Don’t Write Off Shares Just Yet
Some people have a different view on sharemarket downturns. They see the low stock prices as an opportunity to buy a cheap shares.
During times of economic volatility, 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 growth opportunities created during uncertain periods.
Warren Buffet, one of the world’s best investors, sees market slumps from another viewpoint, saying “Look at market swings as your friend rather than your foe; 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 stocks. Why is it that we treat shares that have dropped in price with dread? Stock prices of a listed company can drop for a multitude of reasons.
Lately we have seen the share prices of a number of good 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 constantly checking the market for investment opportunities. Many fund 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 companies will be affected by the global economic crisis similarly. Some sectors are more prone to the economic cycle than others.
Companies who deal in of basic goods and services continue on almost unchanged, 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 18 year peak and growing at 1.7% per year. 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 housing.
Population growth is nearly double 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 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 companies with falling share prices with fear, but we need to take a look under the hood of these companies 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 stock price 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 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 strategy, you should seek financial advice. 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 designer brisbane. Distribution by seo packages. BS1004
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