'Vomit buying': How fundie spent $110m during COVID-19 crash

Buy low, right? This is the sort of courage it takes to actually do that as people are fleeing a burning building.

| More on:
asx share vomit buying represented by cartoon image of businessman vomiting up dollar notes

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Late February and most of March, we saw something we hadn't seen in more than 10 years. 

A share market crash.

You know the story. The S&P/ASX 200 Index (ASX: XJO) hit 7,162.5 points on 20 February, then COVID-19 came — and it had sunk to 4,546 on 23 March.

That's almost a 37% drop in just one month.

Long-held investor wisdom says one must buy when the market sinks to such lows. Pick up the bargains, they say!

But we are all human and it takes even seasoned professionals a tremendous amount of courage to buy when everyone else is selling.

Pengana Australian Equities Fund was in the fortunate situation of sitting on a decent cash pile when the markets plunged as the world went into lockdown.

The fund's chief investment officer and Australian Equities senior fund manager, Rhett Kessler, used that stockpile to buy ASX shares during the crash.

His nerves were shot though, he admitted.

"It was fantastic we did this, but I can honestly say it was one of the toughest periods in my 30 years of experience in this industry," Kessler told an investor briefing.

"It enabled us to apply $110 million of our cash into shares, at really attractive prices."

Vomit buying

Kessler said that buying shares when everyone is selling is called "reaching across the abyss" — as in trying to get to the other side of a canyon. Or perhaps the other side of the price graph.

But there's also a more experientially literal term: vomit buying.

"You literally buy something, then you stand up. You walk around the desk, trying your hardest to settle your stomach so that you don't throw up," said Kessler.

"Then you sit back down, and you buy some more at 5% lower."

Kessler's team did this repeatedly during those harrowing weeks in late February and March.

And it has paid off handsomely for Pengana investors, with the ASX 200 climbing more than 36% since the March trough.

Although Kessler considers his Australian Equities Fund to be reasonably careful with its capital, he said you can't procrastinate during such frantic times.

"It's no good just saying you're conservative. You have to be able to act when opportunities present themselves," he said.

"By deploying so much cash that we went from one of our highest levels of cash to our lowest level of cash in the history of our fund over the period of a month… Speaks to our discipline and our ability to act when needed."

Kessler said the fund had already cashed in a lot of its winnings to build its cash reserve back up.

"Bizarrely things have turned almost 180 degrees. Not only did the market correct… it bounced back enormously. In our view, to some extent it's trading above fair value," he told investors.

"We've gone from our lowest level of cash to net sellers, at very attractive prices."

The Pengana Capital Group Ltd (ASX: PCG) share price itself has almost doubled since the COVID-19 bottom, trading at $1.50 on Wednesday afternoon AEST. It had tumbled to 82 cents back in March.

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Investing Strategies

Woman calculating dividends on calculator and working on a laptop.
Dividend Investing

3 ASX 300 dividend stocks to buy now for income

Brokers think these dividend stocks are buys right now. What sort of yields are they forecasting?

Read more »

Stressed thoughtful old female general practitioner doctor physician looking in distance, considering difficult medical problem solution or illness treatment, working on computer in clinic office.
Healthcare Shares

How much do you need to invest in CSL shares for $8,000 in annual dividends?

CSL's dividends are exponentially more valuable for long-term investors.

Read more »

A male investor wearing a blue shirt looks off to the side with a miffed look on his face as the share price declines.
Dividend Investing

Why is the Soul Patts share price falling today?

Is today's decline actually good news?

Read more »

A woman has a thoughtful look on her face as she studies a fan of Australian 20 dollar bills she is holding on one hand while he rest her other hand on her chin in thought.
Dividend Investing

Is Telstra stock a smart buy right now for dividends?

Would I buy Telstra shares for that hefty dividend yield today?

Read more »

Three women cruise along enjoying ice-creams in the sunshine.
Dividend Investing

The best dividend stocks in Australia right now

Growth and stability are just two of the reasons why I think these are the top ASX 300 stocks for…

Read more »

Man drawing an upward line on a bar graph symbolising a rising share price.
Growth Shares

These ASX 200 growth shares could rise 12% to 30%

Analysts think big returns could be on offer from these shares.

Read more »

Man holding a calculator with Australian dollar notes, symbolising dividends.
Dividend Investing

Buy these ASX dividend shares with 6% to 8% yields: Bell Potter

Big yields could be coming for owners of these shares.

Read more »

Man in an office celebrates at he crosses a finish line before his colleagues.
Growth Shares

Hoping to beat the ASX 200? I'd consider buying these 3 ASX shares

Analysts think these shares can outperform the market.

Read more »