‘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.

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asx share vomit buying represented by cartoon image of businessman vomiting up dollar notes

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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.

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Returns as of 15th February 2021

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.

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