Don’t Write Off the Market Just Yet

Some people have a different view on sharemarket declines. They see the low stock prices as an opportunity to invest in a cheap shares.

During times of economic fluctuations, it is our natural instinct to protect our assets and distance ourselves from risk. While this reaction is unsurprising, it can also mean losing out on profitable opportunities created during volatile periods.

Warren Buffet, one of the world’s most successful professional investors, sees market slumps from another perspective, 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 fear? Stock prices of a company can fall for a multitude of factors.

Lately we have seen the share values of a number of reputable companies with sound 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 constantly reviewing the market for buying opportunities. Many superannuation managers are searching to find shares in sound 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 in the same way. 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 supermarkets aren’t as affected as much as tourism, 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, and other staples. Unlike many overseas countries, Australia benefits from two key factors: a high population growth rate and a high demand for houses.

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 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 companies with high and maintainable returns, strong balance sheets and substantial 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. This article brought to you by a Brisbane business coach who offers sales training and a web design brisbane. Distribution by seo packages. BS1004

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This entry was posted on April 10th, 2009 and is filed under Interesting. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.