💥 Market Crash Monday…is this a temporary pullback?

It’s been quite a chaotic August after the recent minor market crash. Investors are in for a rollercoaster ride. Global markets are still unstable after a significant sell-off on Monday, which also affected the cryptocurrency markets, with Bitcoin dropping by 16.50% and Ethereum by 24.19% at one point on Monday, August 5th. Although there has been a slow recovery, it wasn’t anything to indicate we are out of the red.

What caused it? Substantial losses were triggered by disappointing US job data, which affected the indices and equities markets. The Nikkei 225 also experienced a 20% decline over the past month due to an unexpected interest rate hike.

🍎 Furthermore, Warren Buffet selling his Apple stocks led to speculation that he may know something ominous about the future. Berkshire’s large sell-off of one of the “magnificent 7” stocks may be more of an indicator for other investors, causing a sell-off on Monday.

The Crowdstrike incident, while not directly impacting the markets, has rattled several investors. Crowdstrike (CRWD: US) is down 45% after a recent global IT outage, which has damaged the company’s reputation and led to various lawsuits. It’s not just the outage itself, but also the fact that the company was considered a leader in its field, leaving its clients exposed and causing them losses.

The past few weeks have been nothing short of entertaining to watch, with the market and global economy experiencing various turbulent movements.

But it was headed that way IMO…

I’m not surprised at all that the markets are due for a correction. Markets have grown this year despite all the turbulence. It’s been unusual to see constant price appreciation and “New Highs” on index funds throughout the year.

There is a lot of overvaluation across markets. While the future outlook may be positive for many companies, placing any multiple on that future doesn’t seem like a good strategy.

🌍 The world is in an unusual place, and it’s difficult to make sense of which direction to take. Caution is advised as there are many indicators and areas that investors and economists are observing, which can impact the direction of the markets. There are many uncertainties…

• US Elections – Who will win?
• Global Interest rates – When will they come down?
• Inflation – Will it retract?
• Middle East conflict – Will we see WW3?
• Geopolitical conflicts on multiple fronts – More war?
• Discussions about new viruses – New outbreak or Pandemic?
• Recession fears – Will we enter a recession?

That is a lot of uncertainty to navigate. On the upside, it’s also nothing new. The markets will wax and wane until the end of civilization Preparation is all we have.

🌀 The great rotation into what?

The Magnificent 7 and AI have been the biggest drivers this year, although the tide appears to be changing. The AI boom is slowly starting to wane. Investors may have come to the realisation that valuations are a tad high and want to see some proof in the pudding. Can these companies start to deliver on their AI promises? That’s anyone’s guess; time will tell. Nvidia is down 25% from its high a few weeks back… the start of the rotation?

There will be a great rotation out of the Magnificent 7 and overvalued companies. When 7 companies have driven the S&P 500 and have been the “Tide that raises all boats,” one could expect that when that tide starts to slow and valuations get too high, the tide starts to diminish, leaving a few ships stuck on the rocks in its path.

The capital is flowing out, evidenced by not only the great Mr. Buffett but a lot of institutional funds are headed for the exit. I don’t think there is anything alarming except the valuation being brought down to the realistic level of the future earnings of these companies. I’m going to be hated for it, sure. What do I know? Nothing really, it just seemed high in comparison to other opportunities.

I’ve stayed out of overvalued businesses and largely out of AI, barring a couple of small-cap companies that utilise AI as a part of their offering, however, they are not AI-based companies.

It will be interesting to see where all this capital flows. Answering the question of capital flow is likely to present a lot of opportunities. It’s something I am watching.

👣 Walk carefully and stick to the fundamentals…

There are no shortage of opportunities. Going back to fundamentals here is essential. Don’t pay any number for a piece of a business. Watch the fallout, as always, balance sheet strength is key. Those companies that can survive the downturns will come out on top.

👀 Just waiting and watching, keeping an eye on my holdings. Is my investment thesis breaking? Time to top up or sell? Mainly observing the fallout from Monday. Patience here is key. Not panic selling and especially not exuberant buying thinking they are bargains.

Patience. I’d rather be a little late to the party than to be early and find out the party is a dud.

I’m not an economist, just observing and trying to make sense of all the indicators. However, portfolio positioning, risk mitigation, and ensuring I’m not overexposed to any asset classes is common practice.

I believe there will be plenty of volatility in the future. There are still many unanswered questions regarding the various factors we mentioned earlier. The latter half of 2024 is expected to be unpredictable.

Most investors practice diversification and hedging with defensive positions. While I don’t focus too much on these strategies, sticking to your investment philosophy, discipline, sound fundamentals, valuation processes, and common sense is crucial for success.

Avoid overpaying and chasing trends. There will be plenty of themes and trends in the future. For example, if you jumped on the AI trend late, particularly with Nvidia, and captured it a month or two ago, you would now be facing a 25% loss. Counting on a rebound isn’t a reliable strategy.

In this environment, patience is vital. I believe that now is the time to carefully pick the right individual companies. As always, there will be winners even in challenging times.

🤷‍♂️ What am I doing?

I am currently focusing on finding overlooked, undervalued small-cap stocks in industries that I believe will thrive over the next 5-10 years. The stocks that have strong underlying businesses and healthy balance sheets, and they align with the themes that interest me.

I tend to disregard broader market trends even a large market crash. Although market risks can affect all areas, including the crypto markets that are meant to run opposite fiat currency. I remain focused on the specific industries and companies I’m interested in.

While the markets experienced a downturn on Monday, my small-cap portfolio only saw a modest decline of 2.47%. This demonstrates that there is value in owning quality, undervalued smaller companies. The stock price may be affected, but what matters more to me is the growth and strength of the businesses.

To adapt to different market conditions, I believe it’s important to be prepared for all possibilities. During a 🐂 bull market, it’s difficult to find value, so I look for growth at a reasonable price (GARP) and ensure that the multiples align with future earnings potential.

In a down market, I seek out quality undervalued opportunities. When there are temporary dislocations between price and intrinsic value, I take advantage of them, wait for the rebound, and then sell.

💰 Once more, the primary objective is to make money.