Don’t Write Off the Share Market Just Yet
Some people have a different perspective on stockmarket falls. They see the low stock prices as an opportunity to get a bargain.
During times of economic turbulence, it is our natural instinct to guard our investments and distance ourselves from risk. While this reaction is unsurprising, it can also mean losing out on profit opportunities created during crazy periods.
Warren Buffet, one of the world’s best known professional investors, believes market downturns from another perspective, saying “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”
Generally when we see a cheaper price for something we want we rush in for a good deal, however it can be quite the opposite with stocks. Why is it that we treat stocks that have dropped in price with dread? Share prices of a listed firm can fall for a multitude of reasons.
Lately we have seen the stock prices of a number of strong companies with healthy balance sheets be negatively affected due to a rush to sell as a result of the economic crisis.
Despite the difficult trading environment, fund managers are always checking the market for buying opportunities. Many superannuation managers are searching to find stocks in profitable companies with strong balance sheets and returns. For example Australian companies such as household names like David Jones have delivered strong profits after tax and dividends in 2008. However during 2008, David Jones’ share price fell by more than 30%.
Identifying opportunities
Not all firms will be affected by the world economic crisis in the same way. Some sectors are more susceptible to the business cycle than others.
Providers of basic goods and services continue on almost unabated, for example we all need to eat - so food producers aren’t as affected as much as manufacturing, retail or luxury goods.
Australia’s population growth is at a 20 year peak and growing at 1.7% per annum. Australia’s growing population provides increasing demand for goods and services as people need food, housing, cars, etc. Unlike many overseas countries, Australia benefits from two key factors: a high population growth rate and a high demand for accommodation.
Population growth is nearly double that of the US while Germany has negative population growth. In America there is an over-supply of housing while Australia suffers from a lack of supply. The combination of limited accommodation and a rising population will create growing demand for housing which will support further construction and provide opportunities for the construction industry.
The value of companies
Many people view businesses with falling share prices with fear, but we need to take a look under the hood of these firms to determine why. Have they borrowed heavily?
What industry are they in? Are they competitive against their peers? Only by answering these questions, can we know if their share value has fallen for valid reasons or if the company is indeed on sale.
When investing, many professional investors seek firms with high and maintainable dividends, strong balance sheets and substantial cash flow. These companies are more likely to outlive the volatility storm and may give you a greater return when the market moves into the next phase of recovery and
beyond.
Before you consider changing your strategy, you should see a professional. Having a financial planner and a long-term financial plan can give you confidence to manage the effects of market cycles. With the right advice you can ensure your investments are tailored to your risk profile and time horizon, giving you the certainty of knowing you’re doing what’s right for you. This article brought to you by a Brisbane business coach who offers sales training courses and a web site design brisbane. Distribution by seo packages. BS1004
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