Don’t Write Off Shares Just Yet
April 10th, 2009
Some investors have a different view on stockmarket declines. They see the low stock prices as a chance to purchase a good deal.
During times of market volatility, 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 uncertain times.
Warren Buffet, one of the world’s best known professional investors, sees market downturns from another perspective, saying “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”
Generally when we see a lower price for something we want we rush in for a bargain, however it can be quite the opposite with stocks. Why is it that we treat stocks that have dropped in price with dread? Share prices of a listed firm can fall for a number of factors.
Lately we have seen the stock prices of a number of good companies with sound balance sheets be negatively affected due to a rush to sell as a result of the economic crisis.
Despite the uncertain trading environment, professional investors are always 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 firms will be affected by the global economic crisis similarly. Some industries are more susceptible to the economic cycle than others.
Providers 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 19 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 accommodation.
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 building 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 firms 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 look for firms with high and maintainable dividends, 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 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. This article brought to you by a Brisbane business consultant who offers sales training and a web site designer brisbane. Distribution by seo packages. BS1004
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