Legendary investor Jim Slater lived through the 1970s stock market crash: the worst slump since the 1930s.

The London share index was at a 21-year low in 1975.

If you find yourself in the midst of a bear market then clearly Slater’s seen a thing or two.

Let’s hear what he has to say. (My comments in italics).

Slater’s tips on spotting a bear market bottom

Cash is king
At the bottom of a bear market, everyone agrees cash is the best place for your money. Even fund managers will be holding stacks of cash. This money eventually goes into the market, starting the next bull run.

Value is easy to find
Share prices, as measured by low P/E ratios, will be near to historical lows. The average dividend yield will be high, and shares may be selling at a discount to their book value. In 1975, the FTSE Ordinary Share Index stood at 146, with an average P/E of 4 (!)

Interest rates falling
Slater says interest rates have usually started falling from a high level near the end of a bear market. Lower interest rates will eventually revive economic activity.

Money supply rising
Broad money supply tends to be increasing at the turn of bear markets. Money is the lifeblood of the economy. Also, increasing supply will tend to push up asset prices.

Investment advisers are gloomy
The consensus view of advisers will be bearish. If everyone believes the market is going down, it should already have done so.

Little reaction to bad news
When bear markets stop falling on bad news, it can be a sign the market is bottoming out. Slater’s theory is that most of the weak sellers have already sold out. Shares therefore shrug off the latest bad news as long-term holders wait for better times.

Few IPOs
There are very few new issues (IPOs) at the bottom of bear markets. Entrepreneurs with successful companies would rather wait for more optimistic markets, to get a higher price for their creations.

Disinterested media
Press and TV comment shrinks as the public lose interest in shares. Financial articles are universally bearish, and bullish articles are ignored as the work of madmen. The classic contrast in our times is with the late 1990s tech run, when every magazine had a new billionaire CEO on the cover.

“Don’t talk to me about shares”
Nobody believes there’s any point in owning shares in a bear market, since everyone has suffered huge losses. The subject of the markets will rarely come up at parties. A good contrast would be with the property bull market that ended in 2006. Back then you could hardly reach for a bread roll before somebody declared they were buying property to let.

Changes in market leaders
Sectors that have enjoyed many years in the doldrums often start to recover, which may reveal the new leaders in the next bull market. Growth stocks also become “ridiculously cheap” according to Slater, as their P/E rating plunges to the levels of mediocre plodders. Again, think of the dotcoms – tech shares didn’t lead the 2003-2007 bull market, they handed the baton over to commodity stocks.

Upturn in the Coppock indicator
The Coppock indicator is a technical analysis tool that produces buy and sell signals for the markets. An upturn in the Coppock indicator has got a pretty good record as a strong buy signal. The Investors’ Chronicle in the UK publishes Coppock Indicator analysis.

Unemployment
Slater quotes a study by Matheson Securities that looked at ten stock market turning points, and found bear markets usually began on average ten months after unemployment started falling. Rapidly rising unemployment could therefore indicate a bear market is nearing its end. Presumably this would be because companies are shedding costs and becoming leaner and meaner.

Want more of Jim Slater’s wisdom? Check out his investment guide, The Zulu Principle.

This article on PrimaryBid is by The Lone Exchanger from Team Monevator. Every Monday sees another fresh perspective from the Team.

Ping! A fresh notification popped up on The Lone Exchanger’s mobile phone.

He glanced down at the screen, read the message, and began his mental calculations…

Primary colours

One of the many frustrations of life as an active retail investor is you’re bottom of the pecking order.

Trading fees are higher and access to research is limited, compared to what the professionals enjoy.

It’s also much harder to participate in company fundraisings.

Technology is slowly changing things, however. And that’s to the benefit of everyday investors like you and me.

Dealing fees have been slashed to zero by apps such as Freetrade. Independent stock research is available on platforms such as Twitter and Substack. There are also more investing podcasts.

As for improving access to company fundraising – enter PrimaryBid.

PrimaryBid is an app-based platform. It enables retail investors to more easily invest in new raises alongside institutional investors.

The service is free to use. Launched in 2016, it already has over half a million users.

PrimaryBid is regulated by the Financial Conduct Authority. It even boasts the London Stock Exchange among backers of its recent $50m fundraising.

Shaking the tin

Some access to fundraising was already made available by existing brokers.

But PrimaryBid offers a far wider selection, and makes the process easier.

When a company wishes to raise money via issuing shares – known as equity financing – it traditionally has several options.

If the company is privately held, it can move onto a public stock market. This happens via an Initial Public Offering (IPO), also known as a flotation.

Here the company employs investment bankers to produce a prospectus and to ‘sell’ the company’s prospects to (traditionally) deep-pocketed institutions. The institutions buy shares prior to an official listing on the stock market.

This pre-IPO activity determines the initial share price when the company goes public. Only then can retail investors usually get in. After the shares have officially started trading on the stock market.

A second route – for companies already publicly listed – involves issuing new shares. (Sometimes called a rights issue or a placing). Placings may go to existing shareholders or to large fund managers.

Due to the logistics of getting multiple investors together, this route has also mostly been limited to large institutions. Occasionally brokerage accounts offer retail investors the opportunity to subscribe. But it’s certainly not standard.

PrimaryBid steps in to make things easier. It connects retail investors interested in a placing or IPO with companies raising capital.

Platforming

Accessing these offers via PrimaryBid is straightforward.

First you download the app from the Apple or Android app store. You then go through a sign-up process. This includes the usual due diligence and ‘Know Your Customer’ checks.

You will be asked to name your broker and submit your account number. This is so PrimaryBid can make sure that any securities you purchase via its platform end up with your broker.

There are two caveats worth mentioning.

Firstly, your chosen broker must be a partner of PrimaryBid.

Most if not all of the ‘traditional’ stock brokerage accounts are on-board. Fidelity, Hargreaves Lansdown, Halifax Share Dealing, Interactive Investor, Lloyds Share Trading, and X-O are all partnered, among others.

However share trading apps such as Freetrade and Trading212 are not.

The second caveat is that due to HMRC restrictions, securities purchased through the PrimaryBid app cannot be transferred into an ISA or SIPP held at your brokerage. (Note that the PrimaryBid FAQ page implies you can get investments into an ISA or SIPP if you apply via the broker. The broker then applies through PrimaryBid.)

Let’s start the bidding at…

With everything set-up, you can browse existing opportunities. You’ll also be notified on your phone with details of any new fundraising.

Opportunities on PrimaryBid fall into three categories:

• Initial public offerings
• General placings
• Accelerated book builds

IPOs

For the first category, you will get a period of time to research the opportunity. This includes the publication of a prospectus and often an expected share price range to ponder.

As ever, the devil is in the detail. An IPO prospectus is extremely detailed (no surprise given all the lawyers involved). Expect many devils to be buried.

For example, when leafing through the Deliveroo IPO prospectus, I spotted a large section discussing the risk of countries in Europe classifying riders as employees, rather than as contractors. That’s something you could well have expected to have an impact on margins. A potential red flag!

Placings

Listed companies can raise additional cash through placings.

Usually you will be given an outline of how the company will use the cash. Acquiring a rival for instance, or perhaps to make an investment into physical assets. (Real estate, a solar panel farm, or similar).

Generally you will have some time to think about investing in placings. This ranges from a couple of days to a few weeks. Often you’ll find these same offers advertised at your brokerage, too. They can be aimed at a large pool of investors, and aren’t necessarily PrimaryBid exclusives.

Accelerated bookbuild

Now the category that raises the heartbeat!

An accelerated bookbuild is a swift process. It is generally concluded within a day or so – more often within a few hours. Earlier this year I saw one close within 90 minutes.

An RNS is issued either before or more often after trading hours. This news alerts the market about the upcoming fundraising.

The RNS will detail the amount being raised, how the cash will be used, and sometimes the share price being offered. (Often that’s at a discount to the prior closing price). There will also be additional information, such as whether any directors or major shareholders are participating.

You may not see a share price mentioned. This will be determined by the bids put in by institutional investors. Retail investors should get the same price in the end. However you’re effectively investing blindly.

If there’s high demand your subscription may be scaled back, with priority given to new shareholders over existing ones. (PrimaryBid determines your status by asking whether you are an existing shareholder on subscribing.)

If you choose to invest, you’ll make a payment via your debit card. There can be a minimum investment amount, usually £250.

Upon their admission to the stock market your shares should be speedily transferred to your nominated brokerage account.

Wrapping up

PrimaryBid is another useful tool in an active investor’s kit. It offers simple access to opportunities that would otherwise be unavailable to us.

Directly investing through fundraisings can even be way of avoiding dealing charges, because the shares go directly into your broker account.

I’ve used the platform to subscribe to eleven offerings over the past year. The process is fairly slick, although not on a par with the likes of FreeTrade.

One downside PrimaryBid has in common with other apps are notifications designed to grab your attention. The aim is to increase the likelihood of you investing. Be conscious of this. Think before committing any funds – particularly with quick raises such as accelerated bookbuilds.

Placings, IPOs, and accelerated bookbuilds can be complicated. Let’s hear your questions and comments below!

See more articles by The Lone Exchanger in their dedicated archive.

What caught my eye this week.

All of us know that a calendar year is an arbitrary period over which to measure non-astronomical progress. That’s true whether you’re looking at an expanding portfolio or a shrinking waistline. Or, worse, the opposite!

Yet 90% of us do it anyway.

Far be it from me to take the high ground here. Not when one of my favourite rituals of the quiet New Year is resetting my return tracking spreadsheet.

I love pressure washing the slate clean. Percentages gained and lost and my benchmarks are zeroed. So too is the chunky annual expense tally that’s racked up by my naughty active style.

I try to be happy that my transaction taxes pay for a new nurse somewhere, and resolve to do better.

I also resolve to eat less fried food, and to read more books and fewer Tweets.

We’ll see.

Money for nothing

If tracking annual returns is illogical, forecasting them is insanity.

Yet plenty of well-paid professionals do that, too.

As a financial media junkie, this time of the year sees me digest a hotpot of forecasts from everyone from hedge fund managers and market strategists to bank interns.

They aim to pin the tail on a donkey, by predicting where the world’s biggest stock market indices will sit in exactly 12 months.

Such precision is, of course, errant nonsense.

Nobody knows where the market will be tomorrow, next month, or in a year. Most market prediction methods don’t predict much of anything. Animal spirits loom large – not to mention pandemics caught from animals.

True, over the very long-term GDP growth and stock markets are related in healthy economies. Prices of assets ultimately follow earnings. The price you pay affects the returns you get, so valuation does matter.

But ‘ultimately’ is doing a lot of heavy lifting there. Think decades.

Short-term, anything can happen. For example, consider how the immense contraction in GDP in early 2020 foreshadowed a boom in shares. Nobody saw that coming. Just saying the world wasn’t ending felt contrarian enough.

Still, I’ve also mellowed about these market forecasts. It helps that wider scrutiny via the Internet means fewer people take these horoscopes as gospel nowadays.

Most market mystics just slap roughly 10% on to wherever the stock market sat at the end of the year just passed and call it job done. And in truth that’s about as good a guess as any.

There are more important things to be cross about than pragmatism.

Sultans of swing

Where the pundits do spin stories to justify their +10% forecast – beyond it being an (optimistic) historical near-norm, twiddled for inflation – you can also get an insight into what’s driving the big money.

It’s similar to how some stock pickers start with a company’s market cap, then work back to see what assumptions are being made about its earnings and growth. You can do the same with these wider prognostications.

In an era where people are flipping blockchain-ed JPGs of cartoon monkeys for millions of dollars on a daily basis, thinking about how the stock market might move over a long 12-month period – and why – seems almost sagely.

Right now investors seem to foresee rates rising, but at a moderate pace. Real yields are expected to remain low, historically-speaking. Quantitative tightening (yep, it’s a thing) should eventually drain some liquidity from the system, but it’s thought more normal economic conditions will pick up the slack. Crucially, inflation isn’t expected to run hot indefinitely.

That summary might not sound like anything to scare the horses. But it’s already been enough to crash the highly-rated ‘disruptive’ growth stocks that boomed during the pandemic.

As Michael Batnick points out:

The story that best encapsulates investor enthusiasm for growth stocks was when Zoom’s market cap crossed ExxonMobil [XOM], which traces its roots back to 1870.

When Zoom went public in 2019, XOM was 21x the size. And then, for one brief moment during the pandemic, Zoom took the lead. After the recent growth crash, Exxon is now 5.5x larger. Order has been restored to the galaxy.

Multiple compression has done a number on these stocks. The median price to sales ratio for ARKK names peaked in February at 33 (Zoom got up to 120) and is now down to 10.5.

So much for the highest-fliers. If anything they’re starting to look more like buys than sells to my spidey senses, if you’ve a long enough time horizon.

Your latest trick

A question mark also hangs over what we used to call ‘bond proxies’ in the old days. (You know, those ancient times before March 2020).

These are the high-quality, slower growers like Nestle and Diageo. The sort of companies beloved of star fund managers Nick Train and Terry Smith.

Shares in many such firms have been stagnant for a while but – especially outside of the UK – their valuations remain largely unattractive on a historical basis. Yet the same financial modeling that sees higher yields compressing racy tech stocks should also imply lower multiples for these chocolate makers and whiskey merchants, albeit not to the same degree. I’m watching these companies very closely for clues.

Then finally we have the value stocks – banks, miners, energy firms and the like.

The presumption is rising rates, inflation, and economic growth are good for these because future higher earnings aren’t so valuable as they are in a low-growth, low-yield world. Hence the market sees more rotation into such companies.

For what it’s worth (nothing) I’m not so sure. A lot of assumptions underpin that trade. I find it hard to be confident of an economic boom, with Covid still raging a year on from vaccine euphoria. I believe too that supply chains and consumers alike are getting better at dealing with the pandemic’s impacts. That’s one reason I don’t see high inflation persisting.

Brothers in arms

It’s possible – especially in European markets, which has less of a growth and tech focus – that money could continue to rotate from one kind of company and into another, and the market still head higher.

Individual fund manager or factor returns could crater, depending on style. But index investors might barely feel a flesh wound.

So will the market go up in 2022? Your guess is as good as mine.

Instead of an unsatisfactory answer, a better question: which market?

This graph from Visual Capitalist illustrates a wide variety of moves across asset classes in 2021:

That’s from the perspective of a US investor, but the message is universal.

Diversification potentially gives you more leg-ups and safety ropes in an uncertain future. Whereas betting on just UK value shares or US software-as-a-service or whatnot – or even only shares or cash – is exactly that. A gamble.

If you want more soothsaying for the year ahead, try Saxo Bank’s annual outrageous predictions. They’re tongue-in-cheek, and interesting.

Happy 2022!

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