Some investors have a different view on sharemarket declines. They see the low stock prices as a chance to grab a good deal.
During times of market change, 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 growth opportunities created during crazy periods.
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 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 shares that have dropped in price with fear? Share prices of a company can fall for a multitude of reasons.
Lately we have seen the share 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 difficult trading environment, fund managers are constantly 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 businesses will be affected by the world economic crisis in the same way. Some sectors are more susceptible 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 food producers aren’t as affected as much as manufacturing, motor vehicle sales or luxury goods.
Australia’s population growth is at a 18 year high and growing at 1.7% per year. 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 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 bonnet 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 seek companies 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 consult 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 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 consultant who offers sales training courses and a web designer brisbane. Distribution by seo packages. BS1004