The stock market has been volatile this year. But volatility is normal. Last year was simply an anomaly an the market has reverted to the norms. The major reason for the current bout of volatility can be ascribed to fears of possible rapidly rising inflation and therefore rapidly rising interest rates. This coupled with the fears of other cost increases such as oil and wages (due to low unemployment) have left investors fearful.
But volatility is not something to be afraid of. It should be embraced and taken advantage of. You should learn to live with volatility because it is a fact of the markets. The greatest investors and for that case investments have all experienced volatile periods.
Take Warren Buffet and his investment vehicle Berkshire Hathaway. In the years Buffet has been running Berkshire Hathaway, the book value has compounded at an amazing 19.2% per annum. This gigantic per annum return, sustained over half a century, represents a standard of outperformance that has no close rival and probably never will. Berkshire’s stock price has vaulted from $18 a share to $285,000.
Investors of Berkshire Hathaway shares would have benefitted from Warrens brilliance and attained vast amounts of wealth along the way. But how many of us would have been willing to live through the drawdowns and long periods of underperformance he endured to get there? Just go look at Berkshire Hathaway shares to see the amount of volatility experienced through the period. Investors in Berkshire Hathaway have had to endure underperformance as compared with the S&P 500 more than half the time (over various time-periods) and have suffered huge drawdowns in order to outperform so dramatically in the aggregate. No pain, no gain.
Shares bought in May
I took advantage in volatility at the beginning of May to make the following purchases as part of my monthly stock purchase programme.
- Bought 6 Shares in Imperial Brands for £26.9 a share.
- Bought 4 Shares in BAT for £39 a share.
- Bought 24 shares in Sage for £6.60 a share .
- Bought 3 shares in RB for £57.30 a share.
The above purchases add about £28 in annual dividend income for my portfolio and keeps it ticking along nicely towards the next goal of £2,500.
The one thing I will say about the above companies is that there are of the highest quality in the FTSE 100 universe. I will go one step further and say that if I were to hold only 10 shares from all FTSE 350 stocks, the above 4 would be part of the 10.
This is how much I rate the above mentioned companies. It is amazing that companies of this quality have sold off to the extent they have during what seems to be the final stages of the bull market. I understand the point of view that as interest rates rise, share prices in solid defensive companies will fall as investors will move away from these and go into bonds.
But bonds do not have the qualities of the above mentioned companies. Bonds do not pay you higher and higher amounts every year.
These companies on the other hand do. Go and have a look at their dividend records. As they generate more and more cash year after year, they keep sending increasing amounts of dividends to those that have ownership stakes in them via share ownership. I think bond holders will look back years from now and regret their decision of swapping out equity on the cheap in these companies in order to put their money into low yielding bonds.