on up. When a bear market has come, I have not seen one time in ten when the investor actually got back into the same shares before they had gone up above his selling price. Usually he either waited for them to go far lower than they actually dropped, or, when they were way down, fear of something else happening still prevented their reinstatement.”

The ratio described, of less than one in ten cases, shows the low chances of success. Why is this so? First, the investor thinks the price will fall even lower; then he sets an anchor at the lowest price and sees only what he has already missed from there. Then he waits for a second chance, which never comes.

First hesitate, only then sell

If you have already been fortunate enough to find an excellent company that has also performed magnificently in terms of its share price, you should not part with it lightly. After all, what are the chances that now is exactly the right time to sell? What is the possibility of catching the same or another first-class company again at an attractive price?

“We do not invest in the stock market, we invest in great companies.” A quote from our head of equities and board member of our investment company, Christoph Olbrich. He speaks from my soul. We certainly do not want to cash out and part with these gems. Of course, we will make changes, as we have done in recent weeks, but always with a steady hand.

Are you interested in further details and have not received the mailing on the regional changes in the equity allocation? Write to me and I will be happy to send you this information.

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[1] Incidentally, Meta was not and is not a stock of the Gutmann Equity Strategy.

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