The famous Warren Buffett dictum urges investors to “be fearful when others are greedy, and be greedy when others are fearful”. It’s a well worn piece of advice that has served many people well over the decades. But there’s another quote that I am fond of – it’s something that I once heard value investor Seth Klarman say.
In investing, whenever you act, you are effectively saying, “I know more than the market. I am going to buy when everybody else is selling. I am going to sell when everybody else is buying”. That is arrogant, and we always need to temper it with the humility of knowing we could be wrong – that things can change – and acknowledge that we have a lot of smart competitors.
In other words, investing is a fundamentally arrogant act (at least in part). It takes a lot of self-confidence to say that you know better than the millions of other well informed investors, many of whom are professional money managers. This is particularly true when it comes to large cap stocks – those that are followed by hundreds of analysts at dozens of investment banks and brokerages. And so you must think very long and hard before deciding to put yourself out there and claim that you know better.
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The opportunity
I think that Royal Dutch Shell (LSE: RDSA) is one of those cases where investors need to look at the facts and conclude that they are looking at a perfect opportunity. Here are those facts. Shares of Shell are currently trading at an almost 8.5% dividend yield. This is almost double the yield for the FTSE 100 as a whole (4.6%). Naturally, a high dividend yield on its own is not a reason to buy a stock – indeed, it is often a reason for caution, as it can indicate that a dividend cut is in the offing. However, Shell hasn’t cut its dividend since World War 2 – a very impressive record that I think makes it highly unlikely that today’s management will want to be the first in over 70 years to do so.
Moreover, I also find Shell stock to be reasonably priced. It is currently trading at a price-to-earnings ratio of 8.8 and its share price is approaching 20-year lows. Naturally, the coronavirus outbreak, which has been responsible for the recent stock sell off, has weighed on the share price. Additionally, it seems reasonable that the resulting economic slowdown in China will have a dampening effect on oil demand. And to top things off, oil prices are currently at the lowest they have been in two and a half years, which of course translates to lower margins for oil producers like Shell.
But I also know that oil prices are cyclical, that economic activity will eventually resume, and that valuation matters. Unless we all stop needing oil tomorrow, I think this is a great opportunity for income investors looking to add to their retirement portfolios.
