Investing in Stocks in Difficult Times

Some people have a different perspective on stockmarket downturns. They see the low stock prices as an opportunity to get a good deal.

During times of economic volatility, it is our natural instinct to protect our investments 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 wisest investors, believes market downturns from another perspective, 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 dread? Share prices of a listed firm can drop for a number of reasons. Lately we have seen the stock values of a number of strong companies with sound balance sheets be negatively affected due to a rush to sell as a result of the economic crisis.

Despite the uncertain share trading environment, fund managers are constantly reviewing the market for buying 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 world economic crisis similarly. Some industries 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 supermarkets aren’t as affected as much as tourism, retail or luxury goods.

Australia’s population growth is at a 20 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 houses.

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 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 hood of these companies 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 stock price has fallen for valid reasons or if the company is indeed on sale’.

When investing, many professional investors seek companies with high and maintainable returns, strong balance sheets and ongoing 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 structured to your risk profile and time horizon, giving you the certainty of knowing you’re doing what’s right for you.

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