Unless you have been living alone on a deserted island you would have to be aware of the financial crisis that has gripped the world. In Australia, the economy is still on the down hill run with a lot further to go.  Recession is a possibility.

 

Whilst markets have fallen significantly however, does the value of your investment matter all that much if you are not intending to sell? (Obviously it will if the stock is a dog and the loss is likely to be permanent).  Stockmarkets are forward looking and run well ahead of economies and it is a reasonable proposition that recovery here is not too far off.

 

The downturn continues to deter many people from investing now, fearful of further loss.  But what is the alternative, cash? For the last 18 months or so, cash has been king. But look at the return on cash investments now.  Instead of focusing on the possibility of capital loss, investors now should be focused on the income their money generates. When it comes to income now, share dividends are a far better proposition than a cash alternative, particularly after tax is considered.  The share dividend advantage will be even greater as interest rates fall further this year, (a near certain proposition).

 

Effectively, you will finish up with more money in your pocket if you buy shares now (but not just any shares) than you will if you keep invested in cash. So what if the shares fall some more if you are getting your income.  If you are prepared to ride out the volatility on share prices for awhile longer, investment in good dividend paying shares makes a lot of sense.

 

Ultimately buying companies with quality earnings, will see the prices of those shares rise, as it is the increase in dividends that will drive the share price upwards. As recovery sets in therefore you will pick up an increase in the value of your holdings and in the meantime receive better than cash returns.

 

So consider investing now. But be aware that not all shareholdings are the same.  Look for those companies that pay good dividends and have growth prospects.  Most importantly, get some professional advice.

 

POSTED: 14-Jan-2009

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What a year it has been! So many things have happened that most of us have never seen before, such as the Sub –Prime crisis which fuelled a credit squeeze, the failure of some of the largest financial institutions in the world and a sharemarket that has dropped by amounts not seen since the Great Depression. We have banks needing to be government guaranteed, car makers now looking for handouts to survive, mortgage and property funds frozen and industry giants reduced to a shadow of their former selves, struggling to survive.

 

This has been a year of irrationality and huge swings.

 

Who would have thought that oil could reach a high of $147 with some predicting over $200 a barrel by Christmas, only to see it crash to not much over to $40 a barrel now. The same with the Australian dollar, 88 cents to the US$ in January, 98 cents in July with a rapid decline to a low of 61 cents before recovering slightly. 

 

It’s the same with interest rates. There were two rises of 0.25% each in February and March 2008. By September the RBA started cutting viciously with 0.25% in September, 1% in October, a further 0.75% in November and another 1% in December 2008. And it’s not over yet.

 

Our economy has gone from boom time to bust almost overnight. Suddenly, inflation is no longer a problem (even though it is still at 5%), unemployment is rising rapidly and with forecast job retrenchments will go much higher, a huge government surplus looks like turning into a deficit and a recession looms.

 

So what does the future hold?

 

Certainly the economy is going to do it tough next year. But as we are being told, our economy is better placed than most to weather the global downturn. Recession is a real possibility, though likely to be short in duration and probably quite shallow.  The stimulus package of infrastructure spending announced by the government, coupled with the cash payments to targeted groups should start to have an impact in the early part of 2009 and our economy should start to show signs of recovery soon after.

 

The sharemarket will also recover and much sooner than the economy. History tells us that sharemarkets tend to be well ahead of the economy. The consensus of commentators has recovery setting in toward the end of the first quarter of 2009.  Stock markets always overshoot both on the way up and the way down, which generally means that when the recovery starts, there is a quick catch up period where returns are well above average. Those who remain invested will benefit from the upturn.

 

In times like this it is hard to see the big picture when we are immersed in a deluge of (sometimes conflicting) information on a day to day basis. For all we know, this could be the best buying opportunity right now for decades. Only time will tell that.

 

Hopefully though, a brighter future for sharemarkets and all things financial is not too far away.  After the year we have had, that will be very welcome. 

 

POSTED: 18-Dec-2008

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Warren Buffett is the chief executive of Berkshire Hathaway, a diversified holding company. He is known as the world’s greatest investor.

The following article was published in the New York Times on October 17, 2008. Buffett didn’t get where he is by being timid but neither does he take unacceptable risks. His simple rule as he states below is: Be fearful when others are greedy, and be greedy when others are fearful.

Buffett takes a long term view of the stock market. He knows it will recover and wants to be there when it happens.  This is well worth a read.

 

So … I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.”

 

 

POSTED: 06-Nov-2008

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As we all know, we live in the information age which has had as great an impact on our lives as the industrial revolution had on our antecedents. There is so much information out there, much of it contradictory, that it is at times difficult to sort through it all.  This is no less so in the area of investing.

Much of what we read in this area is either guesswork or opinion masquerading as fact. Much is ill informed, sensational in nature and in some cases designed to lead a person to a favoured conclusion.  So what should you take notice of?

There is no doubt that markets go in cycles, those who say ‘it’s different this time’ are wrong. Sure the circumstances may be different as might the causes but in the long term, the outcome is always the same.  The hardest part is stripping away the emotion and looking at the cold hard facts. It is an unfortunate fact that the doomsayers amongst us get the most press. Nothing sells newspapers like bad news!

Let’s look at the share market as an example. The Australian share market has fallen about 33% over the last year, but it is up 174% over the last 10 years. In the last 50 years of the Australian share market, there have been 13 years when a negative market has occurred, but there has not been one 10 year period which has been negative. It is laughable to suggest as some have that the sharemarket is doomed, that it will never come back and investors will lose all their money.

Consider for a moment what they are saying. Who really believes that the Commonwealth Bank will lose all its depositors or that the bulk of its loans will default? Do you really think that people will stop buying their groceries at Woolworths from which the bulk of Woolworths’ income is earned? Do you think it likely that demand for BHP resources will stop? Do you think people will stop using Telstra to make calls, or shopping at Westfield, buying Rio Tinto’s resources or manufacturers will stop using Toll Holdings to transport goods to market?

There is no doubt that even the best of companies will lose revenue as the economy contracts and this will affect prices. The banks may have increased defaulters and demand for our resources may reduce, which will lead to reduced share prices. Sure some companies are going to fail and others will take a long time to recover. But all this will pass.

Sharemarkets run on fear and greed. At the moment fear is gripping the market and this is forcing the market down further than is warranted on the information available. Inevitably this will wash through the system and rational thought will come to the fore.

Try therefore to look at the information available without the hype and emotion and look at the evidence. It is not different this time. In investing it is not about what happens today but what happens over the long term.  Investing is not about getting rich quick. It is those that buy good companies now when prices are low who will benefit in the long term.

POSTED: 06-Nov-2008

 

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