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Is it time for investors to be greedy when others are already afraid?

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Inflation at 9.1 percent, ouch. That’s the official CPI figure, as revealed by the ONS yesterday, but many of our readers may consider the rise in the cost of living even more acute.

For example, some prefer the now unofficial statistic but still used the RPI measure, which stood at a whopping 11.7 percent in the year to May.

Regardless of your favorite statistic or anecdotal measure of inflation, it’s obvious that this is creating a serious dent in our wealth.

However, it has an even greater impact on some stock prices.

The 15 biggest fallers on the FTSE 100 in the past six months have all fallen more than 35 percent and the list includes some very big names

Until recently, the FTSE 100 has been largely flat for the year, but this past week has sent it down to a 5.5 percent drop in early 2021.

However, that is significantly better than the US stock market. The S&P 500 is down 21 percent since the start of the year and has entered what is known as a bear market — trading 20 percent or more below its peak.

Both numbers, however, disguise the pain inflicted on some previously high-flying company stocks, and many investors may be looking at some painful dips from big name portfolios.

Among the ten biggest decliners of the FTSE 100 in the past six months are Ocado (-50 percent), investment fund Scottish Mortgage (down 47 percent), Royal Mail (down 45 percent), Ashtead (down 43 percent) and Hargreaves. Lansdown (down 42 percent).

These may have all been past stock market highs, but they’re not exactly the kind of companies that were rushed to insane valuations by feverish investors, which marked the bull market as being driven by.

The US saw a boom in sugar rush that the UK didn’t, but even taking that frenzy into account, there are some higher quality corporate stocks across the Atlantic that are feeling serious pain.

Amazon shares are down 36 percent since the start of the year, Meta, also known as Facebook, is down 52 percent, Apple is down 25 percent and Google parent company Alphabet is down 23 percent.

Some of the more speculative stock market enthusiasts of recent times have gotten an even bigger slice: Shopify, for example, is down 72 percent this year, as has Ginko Bioworks, while Netflix is ​​down 70 percent.

Being greedy when others are afraid is one of investors' favorite Warren Buffett mantras, but it's hard to follow right now

Being greedy when others are afraid is one of investors’ favorite Warren Buffett mantras, but it’s hard to follow right now

All in all, the stock market is a volatile and scary place right now.

High inflation and rising interest rates are making investors all over the world very nervous.

But why is that so? Isn’t inflation a sign that an economy is picking up steam and shouldn’t that be good for companies and their stocks?

Meanwhile, we’ve been trying to get interest rates off the floor for years and while they are expected to rise, they will remain relatively low by historical standards, so why all the worry?

To answer the first question, while a little inflation is a good thing, a heavy dose of it – like the 9 percent and rising level we’re dealing with in the UK – isn’t.

Economists and central bankers fear that the vicious circle of inflation is becoming entrenched in expectations: see the wage-price spiral section of your old economics books, etc.

Suddenly, central bankers have decided that the inflationary pressures that quite a few people warned them about during the pandemic turned out not to be so transient, so they are acting late to try and get things under control.

What is troubling the markets is not only this move, but also the sudden change in the mood music of central banks.

Dating from before the financial crisis, but certainly since then, there was a widespread sense that central banks were backing you.

In the UK this was largely considered in the context of homeowners and their mortgages, while in the US the idea of ​​the ‘Fed put’ existed – if the stock market sank too far, the Federal Reserve stepped in to calm the waters with a dose looser monetary policy or guidance.

It’s now abundantly clear that this has changed: The Bank of England and the Federal Reserve are far more concerned about taming runaway inflation than they are about supporting homeowners or investors.

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Do you think stock markets will continue to fall as interest rates and inflation rise?

The difficulty for investors is that while it is possible to unravel what is going on, no one knows what happens next.

This is a different world than the one in which investors, businesses and consumers have been operating for the past ten years.

And that causes major headaches for those who want to adopt the Warren Buffett mantra of being greedy while others fear and step in to pick up some stocks at bargain prices.

It is always difficult to name the bottom – or a close point – and decide when to buy, it is even more difficult when the financial system is turned upside down.

Investors are trying to figure out what companies are worth in this brave new world of inflation-fighting central banks, willing to raise interest rates quickly into recession, rather than shyly floor them.

Nevertheless, Buffett’s aphorism is worth considering.

Among the victims of the faltering market will be good companies, with robust balance sheets, solid earnings and bright prospects for the future – perhaps along with some dividends to reward you along the way.

Fund managers will inevitably be criticized for writing their own book, but a number of respected professional investors who have stopped by a few times have reflected on the punitive nature of today’s markets and that things may be over the top.

Finsbury Growth & Income executive Nick Train, whose investment confidence has suffered after years of outperforming the market, signaled in a recent update to investors how even solid companies with pricing power were being hit.

A trio of Finsbury’s largest holdings, beverage giant Diageo, London Stock Exchange Group and analytics firm RELX, all fell 6 to 8 percent in May “as far as we can judge for no apparent reason,” he said.

Train added: “Of course, I acknowledge, the backdrop for all stock markets these days is unfavorable. But I could hope that predictable, money-generating companies like this trio would have been a haven in uncertain times.”

Meanwhile, Polar Capital Technology Trust’s Ben Rogoff, an investor in a different sphere, said that while consumer-focused stocks would likely suffer a recession, the companies with companies as their customers should prove more resilient.

He said: “While investments in technology are unlikely to remain unscathed by a recession, they could be relatively resilient in many areas given the need to invest to drive both digital transformation and productivity gains (thanks to labor shortages and inflation).”

He highlighted “software spending, data center investments, AI, cybersecurity and cloud computing” as areas where the strength was still evident.

Rogoff said the sell-off had significantly lowered stock valuations, but confidence focused on “companies that could emerge stronger from a sharper-than-expected downturn due to their robust business models, balance sheets and potential for market share gains.”

Fidelity Special Values ​​manager Alex Wright, who has a contrarian value investing philosophy, echoed this, saying: ‘The recent sell-offs in some parts of the UK market have been sharp and indiscriminate.

While the short-term economic outlook looks challenging as central banks attempt to address inflation and recession risks, a downturn is already priced in. We believe that sentiment has become overly pessimistic of late.’

Whether these managers are right or whether they are brave in the face of an even worse storm is up to individual investors to decide.

It’s also essential to keep in mind that this shakeout is hitting, because the financial landscape has changed dramatically: low inflation, the perennial thinking of low interest has been defenested.

Obviously it’s no time to be sloppy and buy stuff because it’s fallen a lot, so having to get back up is a silly game, but as International Biotechnology Trust executive Ailsa Craig pointed out in a recent Investing Show interview, waving the pendulum is always too far.

Be careful trying to time the market and remember that investing is a long-term game.

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