Written by Some investors have a different view on stockmarket slumps. They see the low stock prices as a chance to buy a bargain.
During times of economic turbulence, it is our natural instinct to protect our wealth and distance ourselves from risk. While this reaction is unsurprising, it can also mean missing out on profit opportunities created during crazy times.
Warren Buffet, one of the world’s wisest professional investors,
believes market downturns 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 cheaper 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 listed company can drop for a number of
reasons. Lately we have seen the stock 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 trading environment, fund managers are always checking the market for investment opportunities. Many fund managers are searching to find shares in profitable 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 similarly. Some industries are more susceptible to the economic 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 manufacturing, motor vehicle sales or luxury goods.
Australia’s population growth is at a 20 year peak and growing at 1.7% per annum. 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 twice 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 accommodation and a rising population will create growing demand for housing which will support further construction and
provide opportunities for the building 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 firms 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 companies with high and maintainable dividends, 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 see 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 cut 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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