Tuesday’s market sell-off was a timely reminder of the risks inherent in investing, but for Merewether Capital’s Luke Winchester the drop is only an inconvenience.

Speaking to Reach Markets, Mr Winchester said that while this year’s tough market conditions have not been ideal for investors, the pain that market players have experienced so far is likely only temporary.

And while some companies will struggle through this period, investors who look for businesses with positive cash flows and healthy growth potential should be sitting pretty in the long run.

Some of Mr Winchester’s investors have even seen 2022’s soft markets as an opportunity rather than misfortune, and have chosen to buy into the weakness.

“We have a portfolio of businesses that, despite being small, most of them are profitable, nearly all of them are cash flow positive or could be if they had to be,” he said.

“It gives me confidence knowing if we are hunkering down to weather this storm for however many months and maybe years, we can do that with these businesses.

“I’m not going to wake up tomorrow and find any of these businesses in administration or bankruptcy.”

Being able to generate positive cash flows puts businesses at something of an advantage in these market conditions, Mr Winchester said, because it gives them the capital they need to sustain their business without relying on external capital.

That also helps protect from the other big risk that investors during tough markets can face – having their positions watered down by companies that constantly need to tap the market for additional funds.

Bad markets create good returns

Mr Winchester noted that while it may seem counterintuitive to buy during volatile and bearish markets, investing during these periods can often generate the best returns.

“It’s the seeds you plant today that become your returns in the future, and it’s so hard to do emotionally but you just have to try, you have to almost force yourself,” he said.

“You only have to look back to COVID to see that the people who were willing to grit their teeth and buy in late March, they were earning multiples on businesses as they rebounded.

“I don’t expect the recovery to bounce back as quickly as it did last time, there were mitigating circumstances there that aren’t here this time around, but I struggle to see how things aren’t on the road to recovery over a multi-year time frame.”

Luke will be joining us this Friday, 17th June, at 12pm (AEST) for The Insider: Meet the Fund Manager webcast, where he’ll explain why market fear and panic is causing investors to make irrational decisions and why keeping emotions in check is crucially important when markets edge lower. He’ll also discuss some of the key stocks in his portfolio that could be well placed to navigate the current economic environment. To join us for this session, click here. 

Reach does not assume responsibility for the accuracy or completeness of any information provided, and the views expressed are not reflective of Reach Markets’ position