There is a wave of stock market panic emerging as the fear unfolds.
Yet it is exactly at times of maximum pessimism that investors should be looking to BUY rather than panic-sell.
We urge you to seize the opportunity, before it’s too late.
Dear Concerned Stock Market Investor,
These are troubling times for ordinary stock market investors. The Australian stock market is suffering its worst losing streak in 17 years, as of Tuesday this week having fallen for 12 days in a row.
The last time the All Ordinaries Index fell for 10 straight days was way back in September 1990. The worst losing streak since 1980 was in January 1982, when the All Ordinaries fell for 13 consecutive trading days.
By the time you read this, 2008 could have equalled or even beaten that dubious record.
If you are a stock market investor, your portfolio would no doubt have taken somewhat of a hammering. Few shares and few sectors have been spared – big companies, small companies, banks, insurance companies, property companies and even some oil and gold companies have all taken a hit.
It hurts.
It hurts to look at your portfolio day after day, seeing a lot of those hard fought gains being wiped out in a matter of days and weeks.
Ouch.
Stop The Portfolio Pain
We share your pain. We are stock market investors ourselves. We know what it feels like.
Human beings don't like losing. Psychologists tell us that the pain of loss is three times the joy of gain. Instinctively, we don't want to mess up. And losing money in a down market feels like messing up.
But hang on a minute.
Unless you’ve made some monumental mistakes, like following the latest hot share tip from the mining towns of
If you do, you’ll ultimately quit investing. You’ll beat yourself up so badly after your portfolio surrenders 20% of its value in the blink of an eye that you’ll sell some or all of it in despair.
Losing Money Is As Inevitable As Taxes And Death
Losing money in a down market is not screwing up. It is just a natural and inevitable experience on the rollercoaster ride of long-term investing.
It is worth remembering that the market usually goes down a lot faster than it goes up, yet over the market's past hundred years, two out of every three years go up.
Australian stocks have had a magnificent run over the past 5 years. Just take a look at the returns of the All Ordinaries Index…
· 2006 – UP 20%
· 2005 – UP 16%
· 2004 – UP 23%
· 2003 – UP 11%
That is a phenomenal performance. Yet hidden in those percentage returns are the daily, weekly and even monthly ups and downs of the share market.
For example, in August last year, just as the
At that point in time, it was all doom and gloom. Just as it is now.
Set-backs, corrections and pauses are part and parcel of the long-term investing game. Yet if you focus on the big picture, and constantly remind yourself that stock market investing is a marathon, not a sprint, over the long-term you should be well rewarded.
What The Very Best Investors Do In Times Like These
What do you do during these times of periodic stock market wobbles?
a) Watch the market falling, but ultimately do nothing, waiting out the storm.
b) Sell everything to avoid further losses.
c) Buy some more of your favourite stocks.
d) Avoid looking at anything to do with the share market, including checking your portfolio, reading the newspaper and internet sites, and definitely not watching Alan Kohler’s finance report on ABC evening news.
In many ways, how you react to these periodic stock market wobbles defines you as an investor.
If you react by selling everything as in options b) above, you are probably not suited to stock market investing.
We don’t blame you if you sit on the sidelines, waiting out the storm.
But what really sets the best investors apart from the average investors is their ability to calmly and rationally assess the situation, to concentrate on the underlying value of the company and not its falling share price, and to take advantage of the falling share market to buy some more of their favourite shares at even cheaper prices.
Optimism Is Your Enemy
Last week we read a very interesting interview in the Australian Financial Review with Christopher Davis of
This quote in particular is very telling…
“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.”
Davis Funds shot to fame recently when they took a 5% stake in struggling
Investing in the
Yet, in that uncertain environment, Davis Funds have paid US$48 per share for their 5% stake in Merrill Lynch. Tellingly,
But, they do think Merrill will turn out to be an attractive purchase over the next five or 10 years.
It reminds us of the Warren Buffett quote…
“It’s better to be approximately right than to be precisely wrong.”
At $US48 per Merrill Lynch share, on a 5 to 10 year perspective,
We think his investing decision will be vindicated because…
a) He is buying at a time of pessimism, and pessimistic times produce attractive prices.
b) He is taking a long-term perspective.
How To Tell If You A Good Or Lucky Investor
It’s always nice to make a profit. It’s even nicer when that profit comes quickly. Quick profits are exciting. They give you the confidence to try to make more of them, and make them just as quickly, or even quicker.
Quite a few people we know have made quick profits by investing in mining and resources companies. Just like a rising tide lifts all boats, the share prices of many mining and resources companies have been lifted by rising tide of the stock market.
When people are making easy money, they get over-confident. They think they are good investors when in fact they may just have been lucky investors.
Are you good, or are you lucky?
Or don’t you know?
If you don’t know if you are good or lucky, we’d respectfully suggest you’re likely to be just plain lucky.
The $80 Billion Wipe Out
Smart and experienced investors know exactly what they are doing. They know that when they buy shares, they are investing in a company and not a share price.
They also know they are making long-term investments, and that over the short-term, the share price can and usually does move independently of the underlying value of the company.
For example, it’s hard to imagine the value of BHP Billiton has fallen by $80 billion in just the last 3 months.
But that is exactly what has happened to the value of the company. In October last year the shares traded above $47, valuing the entire company at around $265 billion. Today the shares trade around the $33 mark at which price BHP Billiton is valued at around $185 billion.
Poof. $80 billion gone. Just like that!
There’s a chance shares in BHP Billiton were over-valued in October and today they are trading back at about fair value.
There’s also a chance shares in BHP Billiton were trading at about fair value in October and today they are trading at a discount to their fair value.
There’s another chance that shares in BHP Billiton were over-valued in October and today they are still over-valued.
Finally, there’s a chance shares in BHP Billiton were under-valued in October and today they are trading at an even bigger discount to their fair value.
Do you know which scenario is correct?
If you don’t know, we’d respectfully suggest you shouldn’t be investing in BHP Billiton shares.
Some Of Our Favourite Stocks Have Been Hammered
The share prices of some of our very favourite resources and mining stocks have been beaten down, in some cases, quite savagely.
This could be considered disappointing if…
a) you are an imminent seller of stocks to fund, for example, the purchase of a new car, an investment property or some other alternative asset.
b) you are a regular share trader, used to making quick profits, banking them, and moving onto the next quick win. There are no quick wins in this stock market.
As an aside, there is a saying amongst active stock market traders that a long-term investment is a short-term investment gone wrong. We suspect that all of a sudden, there might be quite a few more few long-term investors today than there were a couple of weeks ago!
c) you are investing on margin (borrowed money) and your broker is making margin calls, forcing you to sell at take losses when share prices are at a low point.
d) you invested in the stock market with money you weren’t prepared not to touch for at least 3 years, ideally 5 years or more.
e) You don’t like seeing the value of your assets going down.
You Have Our Heartfelt Sympathy
We completely sympathise with you if you have been caught out regarding your margin trading. The last 12 days have been brutal and although we’ve been expecting increased stock market volatility, we certainly didn’t the market to fall every single day for this long.
We also completely sympathise with you if you don’t like the look of your personal assets in somewhat of a freefall. It’s not pleasant.
But if you have over-extended yourself regarding borrowings, if you expected to make a quick profit on the stock market because everyone else was, or if you invested in the latest hot tip, knowing little to nothing about the company…well, we suspect you are learning a harsh and expensive lesson.
What Should You Do Now?
It partly depends on your attitude to stock market investing, your time scale, and your liquid resources.
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.
That said, just like Christopher Davis of Davis Funds, we don’t know if today is going to be the bottom of the market, and we don’t know if the worst is soon to be over.
In the short-term, this stock market is driven by fear and panic. Those two emotions always produce irrational prices. Share prices can and will fall to levels that appear to be totally irrational.
Blood On The Stock Market Floor – Time To Buy
In fact, on Tuesday this week, with the stock market in freefall, the Commsec website crashed out, there was widespread forced selling due to margin calls and we had website headlines like “Blood on the floor as market slides”.
Into that unwelcoming environment, amidst the fear and panic, we sent out a special BUY email alert.
Titled “Buy quality”, we said…
“…after considering the market action this morning, we believe that some stocks have been sold off way too aggressively. Many investors are being hit with margins calls and this is leading to capitulation selling. The good is being thrown out with the bad.
Given this situation, we believe it is time to buy quality large gold and resource stocks.
We obviously can't be certain that this is the bottom for these stocks but we are still confident in our longer term bullish call on 'real' assets (gold, oil etc) versus paper assets.
The bottom line is that successful investing is counter-intuitive. Good long term buying opportunities emerge when the situations looks to be the most dire.”
The Six Stocks To Buy TODAY
In the special BUY alert email, we reiterated our positive long term view on SIX of our very favourite stocks and recommend them as BUYS at current prices.
It won’t be a surprise to readers of this email that one of the companies we recommended as a BUY was BHP Billiton. With the shares back down to around $32 or $33 we find them very attractive.
The other five stocks are all high quality resource companies, all of which have seen their share prices hammered over the past week or more, and particularly during the vicious and indiscriminate sell-off on Tuesday.
We think Members who buy the basket of six quality shares at current prices will see excellent long-term returns.
More Cheap Stocks
The selling this week has been indiscriminate, peaking during trading on Tuesday when the All Ordinaries Index plunged more than 350 points, or more than 6%.
That fall masked some massive falls in some of our favourite medium sized mining and resources companies.
For example…
Cheap Mining Company #1
The West Australian emerging gold producer about which we have previously said…
“We remain overwhelmingly positive on this company’s story. There are very few emerging, high quality gold producers in the Australian market, which means that the company should undergo a significant re-rating as first stand-alone god production approaches during the middle of 2008.”
Shares peaked January 4th 2008 at $2.65.
Shares closed Monday January 21st at $2.17
Shares plunged a further 17% during trading on Tuesday January 22nd to around $1.80 on no news.
Cheap Mining Company #2
The emerging zinc producer who recently said that the value of the metal in ground of their existing project bases at current spot prices is about US$13 billion.
Today the total company is valued at less than $200 million.
Shares peaked in November 2007 at around $4.00.
Shares closed Monday January 21st at $2.40
Shares plunged a further 23% during trading on Tuesday January 22nd to around $1.85 on no news.
As you can see, we think there are some absolute bargains out there, and like we did with our special email BUY alert sent this week, we’ll continue to tell our Members exactly which shares to BUY and when.
Why We Like This Tiny Mexican Gold Mining Company
Back in June last year we recommended a tiny mining company. At the time, the share price was just 12.5 cents* and the market capitalisation just $14 million. It’s a small company with big plans, just the way we like it!
Here are some of the reasons why we liked that particular company…
· The company’s Managing Director has 25 years of technical and management experience in the mining industry, and in 2000 was presented with the Prospector of the Year Award by the Association of Mining and Exploration Companies. He has outstanding exploration credentials.
· The company is exploring for gold, silver, copper, lead, zinc and molybdenum in
· We concluded our initial BUY recommendation by saying “…we believe there is very little downside for Members, but rather, for patient investors, there is potential for tremendous upside over the longer term.”
Since we first recommended the shares at just 12.5 cents*, they have traded as high as 31 cents*, before falling all the way back to around 12 cents* on Tuesday this week.
For those who bought the day after our initial recommendation at 15.5 cents, just one month later they would already have been on a 100%* gain.
If they didn’t sell, and we certainly weren’t recommending they sell, they have had to helplessly watch as the shares have today tumbled all the way back to below their initial buy price.
All that is despite the company announcing just last week that drilling in
As we mentioned above, patience will be required, but if this Mexican miner can strike it rich, we believe long-term investors will be highly rewarded.
And the good news, courtesy of the general stock market sell-off, is that today the total company is only worth around $14 million, and its shares can be bought at around the same level as they were way back in June last year.
More Than Mining & Resources
Then there’s the biotechnology company we told you about before Christmas.
When we first recommended the company to our Members, the share price was around 72 cents*. Since then, it has been as high as 81 cents*, and a month ago it sat back around the 57 cents* level.
Like most other companies, the share price of this promising biotech company has recently taken a nose-dive, so much so that the shares now trade around the 38 cents* level.
That is over 33% down in a month, 47% down from the price at which we first recommended them way back in May last year, and a whopping 53% down from their most recent peak.
Yet, in all that time, nothing whatsoever has changed about the underlying prospects of the company. In fact, as you’ll see below, their prospects have probably improved in the past month!
That’s share market investing for you. One day, with the shares at 81 cents*, you are feeling on top of the world. A few short months later, despite the company having improved prospects, they trade for just 47 cents*.
As a reminder, the company we are talking about is a Melbourne-based biotech that we believe has a quality management team and which has created good prospects for their HIV drug developments to reach commercialisation.
One particular drug shows significant potential and its prospects of becoming marketable have improved following positive test results in September last year.
It is an 'antiretroviral drug', a class of drugs which slows and prevents HIV infection progressing to AIDS. As there is no vaccine for HIV, these drugs have to be taken daily to manage the disease.
The Tantalising Prospect Of Spectacular Returns
In November last year, the company announced that it received positive feedback from both North American and European regulatory authorities allowing immediate progression into a Phase III program for the drug the company is developing for the treatment of drug-resistant HIV patients.
Should the drug eventually make it to commercialisation, the returns could be spectacular. The market for HIV drugs in 2005 was over $7 billion, of which 59 percent is represented by the type of drug this Melbourne-based company is developing.
It is worth noting that, in the past, all developmental HIV drugs that have reached Phase III testing have also made it to commercialisation. So if history is any guide, the drug’s chances of being brought to market are extremely favourable.
Start-up biotech companies are generally a lot riskier than your average company. We definitely suggest companies like this one make up a relatively small part of your overall portfolio.
Is This The Next Big HIV Drug?
However, we believe that all investment propositions come down to the risk and reward trade off. With the potential of this HIV drug becoming the next big drug of its type in a massive global HIV treatment market, we believe its risk/reward characteristics are favourable.
We wish you happy and profitable long-term investing.
P.S. We’re not the only ones who think the stock market is due for a bounce. On Tuesday, Austock Securities client adviser and strategist Michael Heffernan was quoted on The Age website as saying “While (the stock market) will finish down today, sooner or later investors are going to see the value in good stocks and I say they are great value.”
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