10/14/22 10:00 AM - Lesezeit

The Good, the Bad and the Ugly

Robert Karas

Chief Investment Officer, Partner

The 1966 Italian epic western of the same name made it easy for the movie-goers: Clint Eastwood is as clearly the good guy as Lee Van Cleef is the bad guy. The information board shown below will bring back your memories if you do not know what I am referring to. It features Clint Eastwood ("El Bueno") in Spain, where most of the Western was filmed.

Photo source: jcami/Shutterstock.com

The bargain hunt is open

Are these adjectives applicable in the markets as well? Your first reaction is probably: Sure, the bull market is “the good one”. After all, securities are going up. Clearly, the bear market is ugly - assets are declining and there are several candidates for the role of the bad guy. Perhaps the central banks, which are brazenly raising interest rates at the moment?

Yet, what if you are not yet invested or will be investing for many years to come? Are bear markets still ugly and the supposed triggers actually evil? I do not think so, rather we should cheer for lower prices and go bargain hunting.

The price goes down, the share goes up

How can this be? Simply stated, many companies buy back their own shares as part of their capital allocation strategy. If the price falls, the buyback programs reduce the outstanding shares at more favorable terms. The lower the stock price, the more shares can be bought and the remaining shareholders' ownership in the company increases.

For example, if you hold 10% of a company and it buys back 20% of its own shares, you own 12.5% of the remaining shares. You have not bought a single stock - yet your company ownership is automatically higher because share buybacks reduce the number of outstanding shares. That is not so bad, is it?

Out at any price

Currently, the bear market is taking on the role of the ugly. A broad downturn does not spare even the best quality companies. The reason for this is investor psychology: fear motivates sellers to accept lower prices. “I want out, no matter what the price,” is the emotion at the bottom of a bear market.

The corresponding price arises where rare buyers take heart and strike; usually they are long-term oriented and have taken a good look at the company and are comfortable with them.

The investor is unlikely to sell quickly, even if the price drops lower. This forms the bottom on which the next bull market can blossom.

Boldly into the future

The uglier the bear market, the more attractive the prices. Mass panic and waves of selling are not predictable. However, anyone who invests over many years will have to live through them. Truth be said, taking a long-term stake in excellent companies while avoiding setbacks on the stock market is impossible over an investor's lifetime.

Therefore, arm yourself internally against any financial setbacks and practice patience. This is the best strategy for your own psyche. We support you in this and position ourselves for the market recovery. 

Disclaimer: This is a marketing communication. Investments in financial instruments are exposed to market risks. Past performance or forecasts are not reliable indicators of future results. Tax treatment depends on each client's personal circumstances and may change in the future. Bank Gutmann AG hereby explicitly points out that this document is intended solely for personal use and for information only. Publishing, copying or transfer shall not be permitted without the consent of Bank Gutmann AG. The contents of this document have not been designed to meet the specific requirements of individual investors (desired return, tax situation, risk tolerance, etc.) but are of a general nature and reflect the current knowledge of the persons responsible for compiling the materials at the copy deadline. This document does not constitute an offer to buy or sell or a solicitation of an offer to buy or sell securities. The required data for disclosure in accordance with Section 25 Media Act is available on the following website: https://www.gutmann.at/en/imprint

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