There is no hiding from this stock market. It is taking down the good with the bad and the ugly.
But we have some good news…
Not content with our successful predictions on oil and gold, we make two new predictions…one about interest rates and one about the stock market. The news is looking good.
Dear Despondent Stock Market Investor,
Last week, the Australian share market suffered its worst loss since December 1987, with the All Ordinaries slumping 5.4%.
Monday saw another sell off, with the All Ordinaries Index down another 1.7%. Tuesday saw no let up either.
From its record high, reached just a few short months ago on November 1st 2007, the All Ordinaries is down 24%. In 2008 alone, it is down a whopping 19%.
At the same time as the market has been falling, Australian interest rates have been moving in the opposite direction, last week being raised to a mortgage-busting 7.25%.
Prime Minister Kevin ‘O’Seven’ Rudd recently said “Australians are paying the second-highest mortgage rates in the developed world” and “Housing is at the worst it has been in living memory.”
Yet also at the same time, oil prices reached a record high, above US$108 a barrel, and gold also recently hit a record high of US$980 an ounce.
While the stock market is generally shrouded in a veil of doom and gloom, oil and gold continue to be conspicuous bring spots. These are strange times.
What You Should Do Now
· Sell if you can’t sleep well at night. If any of your stock market investments are stressing you, push the sell button. It’s not worth risking your health.
· Hopefully you invested in the stock market with money you didn’t need to touch for at least 3-5 years, ideally longer. If that’s the case, you should be able to ride out these troubled times.
· If you’ve got the mental and financial capacity to buy more shares, buying around now is likely to turn out to be an excellent long-term investment opportunity. We’re not necessarily saying that we’re at the bottom of the market right now, but we might be relatively close. Remember – share prices will hit bottom before the economy hits bottom.
Read on for some specific investment ideas, including two beaten down oil companies we think might offer compelling value at today’s prices.
Buy Commodities, Particularly Oil and Gold
We admit the stock market news and the continued falls in share prices is all rather gloomy.
What does it all mean to you?
· Don’t over-commit yourself to the housing market.
o Make sure you can comfortably afford your mortgage repayments. The same goes if you own an investment property or properties.
· Watch your margin lending.
o For those people using margin to invest in the stock market, we’d suggest you keep a very close eye on your liquidity levels. Forced selling because of a margin call inevitably means selling at one of the worst possible times.
· Avoid financial and banking stocks.
o With deteriorating conditions in the credit markets, we have thought for a while now that banks are facing a period of underperformance, and we’ve been right. Although we’re still cautious on banks, we think they could soon be approaching reasonable value.
· Buy commodities, particularly oil and gold.
o
Don’t just take our word for it regarding gold. Ian Harding, principal of WaveStone Capital, was quoted in last weekend’s Australian Financial Review as saying…“Gold looks like a haven in the current market, particularly if the Chinese begin to reallocate financial reserves from US dollars to gold.”
It should be no secret to regular readers that our strategy continues to be to maintain exposure to the resources sector, looking to buy on weakness.
Take a look at these 2 beaten down oil companies, who despite their share price woes, we think are very well placed to ride the resources boom for years to come.
It is worth remembering that whilst the share prices of these have fallen, the oil price has risen from around US$80 a barrel to close to US$110. Go figure.
Beaten Down Stock #1 – A small oil production and exploration company whose share price has fallen 50% from its recent peak, leaving the whole company valued at around $65 million.
Today the company is forecasting profits of over $16 million in 2008, putting the company on a price to earnings ratio of just 4 times. If that’s not enough, the company themselves think their own shares might be worth around $1.55, some 384% above their current share price.
Beaten Down Stock #2 – The company about whom we recently told our Members that “Despite continuing to add impressively to its West Australian mineral sands position through aggressive exploration, the company has recently hit a brick will with respect to its share price.”
The shares are off 40% from their recent peak. We believe the market is missing out on a fantastic longer-term opportunity, and the company remains a core holding in our portfolio.
A Tale Of 5 Companies
Do you want further evidence that resources stocks are the place to be? Just take a look at the share price movements of these selected S&P/ASX 200 stocks for last week…
ABC Learning – down 31.3%
Centro Properties – down 31.1%
National Australia Bank – down 6.7%
BHP Billiton – down 1.8%
The Chinese Emerging Gold Explorer – up 8.4%
Can you spot the trend?
Firstly, last week was obviously a tough week for stock market investors, with the prices of many stocks falling.
The share prices of highly indebted companies like ABC Learning and Centro Properties continue to be hammered, and that’s after they’ve already plummeted heavily. There is seemingly no let up.
Secondly, in general, the share prices of resources companies are holding up reasonably well. That’s not surprising, given as the prices of many commodities continue to hit record highs.
Two More Predictions
Based on our views of the global economy, the US dollar and simple supply constraints, you already know we like gold and oil.
We like making predictions, and today we’re happy to give you two more.
A few months ago, we looked at two potential scenarios for the Australian economy and interest rates.
Under scenario one, we said interest rates might peak at 8.5% to 9% before they start falling. Courtesy of the global economic woes stemming from the
Under scenario two, we said interest rates would peak this year at 7.25% to 7.5% and stay at that level for a further 12 odd months. We said it’s not quite the ideal scenario, but the closest we can hope to get to it. Which leads us to our first prediction…
Prediction #1 – Australian interest rates will peak this year at 7.25% to 7.5%, before starting to fall in early 2009.
The
Prediction #2 – Most US financial, retail and building US stocks are close to the bottom, with the turning point coming somewhere in April and May.
What’s so good about
Having just made those predictions, let us put out a caveat…whilst we think we’ll be correct that Australian interest rates are close to peaking and that many
Longer-term stock market predictions are easy. The market will go up. We just don’t know exactly when it will start going up again.
But what we do know is that history has shown when the bounce comes, it will be swift. We also know that many experienced, successful investors, especially in the
What Goes Down Fast Goes Up Even Faster
For example, in its most recent quarterly investment letter, Canadian-based Trapeze Asset Management, a small money manager with a strong value investment philosophy and an excellent track record said…
“…invariably, after a poor performance period, rooted in an overall market decline, our best upside performance has followed. We are in the right groups. Overweighted in Energy (with oil at a record high over $100 and natural gas at two year highs), and Golds (with gold at record highs), some other resource plays (with their commodities strong too), a cheap defense stock and some cheap, beaten up retailers.”
“Many are smaller caps and went down much more than the market as investors avoided those kinds of stocks. We think those stocks will rise more quickly in the market recovery.”
“History is on our side too. Market declines tend to be brief in duration and volatility is greater on the following upside than on the decline with the rebound typically very substantial in the first three to four months after the bottom.”
Getting Out Of The Stock Market For Life
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 to look at your portfolio day after day, seeing a lot of hard fought gains being wiped out in a matter of days and weeks. It could turn you off the stock market for life.
Take this email we received recently from a friend of ours …
“I don’t think I will EVER buy any more stocks. I invested $3000 and they are now worth just over a grand, what a joke. I am hoping they will climb up to around $1,500 and I am going to sell then, losing 50%, and get out for life.”
Our friend is hurting. But unfortunately we predict the hurt won’t end here for our friend.
He has clearly made many mistakes …
Mistake #1 – Investing in shares in the first place
Our friend shouldn’t have bought shares in the first place. If you are not prepared to invest for a period of 3-5 years, and to ride out the inevitable ups and downs, you shouldn’t be investing in the stock market at all. Period.
Mistake #2 – Thinking of making quick and easy profits
Our friend was persuaded to invest in the stock market because he saw other people making “easy” money in tiny resource companies, and thought he’d give it a try too.
Worse, he invested in his mate’s “hot tip”, without knowing a single thing about the company he was investing in, especially the risks.
Worse still, he put all his eggs in one basket – a tiny oil explorer hoping to hit it big in a politically unstable area of central
Mistake #3 – Hoping to get out with just a 50% loss
When our friend says he is hoping to sell out when his current $1,000 investment gets to $1,500, he doesn’t quite realise he is probably about to compound his original mistake.
He should be forgetting what he paid for the shares, because that is irrelevant now. If he thinks the shares will rise 50% from here, taking his $1,000 to $1,500, surely he should be buying more shares now.
But he’s not thinking like that. He’s fixed on taking a 50% hit on his initial investment and with that, getting out of the stock market for life.
We’d respectfully suggest the chances are that his speculative central African oil explorer will fall by another 50% or more rather than rise 50% from today’s price. Our friend should sell out completely now.
Mistake #4 – Buying at the top and selling at the bottom
It’s the classic small private investor error. Inexperienced investors are often sucked into buying when prices are high, afraid of missing out on future profits. Conversely, they sell when the share price is at a low point, just wanting to get out to avoid any further pain.
For what you should be doing now, read on…
Mistake #5 – Getting out of the stock market for life
Stock market investing is a great way to build long-term wealth. To give up on it because of one or two bad experiences is a mistake. Instead, a better course of action would be to learn from your mistakes, change strategy, and vow to conquer the stock market.
If you need pointing in the right direction, completely independent analysts may be able to help get you on the right track.
Oops – There Goes The House Money
The stock market blues are catching.
Here’s another email we received this week, one we suspect many people might sympathise with.
It came from an Auntie of one of us here, a 71 year old widow who recently sold her house to move into a smaller rental property, trusting a large portion of her house sale proceeds to a financial advisor to invest in the stock market on her behalf.
“The stock market news is very depressing. I have lost faith with the financial advisor crowd I went with. They blame the
We suspect she is not the only person questioning the expertise of her financial advisors, people she pays handsomely for their services. Annual management fees of between 1% and 2% are commonplace, meaning for a portfolio of $800,000, annual fees could be between $8,000 and $16,000. Thanks for nothing!
Everyone makes mistakes, and in this market, mistakes are magnified. But we’d question how so-called ‘expert’ highly paid financial advisors could invest this lady’s money into not one, but three very highly indebted companies, all of whom have seen their shares lose over 80% in value from their peak.
Swimming Naked
As far as the financial advisors are concerned, we put it down to…
1. Complacency.
2. Laziness.
3. Greed.
The 5 year bull share market has bred a culture of complacency, laziness and greed. A rising tide has lifted all boats. The strategy of buying on the dips has served investors and financial advisors very well.
But the tide has now gone out, exposing some naked swimmers, like our Auntie’s financial advisors. Unfortunately it is her who pays the ultimate penalty and not the financial advisor. If you think the whole fee structure of many financial advisors – where they get paid a percentage of assets, regardless of the performance of the investments – is flawed, so do we. But that’s a story for another day.
What should our Auntie do? We suggest she tries for a complete refund of her fees, she withdraws her money immediately from her current financial advisor, and puts all her money in a low cost indexed Exchange Traded Fund, like the one that replicates the performance of the top 200 Australian Shares.
What The Very Best Investors Do In Times Like These
What do you do during these times of periodic stock market wobbles?
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.
The Shares To Buy When The Market Tanks
One of the keys to successful investing is being prepared.
When the market tanks, like it has during 2008, 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 wish you happy and profitable investing.
P.S. Remember the gold explorer we told you about a couple of weeks ago who we believe will have eventual global gold resource in the vicinity of 3-5 million ounces? The share price has fallen over 10% in the last 2 weeks alone, despite the gold price threatening to break the US$1000 an ounce mark. It may not be this cheap for much longer.
P.P.S. The latest Trapeze Asset Management investment letter also said… “There is considerable evidence that the (North American) market has already bottomed, so we need to be ‘in the game’, owning good businesses when they are as cheap as they’ve gotten. This is a time of opportunity, not a time to be feared.” As they say in Scouts, Be Prepared.
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