Some investors have a different perspective on sharemarket falls. They see the low stock prices as a chance to buy a good deal.
During times of economic turbulence, it is our natural instinct to guard our investments and distance ourselves from risk. While this reaction is unsurprising, it can also mean missing out on growth opportunities created during uncertain times.
Warren Buffet, one of the world’s most successful 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 shares. Why is it that we treat shares that have dropped in price with fear? Share prices of a listed company can fall for a multitude of factors.
Lately we have seen the share prices 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 trading environment, professional investors are always reviewing the market for buying opportunities. Many fund managers are searching to find shares in healthy 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 firms will be affected by the world economic crisis similarly. Some sectors are more prone to the economic cycle than others.
Providers 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 manufacturing, retail or luxury goods.
Australia’s population growth is at a 19 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, 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 double 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 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 price has fallen for valid reasons or if the company is indeed on sale.
When investing, many professional investors look for companies 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 investment, you should seek financial advice. 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 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 courses and a web designer brisbane. Distribution by seo packages. BS1004