Investing in Shares in Troubled Times
Some investors have a different view on stockmarket slumps. They see the low stock prices as a chance to buy a good deal.
During times of market volatility, it is our natural instinct to protect our investments and distance ourselves from risk. While this reaction is unsurprising, it can also mean missing out on profit opportunities created during crazy periods.
Warren Buffet, one of the world’s wealthiest investors,
sees market slumps from another perspective, saying “Look at market swings as your friend rather than your enemy; profit from folly rather than participate in it.”
Generally when we see a lower price for something we want we rush in for a good deal, however it can be quite the opposite with shares. Why is it that we treat stocks that have dropped in price with fear? Stock prices of a company can fall for a number of
factors. Lately we have seen the stock values of a number of blue chip companies with healthy balance sheets be negatively affected due to a rush to sell as a result of the economic crisis.
Despite the difficult share trading environment, fund managers are always checking the market for investment opportunities. Many superannuation managers are searching to find stocks in profitable companies with strong balance sheets and dividends. 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 businesses will be affected by the global economic crisis similarly. Some industries are more prone to the business cycle than others.
Companies who deal in 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 tourism, motor vehicle sales or luxury goods.
Australia’s population growth is at a 20 year high and growing at 1.7% per annum. Australia’s growing population provides increasing demand for goods and services as people need food, housing, cars, and other staples. Unlike many overseas countries, Australia benefits from two key factors: a high population growth rate and a high demand for housing.
Population growth is nearly twice that of the US while Germany has negative population growth. In the US there is an over-supply of housing while Australia suffers from a lack of supply. The combination of limited housing and a rising population will create growing demand for housing which will support further building and
provide opportunities for the construction industry.
The value of companies
Many people view companies with falling share prices with fear, but we need to take a look under the hood of these firms to find out 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 stock value has fallen for valid reasons or if the company is indeed on sale.
When investing, many professional investors look for companies with high and maintainable dividends, strong balance sheets and ongoing cash flow. These companies are more likely to outlast 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 investment, you should consult 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 structured to your risk profile and time horizon, giving you the certainty of knowing you’re doing what’s right for you.
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