We are currently undergoing a correction or bear market. Without getting too stuck on definitions, we have seen the value of global and local shares as well as bonds decline this year. In fact, this year has been one of the worst performing years ever for the standard long-term equity/bond portfolio split of 60/40. Everyone fears a bear market because you see your wealth decrease before your eyes, but there is also a different perspective.
What bear markets and corrections do is give you the opportunity to invest in great companies at lower prices. It also clears out excesses (most recently in zero-profit technology and cryptocurrency). As I have been thinking about portfolios, I have also been thinking about those companies that have products I just cannot do without.
If I asked you today which of these companies’ products you and maybe the world could not do without, what would your answer be? Microsoft, Apple, Google, Meta, Nike, Coke, Tesla, Netflix, Spotify? I’d argue that the two stars in this list are Microsoft and Google. Ok, I am not an Apple user, so I might be a bit biased on that one, but I’d argue that the Android ecosystem is a good alternative to Apple. Replacing Microsoft would be much harder. Excel, PowerPoint, Teams, Outlook, Xbox, Windows and Azure all have credible alternatives, but if I had to give up on all of them at once it would be a very hard transition. Similarly, Google’s Search, YouTube and Android have become such integral parts of our and our kids’ lives that we would not be able to easily do without them. Meta is an interesting one as they have ±2.5bn daily users, but I am sure I can do without Facebook, Instagram and even WhatsApp should I have to. A big opportunity for them lies in WhatsApp which has not been monetized to its full potential, but as a company it is nowhere near the quality of a Microsoft or Google.
What Buffett has taught us is that we should invest in companies with moats, and then keep them (forever). He first bought Coke stock for Berkshire in 1988 and still holds the company today. I believe Microsoft and Google are two of these companies with big moats, and if the market gives one the opportunity to add to holdings at lower prices, one should gladly accept.
Bear markets, corrections, recessions and hiking cycles are all part of the natural functioning of markets. One should not fear any of them - it is an opportunity to sharpen the pencil and add those great companies to a portfolio at better prices.