Welcome to Value3: The Next Evolution of Value Investing
Downturns Aren't a Threat - They're a Gift
The real challenge isn't deciding whether to invest during a downturn - it's knowing what to invest in, how, why, and when.
Since 1950, over half of the S&P 500's best days occurred during bear markets. Another 30% came within two weeks of a market bottom.
The takeaway is clear: If you're waiting for clarity, you'll likely miss the upside.
Market downturns are undeniably painful, but they're also fertile ground for exceptional returns.
The real challenge isn't deciding whether to invest during a downturn — it's knowing what to invest in, how, why, and when.
The Counterintuitive Logic of Investing in Downturns
My approach to investing during market turbulence isn't complicated:
When markets recover, you've acquired great assets at a discount. Even in full-blown disasters, quality businesses not only survive but bounce back fastest and often come out stronger after weaker competitors are acquired or go under.
Buffett's legendary moves prove this strategy:
- Coca-Cola after the 1987 crash
- Banks during the 2008 financial crisis
- Apple in 2016
He's not being contrarian for the sake of it — he's being rational.
Real-World Example: ResMed (RMD) —
When the Market Overreacts
Not every opportunity comes during a full-blown market crash. Sometimes, it's just one sector — or even a single misunderstood business.
ResMed, the global leader in Sleep Apnoea management, had been on my watchlist for years as a potential super compounder. But I'd never owned it — the price was always too high to meet my 20% compound return target with a margin of safety.
Then, along came Ozempic for treatment of type 2 diabetes.
In August 2023, the media ran wild with headlines, and some brokers began claiming that GLP-1 weight loss drugs like Ozempic would make Sleep Apnoea treatments obsolete. The result? ResMed's share price tumbled — its PE ratio collapsed from 31.3 to 19.3, and the stock fell from $35 all the way down to $21.14 by October 2023.
The market, as it often does, overreacted.
We spoke directly with management, and their view was far more balanced: they believed there was a 50/50 chance Ozempic could actually help their business. Why? Because patients seeking the drug would need to see their GP, and many would be referred for sleep studies — uncovering undiagnosed Sleep Apnoea problems. Also, many have sleep apnoea even though they are not overweight.
That insight plus my confidence in the quality of the history of management gave me conviction to act.
I started building a large position and averaged in at $22.05 — confident in the underlying business and its long-term future.
Fast forward a few months, and ResMed rebounded to $40.75 — a 92% gain. I intend to hold the position long term.
BTW there's been no drop in ResMed's EPS growth rate of 16.4% PA, with 92% stability over the last 5 years - see the visual below. So no negative Ozempic effect.
It's a classic case of the market mispricing fear — and one of many examples of why patient, evidence-based investing works.
RMD Value3 EPS graph:
The Anatomy of a Market Downturn
Markets don't crash overnight. They unravel in distinct stages:
First: Speculative stocks get hit (those with no earnings and big promises)
Next: High-growth darlings fall — usually dramatically
Lastly: Even quality giants get sold off — typically to raise cash
I pay closest attention to that third stage. When industry leaders like Costco, Microsoft or CSL go on sale, then it's time to take notice.
My 4-Step Downturn Playbook
1. Wait for the Storm to Subside
"Don't rush to invest at the first sign of a dip. Patience will pay."
2. Review my pre-researched watchlist of businesses I understand and want to own.
In other words, I am always prepared with my shopping list.
As Buffett say’s “I’m prepared to wait for ever for a stock I’m lusting to own” - meaning if he can’t buy it at a price that will give him, his required rate of return he will just keep waiting.
Update and re-rank the list from strongest to weakest.
Typically, they will have the following characteristics - at a minimum:
- Consistent 5-year earnings growth > 12%
- High returns on capital (12%+)
- Minimal disruption risks
- Strong Moats
- Founder Mentality - Management with lots of skin in the game
- You don’t believe whatever caused the market drop will impact the company at all, or for long
It's also important to remember that the market is dynamic. Valuations are always changing, not just on an absolute basis but also relative to the market. In an expensive market, companies trading on an average PE may seem good value. But as the market becomes less expensive, average PE companies become far less compelling.
This makes it crucial to update your watchlist and price targets regularly to ensure you’re not passing up even better opportunities.
3. Apply a conservative valuation approach.
- Use the EPS growth rate, based on historical performance and my understanding of the business
- Determine a fair terminal PE multiple in 5 years' time
- Build in a margin of safety (I typically discount my target price by 15-20% to allow for errors in my analysis)
Buying Strategy:
- Choose the strongest contenders that also show the highest potential return over 5 years – always with minimum 20% PA
- If the price reaches my target? I buy
- If it falls further? I carefully add to my position in tranches up to my available cash.
4. Make use of limit orders.
The past few days have reminded me of just how volatile the market can get. This is especially true in the US. On Monday night, the S&P 500 moved 7% in intraday trade.
Swings were even bigger for some of the large technology companies. Nvidia traded at $87 before gaining 14% in the space of a few hours to reach $99. Similarly, Amazon changed hands for $161 before surging almost 11% higher to $179 in a similar timeframe.
To take advantage of such wild swings, it pays off to settle on price targets in advance and place limit orders before you go to bed. That way, if the share price gets there during the night (even momentarily) you’ll be able to lock in your desired price.
Recent volatility examples:
NVIDIA:
$87 → $99 (+14%)
Amazon:
$161 → $179 (+11%)
A Repeatable Cycle
This isn't a one-time approach. The cycle continues:
- Be patient, 'don't let cash burn a hole in your pocket', wait until you can buy high-quality businesses at a discount
- Hold them until the original investment thesis is no longer valid
What about Smaller Growth Stocks?
An observation I've made over multiple market cycles: Typically, what falls first, recovers last. What falls last, recovers first.
While highly liquid market leaders bounce back first, smaller growth stocks often lag - which creates an opportunity window. My approach:
Wait for market sentiment to turn more positive before investing in smaller companies.
Personal Portfolio Construction
- Core portfolio (dominant, profitable compounders): circa 70%
- High-growth potential Super Compounders: < 30%
- Unprofitable speculative stocks: 0%
- Companies that I don’t believe will return my minimum RRR over the next 5 years: 0%
70%
Quality Compounders
30%
Super Compounders
0%
Speculation
0%
Low Conviction
Final Thought: Strategy vs. Execution
This approach isn't groundbreaking in its complexity. But here's the truth: Execution trumps ideas.
You don't need a perfect model — you need the courage to follow a solid strategy through market turbulence.
Stay patient, remain rational, and keep calm while others panic. That's how you'll spot opportunities and realize exceptional returns. And lastly, avoid looking for emotional support - the more opinions you get, the higher the likelihood you will do nothing and miss out.
That's the edge in my opinion.
Master Crisis Investing
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P.S. Since I first wrote this letter, we’ve had a bit of a Trump Tariff Tantrum.
As long as tariff uncertainty dominates the headlines, fundamentals will take a back seat in the short term. And that’s perfectly fine with us at Value3. These are the moments—when price disconnects from value—that create outsized opportunities for long-term investors. You just need the patience and discipline to act.
If you’ve been watching the media, you’d be forgiven for thinking it’s the end of the world (again). My take? Trump has been pretty clear: he wants to reset the US economy in America’s favour—fixing trade imbalances, tackling deficits, and launching a new Department of Government Efficiency, (DOGE) with a goal of cutting $2 trillion in waste and fraud.
He’s also said some short-term pain is necessary—and he’s delivering on that promise.
My expectation? The Trump team will strike deals with the key players like—China, Japan, and others—and once markets realise it’s not the end of the world, we’ll likely see a sharp V-shaped recovery. (Think: post-COVID bounce.)
Will that happen this week or next? No idea. But here’s what I do know: Quality Super Compounders are on sale—some down over 20%.
Personally, I’ve been doing a bit of shopping—mainly in US tech. Nvidia (NVDA), Amazon (AMZN), and Broadcom (AVGO) are on my list. And remember: the only time you’ll know where the bottom was… is with hindsight.
If you think there will be more downside, a useful tactic that works for me, is to dollar-cost average in over a week or a month. That way, you don’t miss the sale while you wait and hope to buy lower. It may not happen.
Remember long-term returns aren’t made in calm, predictable markets. They’re made when most people are too scared to buy and choose the relief of selling - unwittingly - sabotaging their financial future.
Right now, the over-leveraged and short-term crowd are panicking. But the patient, un-levered, long-term investors like you and me? They’re relaxed, buying and —maybe even smiling.
Make sure you’re on the right side of that line.
Disclosure: This is general advice only. Past performance ≠ future results. Consult a financial advisor.
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