Right now, we are in one of the most unusual times for investors in history. The reversal of easy money as inflation bites for the first time in over 15 years has made managing money especially difficult. Where do you put your money? Where do you hide? There is no simple answer. Almost every asset class is going backwards. Shares down 20%. Bonds down 12%. Fixed corporate bonds down almost 20%. The property fall is starting now that rates are rising. None of these are great returns when considering where to deploy cash, so we wait and continue to hold a significant portion of our portfolios in cash.
Why do we hold so much cash? When you’re getting somewhere between 0%-3% and inflation is 5.1% it’s still not a great option. In real terms you’re going backwards. But where else would you rather be when every asset class is falling? In the past 6 months cash has been easily the best performing asset class. While other asset classes continue to fall and opportunities emerge, I still believe it is very likely many of those same assets will be cheaper in the next few months. So, while we look forward to investing our cash as soon as possible, there are very few places to deploy funds right now.
One of the lasting lessons I took from the GFC 15 years ago was that the most experienced investors and companies were not only in great shape going into the downturn, but they also used those times to buy assets at prices that were previously unimaginable. In the midst of a once in a generation economic collapse, while everyone else was worried about survival, they were able to take advantage of a once in a generation opportunity to invest when no one else would or could. There were many examples but there were 2 deals that stood out to me at the time.
The first, was Warren Buffett coming to the rescue of the banking system in the fall out from the Lehman Brothers and Bears Sterns collapses. He invested US$5 billion in banking giant Goldman Sachs. But he didn’t just invest. He structured the deal on terms completely in his favour. He bought shares at record a low price, but they were structured as preference shares, so he was higher up the security chain and also received a 10% interest pa for his investment and a range of other options in the agreement. He had the cash available when it was needed most and was able to negotiate the terms he wanted.
The second, was the Commonwealth Banks acquisition of BankWest for $2 billion. Only the most unusual of circumstances made this deal possible. Firstly, HBOS (Halifax Bank of Scotland) was on its knees and desperate to raise cash through asset sales for its own survival, so it was very unusual to have a forced seller of that sized asset from such a large owner. Secondly, in normal times there was no way that deal was getting past the competition regulator. But in times of a complete breakdown in the system these things don’t matter as the integrity and function of the market overrides everything in an emergency. US banking giant JP Morgan completed similar deals in the US. The strong get stronger.
What I realised then was that in times of genuine crisis is where the greatest deals of your life are made. Deals that would otherwise never be available. It was also noticeable to me that the main deal makers were the old investors who had seen multiple market down turns. They understood that being prepared and patient was key, and they moved in when others were desperate and almost no one else was buying. There is no benefit in heading into a downturn fully invested or worse, highly leveraged. That is more likely to put you on the other side of the deal equation and ending up a forced or distressed seller. These deals are only available to those who are prepared and waiting for the opportunities to unfold.
In the current situation, it is impossible to know where the best opportunities will arise, and in reality, we will need to continue waiting to see how it all plays out. A lot will depend on just how bad the downturn becomes and how far markets end up falling. There are early signs that technology companies and those in the retail and banking sectors will be likely candidates in due course simply because of how beaten up those stocks are already. When the dust settles in the months ahead those who have been most patient will be in the best position to take advantage of the opportunities that have become the most attractive.
General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.