Investing in Stocks in Difficult Times

Some investors have a different perspective on sharemarket downturns. They see the low stock prices as an opportunity to snare 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 not surprising, it can also mean missing out on profit opportunities created during volatile periods.

Warren Buffet, one of the world’s most successful professional investors, sees market slumps from another viewpoint, saying “Look at market fluctuations 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 shares. Why is it that we treat shares that have dropped in price with fear? Share prices of a listed firm can fall for a multitude of factors. Lately we have seen the stock values of a number of reputable 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, fund managers are constantly reviewing the market for investment opportunities. Many superannuation managers are searching to find shares in profitable 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 businesses will be affected by the global economic crisis in the same way. Some sectors are more prone to the economic cycle than others. Companies who deal in of basic goods and services continue on almost unchanged, for example we all need to eat - so food producers 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 housing.

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 accommodation and a rising population will create growing demand for housing which will support further building and provide opportunities for the building 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 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 price has fallen for valid reasons or if the company is indeed on sale’.

When investing, many fund managers look for companies with high and maintainable dividends, 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 investment, 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 cut 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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