Investing in Stocks in Turbulent Times
Some investors have a different perspective on sharemarket slumps. They see the low stock prices as a chance to purchase a bargain.
During times of market turbulence, it is our natural instinct to protect our wealth and distance ourselves from risk. While this reaction is not surprising, it can also mean losing out on profitable opportunities created during crazy times.
Warren Buffet, one of the world’s best investors, believes 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 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 stocks that have dropped in price with fear? Stock prices of a listed company can drop for a multitude of factors. Lately we have seen the share prices 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 uncertain share trading environment, professional investors are constantly checking the market for buying opportunities. Many superannuation managers are searching to find stocks in sound 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 companies will be affected by the global 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 unchanged, 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 18 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 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 housing 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 bonnet 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 value has fallen for valid reasons or if the company is indeed on sale’.
When investing, many fund managers look for firms with high and maintainable returns, 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 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 tailored 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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