Don’t Write Off the Share Market Just Yet

Some investors have a different perspective on sharemarket downturns. They see the low stock prices as a chance to snare a good deal.

During times of economic fluctuations, it is our natural instinct to protect our assets and distance ourselves from risk. While this reaction is not surprising, it can also mean losing out on profitable opportunities created during crazy periods.

Warren Buffet, one of the world’s best known professional investors, believes market downturns from another viewpoint, 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? Share prices of a company can drop for a number of reasons.

Lately we have seen the stock prices of a number of good companies with healthy balance sheets be negatively affected due to a rush to sell as a result of the economic crisis.

Despite the difficult share trading environment, professional investors are constantly reviewing the market for investment opportunities. Many fund 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 companies will be affected by the global economic crisis in the same way. Some industries are more prone to the business 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 tourism, motor vehicle sales or luxury goods.

Australia’s population growth is at a 20 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, and other staples. 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 double 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 housing 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 businesses with falling share prices with fear, but we need to take a look under the bonnet 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 share price has fallen for valid reasons or if the company is indeed on sale.

When investing, many fund managers seek firms 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 strategy, you should seek financial advice. 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 coach who offers sales training and a web design brisbane. Distribution by seo packages. BS1004