Don’t Write Off the Share Market Just Yet
Some investors have a different perspective on sharemarket falls. They see the low stock prices as a chance to invest in a bargain.
During times of economic change, it is our natural instinct to protect our wealth 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 most successful professional investors, believes market downturns 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 cheaper price for something we want we rush in for a bargain, however it can be quite the opposite with shares. Why is it that we treat shares that have dropped in price with dread? Stock prices of a listed firm can drop for a number of factors.
Lately we have seen the stock prices of a number of reputable 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, professional investors are always 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 businesses will be affected by the world economic crisis in the same way. Some industries 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 supermarkets aren’t as affected as much as manufacturing, motor vehicle sales or luxury goods.
Australia’s population growth is at a 20 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 accommodation.
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 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 companies 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 share value has fallen for valid reasons or if the company is indeed on sale.
When investing, many fund managers seek firms with high and maintainable returns, strong balance sheets and ongoing 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 consult a professional. Having a financial adviser 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 cut 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 consultant who offers sales training and a web designer brisbane. Distribution by seo packages. BS1004
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