The recession that began in the US at the end of 2007 and that spread around the world has brought some important lessons about investing. And it has also brought some important lessons about human behavior, as investing can't be separated from our needs, desires and everyday choices.
During this time of economic uncertainty and fear, consumers have demonstrated with their purchases what they consider to be necessities and what they consider to be luxuries. If investors could have predicted with certainty what consumers would give up and what they would keep buying, they could have done quite well despite the downturn. But there have been surprises as well opportunities.
At the beginning of the downturn, some investment advisors assumed that companies such as Tiffany (TIF) and Bulgari (BULIF) that cater to wealthy consumers would weather the economic storm. They assumed that wealthy consumers would keep buying the expensive goods they were accustomed to buying. Others said that investors would be better off staying with stocks of companies that offered cheaper goods, such as Wal-Mart (WMT).
As it turned out, both views had merit as well as serious drawbacks. Almost all stocks in the U.S. and European markets took a dip during the downturn, from the high end to the low end. The entire consumer discretionary sector dropped. Companies like Tiffany were hit very hard, while companies that promised bargain prices for consumers dipped much less in stock price. Many wealthy consumers lost as much as 40 to 50 percent of their net worth, and they simply cut back their buying on nearly everything, from diamond rings and second and third houses to sports cars. But that’s not the whole story. Just as important is what happened after March 9 of the last year, which marked the market low in the U.S. That’s when the bargain hunters began looking at beaten down luxury stocks and realizing that they were looking at fire-sale prices.
Let’s take a look at two companies that represent different ends of the economic spectrum: McDonald’s (MCD) and Starbucks (SBUX). For many customers, the idea of spending as much as $4 on a “frothy blended cappuccino” would be considered a luxury. And as many expected, the price of Starbucks stock plunged from about $28 in November 2007, at the beginning of the recession, to a low price of $9 in March 2009, when the market hit bottom. During that same time, the stock of McDonald’s, where you could spend a quarter of that price for a cup of coffee, dropped from $60 to $52.
So would you have been better off just buying McDonald’s? It depends on when you bought it. If you had bought McDonald’s stock at the beginning of 2007 and held on to it, you would now have a very nice gain of 100%. But what happened to Starbucks after its low in March 2009? It began a dramatic recovery, even though the job market had not yet recovered. Consumers just couldn’t do without those frothy cappuccinos. So if you had bought Starbucks stock in March 2009, you would have an ever nicer gain of nearly 144%.
You’ll see a similar story if you compare a bargain shoppers’ stock like Wal-Mart with the glittering brand of Tiffany. The price of Wal-Mart stock has been essentially flat since 2005. So you would not have taken a big loss during the downturn. Tiffany, on the other hand, a respected global luxury brand, had climbed 80% from 2005 to November 2007, at the beginning of recession. But then it began a terrifying plunge. You would have lost all your gains and lost another 40% if you had held on to your Tiffany stock from 2005 to March 2009. Some investors sold their stock at that lowest point, making a huge loss. But what if you bought it in March 2009? You’d be celebrating because you’d be up 80%. And what if you had held onto the stock you bought back in 2005? You would actually have a gain of 40%.
So what are the lessons here? They are some of the oldest and best lessons in investing. Try to buy low and sell high. Don’t panic. Look seriously at the best brands in the world and wait patiently. The pendulum always swings.
Disclosure: No positions