Whilst it’s no surprise to us that the share market keeps bouncing around, it is surprising that some people sold shares last week when it seemed to us as if it was the perfect time to BUY.
With that in mind, and with the gold price hitting a record high this week of US$930 an ounce, we give you details of what we told our Members just last week is the “perfect gold sector exposure.”
Dear Confused Stock Market Investor,
It has certainly been an ‘interesting’ time for stock market investors.
Whilst everyone catches their breath, let’s just recap on the events of last week…
Monday
The All Ordinaries Index falls 169 points, or 2.9%, at the time, the largest one day fall so far in 2008, and the eighth largest since 2000. The fall is the 11th daily decline in a row.
BHP Billiton shares fall 4.3%, from $34.31 to $33.29.
Tuesday
Absolute carnage amidst panicked selling. The All Ordinaries Index falls 409 points or a massive 7.3%, its biggest one day loss since October 1989.
It is the 12th day of declines in a row.
A picture of a growling bear adorns the front page of the next morning’s Australian Financial Review. The All Ordinaries Index is now a whopping 24% below its November 1st all time high. A bear market is commonly defined as a fall of 20% or more.
BHP Billiton shares fall 6.8% to $31.00.
Wednesday
Chairman of the US Federal Reserve Ben Bernanke rides to the rescue, unveiling an emergency interest rate cut of 0.75% as it attempts to revert a US recession.
The All Ordinaries Index emphatically breaks its 12 day losing streak and jumps 224 points or 4.3%.
Meanwhile, whilst the US, Canada and the UK cut interest rates, Australian inflation rises to an annual rate of 3.6%, its highest in almost 17 years, increasing the prospect of an interest rate rise in February.
BHP Billiton shares rise 9.3% to $33.89.
Thursday
The All Ordinaries Index jumps another 160 points or 2.9%.
Even “basket cases” like Centro Retail Group, up 39% and Allco Finance, up 29%, join in the fun.
BHP Billiton shares rise 2.7% to $34.82, finishing the week up
Friday
Yippee yahoo.
The All Ordinaries Index jumps again, this time by a massive 281 points or 5%.
There is just a scent of panic buying in the air as investors scramble back into the market, fearful of missing out on future gains.
BHP Billiton shares rise 5.7% to $36.80.
Follow The Bouncing Market
To say it was a roller coaster week would be somewhat of an understatement.
Early in the week, as fear and panic absolutely gripped the market, and with continued negative news coming out of the
Margin calls exacerbated the sell-off, as some people were forced sellers. Take the tip from us – it is generally not a good time to sell when the market is in freefall!
Anyway, by the time Wednesday came, the markets were due a bounce, and they duly obliged, and kept bouncing higher all the way through to the eve of Australia Day and the long weekend.
A Week Spent On A Deserted
Instead of watching the daily machinations of the stock market throughout last week, let’s imagine you’d decided to spend some of your hard earned money on an exotic holiday at a deserted tropical island.
You deliberately had no access to the internet, newspapers, televisions or radios, wanting to get away from the rat race for a week.
On your return home, after all the unpacking and associated domestic stuff, you take a look at your share portfolio.
Firstly, you see the All Ordinaries Index stands at 5886, up 1.5% over the course of the last week. Not a bad week you think, and nice to see the market bouncing higher after the difficult start to the year.
Your biggest holding, BHP Billiton, has risen 7.3% in the last 5 trading days, a very nice jump. You are a happy investor.
Recent hot new float Platinum Asset Management has risen 6.5% in the last week. You think to yourself that it’s nice to see the shares on the move again, with an added bonus being that the shares trade on a fully franked 2008 dividend yield forecast of over 5%.
One of your more speculative holdings, emerging uranium producer Bannerman Resources, falls just 10 cents to $2.91, which is relatively immaterial for such a volatile stock. You are not complaining however as you originally bought the shares at 72 cents* back in August 2006 and are already sitting on a 300%+* gain.
Why Some People Do Absurd & Idiotic Things
All is good.
You are a long-term investor. Shares go up and down on a daily basis. You presume that, as usual, the share prices of your holdings went up and down over the course of the week, but judging by share prices at the end of the week, there were no major catastrophes.
And we are only talking one week here! Stock market investing is a long-term game, with returns and success usually measured over periods of years, even decades, not just one week or even one day.
Yet that is how some people seemed to be judging their “success” just last week.
One of the most absurd and idiotic things an investor can do is to sell because shares have fallen. Yet that is exactly what was happening during last week’s panic attack.
On any given day, you are neither forced to buy shares nor forced to sell shares.
As we said last week, psychologists tell us that the pain of loss is three times the joy of gain.
There was a lot of pain last week, but no need to sell.
Four Dumb Reasons To Sell
We’ve come up with four reasons why people might have sold shares last week, not including forced margin loan sellers.
1. Perhaps some people were selling just so they could end the pain.
2. Perhaps some people were selling because they feared the market would go down even further.
3. Perhaps they sold because they read in a newspaper that a US recession was now inevitable, the sub-prime crisis was only going to get worse, and some ‘experts’ were predicting the markets would fall even further.
4. Finally, perhaps some sold now with the intention of buying back in when the stock market hit rock bottom.
High Quality Businesses Don’t Suddenly Lose Value
The folly of such behaviour has been highlighted in the last week.
Let’s use Platinum Asset Management as an example.
You presumably bought the shares in the first place because you thought it was a high quality business, with a solid business model, and was trading at an attractive share price. Asset management is typically a high margin, cash generative business, and a business that over the long-term has excellent growth prospects.
At the beginning of last week, the shares traded at $4.62.
During Black Tuesday 22nd January 2008 their low for the day was $4.00, a fall of over 13% since the beginning of the week.
Do you think the underlying value of the Platinum Asset Management business deteriorated by 13% in just two business days?
We don’t.
Yet there seemingly was no shortage of people willing to sell their shares around the $4.00 mark.
Why?
We can only point to the four reasons above, all of which are idiotic.
Instead of selling, people should have been considering BUYING.
Try This Sure-Fire Investing Strategy
As we said previously, Platinum Asset Management shares closed last week at $4.92, up 6.5% over the week.
From their Black Tuesday bottom of $4.00, they rose an impressive 23%.
We wonder how those “investors” who sold at around the $4.00 with the intention of ending their pain, or because they thought they’d be able to buy them back cheaper in a couple of month’s time are feeling now.
But perhaps we are wrong. Perhaps the market is going to fall back again, and Platinum Asset Management shares will again plunge below $4.00.
In the short-term, we don’t know which direction the stock market is going to move, and by how much.
But here’s what we do know…
· It’s highly unlikely the volatility we’re seeing in the stock market is going to end any time soon. There are a lot of nervous investors out there, on the one hand fearful of making losses and on the other hand, greedy enough to pile back into the market on the good days.
· Buying great companies when they are trading at cheap prices is always an excellent investing strategy.
· Trying to buy at the absolute bottom of the market is a futile exercise – you’ll end up either never buying or buying back after the share market has more than bounced back. It’s this type of behaviour that sees many inexperienced private investors sell low and buy high. Doh.
· The resources boom is set to continue, likely for years to come, with gold and oil set to be the major beneficiaries. But more on that a little further on, including news of the gold price hitting a record high this week of over US$930 an ounce.
The Perfect Time To Buy
Readers may remember the Christopher Davis of Davis Funds quote we featured in last week’s email.
So good was it, that not only are we going to repeat it today, but we also suggest you copy it and stick it on your wall, as some of us here have done.
“You want to invest in times of pessimism. Not because you like pessimism, but because you like the prices it produces. Optimism is the enemy of the rational buyer.”
If you followed that investing philosophy, Black Tuesday last week would have been a perfect time to buy.
Blood was on streets.
Share prices were being indiscriminately hammered across the board.
Fear and panic gripped the market.
If that wasn’t a time of pessimism, we don’t know what is.
These
It was into that pessimism that we sent out a special BUY email alert.
Titled “Buy quality”, we said we believed it was time to buy quality large gold and resource stocks.
We also said that successful investing is counter-intuitive. Good long term buying opportunities emerge when the situations looks to be the most dire.
We went on to name SIX high quality resource companies, all of which had seen their share prices hammered over the past week or more, and particularly during the vicious and indiscriminate sell-off on Tuesday.
In tune with the rest of the stock market, all have risen smartly since we sent out that email.
Yet all SIX remain some way off their record highs, and despite the share price rises of last week, we remain confident about their long-term prospects.
The Uranium Explorer That Jumped 80% In Just 3 Days
Now of course we could pat ourselves on the back because all SIX stocks we highlighted to our Members have seen their share prices fly significantly higher.
But the truth of the matter is that the share prices of most companies flew higher from their lows of Black Tuesday.
Anyone who bought on that fateful day should be sitting on a handy profit, almost regardless of the company. In fact, a company called Deep Yellow, a mid-sized uranium explorer, jumped almost 80% from its Black Tuesday low to the end of last week. Others jumped well over 100%.
Where we have no hesitation in patting ourselves on the back is in recommending our Members BUY shares when all else around were selling.
We recommended them to buy quality companies, trading at attractive valuations, during a time of stock market pessimism, and as ever, we encourage our Members to treat these as long term investments.
Buying Opportunities For Smart Investors
As we said previously, we don’t know what the short-term future holds for the share prices of those SIX high quality resource stocks.
There is a chance they could come all the way back to the lows of Black Tuesday, or fall even further.
But if that happened, we suspect two things might occur…
1. Our Members wouldn’t be panicked into selling these quality companies just because the share price had fallen. On the contrary, we’d hope they’d consider buying more shares in these excellent companies at the attractive prices on offer.
2. We’d likely be sending out another special BUY alert email, reiterating our advice of last week, and perhaps even highlighting some different companies to buy. One thing you can be sure of during a stock market rout is that some companies fall harder than others, and that sort of behaviour almost always offers smart investors buying opportunities.
The Shares To Buy When The Market Tanks
One of the keys to successful investing is being prepared.
When the market tanks, like it did on Black Tuesday, you need to know which stocks to buy. Some share price falls will be justified, especially in the highly speculative mining penny shares sector.
But some falls will create compelling buying opportunities.
If you are prepared, you’ll know exactly which shares to buy, and at what price to buy them.
We pride ourselves on being prepared. We currently have OVER 100 different companies in our hypothetical portfolios.
Our experienced analysts also have a sold working knowledge of hundreds of other companies too.
Warren Buffett’s Number One Rule Of Investing
Some are high quality, highly admired companies like the Coles, Target, Kmart, Officeworks and Bunnings owner Wesfarmers, whose shares are not quite cheap enough for us to recommend as a buy.
But if and when the price is right, we’re ready willing and able to pull the trigger and send out a very special BUY email alert.
Others are companies we think are best avoided – such as most banking and finance shares, as we’ve mentioned in the past. Avoiding buying poor companies is almost as critical as buying great companies, a skill that many people overlook.
It’s a skill master investor Warren Buffett thinks is so important and so absolutely fundamental to investing success, that he makes it his number one rule.
"Rule No.1: Never lose money. Rule No.2: Never forget rule No.1."
Three More Attractive Stocks
When the market tanked last week, we were well prepared.
As well as sending out the special BUY alert email with the names of the SIX stocks to buy NOW, we named THREE other stocks we found very attractive at current prices.
Two of these were smaller companies. We usually spend most of our time searching for cheap companies with excellent management, outstanding assets and sustainable competitive advantages.
That’s because when it comes to smaller companies, a new discovery or improved production can instantly do wonders to the share price.
Also, over time, smaller companies can grow to be larger companies. For example, a company worth $10 million can grow into a company worth $100 million, and all else being equal, the share price would rise by 1000%!
Shares that go up by hundreds of percent are the holy grail of investing. One of the great things about investing is that shares can go up indefinitely whereas they can ‘only’ go down by 100%.
Having said that, you can be absolutely assured we are not planning on recommending shares that go down by 100% - refer to Warren Buffett’s rule number 1 above!
Our Top Ten Stock Market Investing Tips
Which bring us nicely onto our top ten stock market investing tips…
1. Buy the right shares.
2. Buy the right shares at the right time.
3. Buy the right shares at the right price.
4. Invest with a long-term perspective.
5. Accept that losses are part of stock market investing.
6. Don’t panic when all about are acting like propeller heads.
7. Buy shares when others are fearful.
8. Sell shares when others are greedy.
9. Sell the right shares at the right time.
10. Sell the right shares at the right price.
Our Proprietary Stock Picking Formula
Easy hey?
In theory…yes.
In reality…no.
But that’s where we can help.
Picking the right shares is the obvious first step to making your stockmarket riches.
We have devised a proprietary stock picking formula which has served us rather well in the 7+ years of our existence.
· We search for value.
o We don’t just search for cheap companies. As we said previously, we search for cheap companies with excellent management, outstanding assets and sustainable competitive advantages.
· We identify companies that are able to out-perform.
o These are often found in smaller companies. Smaller companies are generally over-looked and under-researched, allowing us to find companies with outstanding prospects, yet valued at a fraction of the price of larger companies.
· We search out unloved companies and sectors.
o We don’t follow the crowd. When others see doom and gloom, we search for opportunities, like the SIX companies we recommended our Members BUY during last week’s stock market carnage.
· We are investors, not traders.
o We look at the company and not the share price. Over the medium to long-term, if we identify the right companies at the right price, the share price will eventually track the underlying progress of the company, and our Members will hopefully be well rewarded.
An Outstandingly Cheap Emerging Gold Producer
This proprietary stock picking formula has served us well over the years.
We used our formula to hunt down and highlight a company that just last week we told our Members “…looks outstandingly cheap by any measure.”
· It’s a small company, just the way we like it.
· Last week we had the opportunity to meet with the company’s Managing Director, and that meeting “…reinforced our overwhelmingly positive view” on the company.
· We find the company all the more attractive because it is one of the very few Australian gold producers and explorers.
· All of this is at a time of record high gold prices. Regular readers will know we have been positive on the gold price for a long time now, having recently increased our gold price target to a whopping US$1100 an ounce.
· We anticipate the company soon being in a position to announce 1 million of attributable gold reserve ounces. This would be a major milestone and in our opinion make the rest of the stock market sit up and take notice.
The Perfect Gold Sector Exposure
· Finally, the company has no debt. We concluded last week’s report by saying the company “…represents the perfect gold sector exposure. The stock is also cheap by any measure. The downside is limited, yet the upside remains outstanding.”
Not surprisingly, since last week’s report, along with the rest of the share market, the share price has spiked up, going from $1.34 to around $1.70.
But the gold price has also risen decisively above the US$900 an ounce level, peaking at over US$930 early this week.
Also, the share price still remains some way off its high point of above $2.50, reached as recently as October last year.
In short, this company ticks many of our investing strategy boxes, and in the coming weeks, months and years, we have high hopes for its future prospects.
It’s Likely An Excellent Time To Be Buying Shares
The share prices of some of our very favourite resources and mining stocks have been beaten down, in some cases, quite savagely.
But presuming you are willing and able to invest for the long term, realise that, over time, the stock market will go down as well as up, and you have some cash to invest in the market, around now is likely to be an excellent time to be buying shares.
And like we did with our special email BUY alert sent last week, plus our report on the cheap gold producer and explorer we mentioned above, we’ll continue to tell our Members exactly which shares to BUY and when.
With many experts suggesting the market is over-sold and headed for a bounce, we urge you to act now in order to access our current recommended stocks.
We wish you happy and profitable long-term investing.
P.S. We’re not the only ones who think the current stock market offers good value. Barry Ward, of Ward Financial, was this week quoted in the Australian Financial Review as saying “There’s stupidity in market prices and people have to ride it out. There’s some bargains out there for those who have some money to buy.”
P.P.S. Last week we also recommended a junior oil company that at the time was valued at just $67 million. The company recently released its quarterly production report showing record oil sales revenue, strong cash backing, modest debt and an aggressive oil and gas development programme underway. We said “The outlook for the company has never been better, which makes the irrationality of the recent sell-off mind-blowing in our view.” Although the share price has bounced since last week to around $1.25, it still remains some distance off its all time high of $1.88 achieved way back in July 2006.
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