Did you also play the what if game after the severe market declines in 2008 and in the first quarter in 2009?
I know I did and, to a large extent, it kept me out of the market in 2009 causing me to lose out on quite substantial gains.
Rabbit in the headlights
It is not that I did not find any attractive investment opportunities, I was just frozen like a rabbit in the headlights by the banking crisis, Lehman bankruptcy and sudden market decline.
Frustrating but too late to do something about now.
In 2009 (after the market lows in March) my number one “what if” question was:
What if there is another sharp decline should the economy stall after its jump start and steroid boost through stimulus spending? Which led me to think: As the markets hit new low it will be time to get in!
It never happened and I watched the market take off with me just watching.
I did however earn a return of 6.5% on my portfolio while being about 70% in cash.
But I could have done a lot better.
So what did I learn?
I realised at any time there are a thousand things that can go wrong; with the world economy, country economy and the company you invested in.
At the same time however there are a thousand things that can go right.
Companies aren’t static entities, they constantly change, new products get developed, businesses or divisions get sold or closed, and they fight for survival. So there are a lot of positive things that can happen as well.
The secret to profitable investing is not paying for all the positive things that may happen. Thus to invest if you find an undervalued company, irrespective of market conditions.
What you must do is look for companies where the worst or all negatives are reflected in the price. That way you get all the positive developments for free.
How do you find these companies?
The best places to look are:
- The 52 week or all time low share price list
- Companies with the highest dividend yields
- Companies with the lowest price to earnings ratios
- Companies with the lowest price to book ratios
But wait a minute, you may be thinking. There are also a lot of junk companies in these lists…
…companies that are in a dying industry such as newspapers, companies with inflated past earnings due to a bubble or industry tailwind such as commodity companies and US, Irish or Spanish construction companies in 2008.
You would be 100% correct. But you know what, it doesn’t matter.
Indiscriminately buying is good
Because numerous long term studies have shown that indiscriminately buying the cheapest companies using for example price to book or price earnings ratios leads to index beating performance.
Not every year, but on average over long periods of time.
Even if you do not indiscriminately want to buy cheap companies this is good news.
What you need to do is further analyse the companies on these lists to identify worthy investments.
Look at it this way.
Analysing companies on these lists are like digging near a rich vein of gold. There may still be some rubble around but it’s a lot easier to find gold than for example just starting to dig just anywhere.
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So in summary
There are always a 1000 reason not to invest, but if there is a really compelling undervalued company you have to make use of the opportunity and invest.
With the markets having moved up so quickly in 2009 the obvious candidates were gone. But if you look carefully, and am willing to turn over a few rocks there are still very good investment opportunities around.
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Your digging in the dirt analyst