Warren Buffett once famously advised investors to ‘be fearful when others are greedy and greedy when others are fearful.’ He’s not wrong.
I am not going to liken myself to the ‘Sage of Omaha,’ nor in any way believe that I will reach the heights attained by the nonagenarian Chair and CEO of Berkshire Hathaway. However, I do think that this particular pearl of wisdom — to buy shares on the dip at times of maximum fear — makes absolute sense.
And this remains true whether trading small-cap or blue-chip stocks. Of course, for clarity this article does not constitute advice.
But broadly speaking, blue chips are affected by broader macro market movements — inflation, interest rates, oil prices and so forth. Meanwhile, small-cap swings are dictated by the volatile sentiment of traders placing bets on imperfect information.
What does this mean for those looking for value?
Blue-chip dips
UK investors have many share choices; but when it comes to large caps, most tend to invest in FTSE 100 or S&P 500 index trackers (or a combination of both). For long-term investing, there’s pretty much no easier way to diversify risk, with the S&P 500 delivering average returns of circa 10% every year since its inception in 1957, and the FTSE returning solid dividends year after year.
The general idea is that in a loose monetary environment with low interest rates — aka 2008-2021 — US tech sector growth stocks see serious capital gains, while a stricter monetary environment benefits the banks, oilers, and miners of the FTSE. This has of course played out through 2022, with the UK’s premier index rising slightly and the US’s falling sharply.
When it comes to exceptional tech stocks, the dip — or the moment of maximum fear — came in between early November and early January last year.
Meta had fallen from a peak of $379 in September 2021 to a low of $91.
Alphabet had fallen from a peak of $149 in November 2021 to a low of $86.
Amazon had fallen from a peak of $184 in November 2021 to a low of $90 (though it fell slightly further before recovering)
Tesla, Microsoft, Nvidia, and a dozen others — same story.
Now here’s the thing. When a small-cap company falls for a specific reason, it often doesn’t get back up. A failed clinical trial, a disappointing feasibility study, or an overlarge placing can do lasting damage.
But companies that own the likes of Facebook, WhatsApp, Instagram, Google, Youtube, Amazon e-commerce, AWS, Tesla superchargers, Microsoft Office, microchip factories et al, are almost certainly going to rebound at some point. Timing the dip is an art for the technical analysts, but even now, fearful investors are running to the ‘safety’ of the FTSE 100 stocks, leaving them potentially overvalued and ignoring the capital gains on offer in the US. There is no point at which the S&P 500 has not recovered to reach new record highs, and at 4,131 points, it’s STILL over 600 points from this record.
For very long-term investors — especially SIPP investors — this is a gift. However, it requires a ‘buy and hold’ philosophy that can be psychologically difficult for those unable to stomach short-term paper losses.
Small-cap dips
Small caps are a different kettle of fish. Of course, most are also affected by the wider monetary environment — the FTSE AIM as a whole is down by 21% over the past year as these early-stage growth companies are to some extent also dependent on cheap credit.
But the key thing to note is that large-caps are predominantly affected by the wider issues (excluding individual incompetent management), while small-cap shares rise and fall on their own distinct and very specific investment cases.
And my own personal philosophy is this: if the investment case has not been materially affected, then I’ll take your shares on sale when you sell out of fear.
Let’s consider Angus Energy (LON: ANGS). I believed in early November that a placing was imminent; after it occurred, shares halved from 2p to 1p by the middle of February. They have since recovered to 1.8p — and those who sold lost out. Fundamentally, the gas at flagship project Saltfleetby was still in place, and the company simply needed more cash to verify whether the project will be financially feasible.
Then there’s Caracal Gold (LON: GCAT). OCIM funding worth $10.5 million that would have left the miner fully funded to production was withdrawn on 10 January, and the share collapsed from 0.8p to 0.2p by the end of February — providing a lovely opportunity to top up. The gold remained in place, and shares have now recovered to 0.45p.
Take another — Atlantic Lithium. Blue Orca alleges corruption that could see its flagship Ewoyaa Project stripped away, and the share falls from circa 38p to circa 23p overnight. After refuting these claims, shares are now almost back to their pre-crash point — and ALL could be ready to rip soon.
One last example is Premier African Minerals’ share price drop from 0.56p to 0.41p in the space of a day in mid-December. There was no apparent reason for the fall, and the shares recovered within a week, and then went on to see record highs. Those who sold either bought back in for more than they sold or enviously watched the aftermath from the side lines.
There are examples of these kinds of share price dips every week. Instead of buying the latest ‘hot’ AIM stock that seems to have taken over your social media, investors should consider where the best value for money is.
The alternative is to buy the peak and end up carrying the bags.
As someone once said, ‘the stock market is a device to transfer money from the impatient to the patient.’
This article has been prepared for information purposes only by Charles Archer. It does not constitute advice, and no party accepts any liability for either accuracy or for investing decisions made using the information provided.
Further, it is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.
Very nice article Charles!