The Only Way How to Make Money so the Money will Make You
Is There Ever A Perfect Time To Invest?
Generally, investment advisors suggest you do not try and pick the market. Rather you invest for the long term and in doing so, you gradually build up your investment portfolio over time, regardless of the market conditions pertaining to those times. If you spread your investments out over time, you will tend to always end up on top, despite the peaks and troughs. Every now and then though, the investment markets give us an opportunity to get in "at the bottom", or close enough to, and therefore the opportunity to ride the market all the way up to the top. Buying during these times is a great way to build value and enhance the returns of your portfolio
Market Sentiment
Quite often, investment markets are driven by sentiment, rather than value. This happens particularly at the extremes of an investment cycle. This means that at the top of a cycle, it is often a euphoric sentiment that pushes share prices up to record highs, rather than the underlying value of stocks. Similarly, at the bottom of an investment cycle, it is often a panicked sentiment that pushes stocks down, way past the value of the companies.
Everyone knows about these phenomena, they are commonly called the "crowd mentality", yet they happen in every investment or business cycle. The top of a cycle will be called a "boom" of some kind, and the bottom of the cycle will be called a "crash" of some kind.
The start of 2008 is a prime example of a "crash" period. Due to real financial concerns in the US, the Australian stock market has plummeted. The market is looking for any excuse to strip value off companies' share prices. Our market is almost perfectly following the movement of the US market, despite the relative economies being in completely different phases of the business cycle.
For example, in Australia during this period, the Reserve Bank is continually raising interest rates as our economy is strong. We have full employment and the RBA fears excessive inflation increases. In the US, the opposite is happening. The US economy is weak, there is a constant and real fear of recession. As such, the US Federal Reserve is continually dropping interest rates to try and get the economy moving. Why are our stock markets moving in the same direction then?
Buying Opportunities - Get Advice
(Please note, the information contained within this article is not financial advice. Please see a licensed broker for advice before making your purchasing decisions)
As a result of this, quite often the share price of specific companies has dropped significantly due to little other than sentiment. I hold 2 stocks which seem to have done this. QBE is one, they released to the market half yearly record revenue and profit results. It was the most profitable result they have ever produced. In response to this, the market sold QBE down from $32, to $20. BXB posted a similarly strong result yet has also been sold down, from $14 to under $10.
Our banking sector is similar. The Australian banking sector as 1 has been dramatically sold down, many of the banks losing over 50% of their value. A big reason for this is that the problems in the US are driven from the US banking sector. (with the Sub Prime meltdown) The interesting fact though is, that both the Aussie banks exposed to the US and those not exposed to the US have been sold down. There has been no discrimination, all banks lost value.
These situations can create great buying opportunities for the savvy investor. You need to remember that a company's value (share price) will ultimately come from its ability to make a profit, and pay income to its shareholders. There are currently plenty of solid Australian companies who have lost tremendous share price value, (ie. 30 - 50%) yet their ability to earn and pay dividends is unchanged or improving. These companies will soon be declaring relatively high dividend yields. When this happens, investors will flock back, hoping to take advantage of these yields, pushing the share prices back up.
See a licensed financial advisor. Talk to a stock broker. Find out which Australian stocks fit this bill. These are your buying opportunities.
An Appropriate Strategy
In periods like the current, you need to remember that the market is still quite unstable. There is still much volatility. So keep your strategy safe, leaving yourself plenty of room to move. Do not push your margin loans, as one panicked day can leave you in all sorts of trouble (even if the market bounces back the next day)
The type of strategy I pursue in these times, is a dividend growth strategy, once again looking at improving the income generating properties of my portfolio. I will purchase stocks which have historically paid good dividends, and where the dividends improve over time. Buy these stocks cheap today, and the dividend yield on the stocks over the next 5 years will tend to improve beyond any interest payment you are likely to get anywhere else. Add in the capital gains, and additional income you can earn with options as we explain in our Stock Market Trading Strategy, and you have one sure fire safe and profitable stock market strategy.
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