By MoneyMorning.com.au
‘If [you are] the right kind of investor [you] will take added satisfaction from the thought that [your] operations are exactly opposite from those of the crowd.’
Ben Graham, The Intelligent Investor
It’s amazing how your view of the world tends to be moulded by what the stock market does. This is obviously because a portion of your wealth links your emotions to the market. The media splashing front-page headlines about how much value was wiped from the market the previous day certainly does not help your blood pressure.
On Monday, you could have been forgiven for thinking the global economy was unravelling. News.com.au reported – ‘Here we go again: $37bn wiped off Aussie shares’.
But here we are, four days later. The market has rebounded 143 points. And this morning, the Sydney Morning Herald reports…
‘Investors enjoy best day in years… THE sharemarket added $42 billion in its best session in nearly three years yesterday as investors seized on hopes of a resolution to the European sovereign debt crisis.’
This is what the Aussie market looked like over the last five days…
And here’s what it looks like over the last year…
It’s easy to get caught up in the headlines and trade emotionally. But to survive this bear market, you need to take a step back and look at the big picture. Only then can you see what is really going on in the world. And only then can you take action to protect your wealth.
I’ve said this before but I’ll say it again. In a bear market, cash is king.
The industry has conditioned most investors to think cash is useless and you’re doing yourself no favours by holding it. Apparently your wealth is not ‘working for you’.
This is true to some extent. Cash is not exactly a high-returning asset. But neither are equities in an environment of falling earnings and expensive prices. We are in a deflationary environment for asset prices at the moment and the purchasing power of cash rises in such an environment.
Cash is valuable not for what it will earn you now, but for what it enable you to buy later.
Your strategy here should be to continue scaling into the market and buying during sharp falls or market panics. If you can, I’d recommend you identify quality stocks trading well below a conservative estimate of value so you can be ready to buy those companies at an opportune time. If you’re not sure how to do that, but would like to, click here…
In this environment, you also need to be prepared to see the companies you own trade below their intrinsic value for a prolonged period of time. Mr Market is a nervous operator. In bear markets, prices are low and can get lower.
In these circumstances, you have to practice sound investing principles. Focus on the business and value, not price. Look at negative sentiment as an indicator of value.
Move into the market with greater conviction when there is panic and take profits when there is complacency. This is the aim of the value investor: To take advantage of the market’s emotions. It’s a strategy that might work for you. It’s not easy. But with experience and a solid understanding of a company and its value, you could build a strong value-based portfolio and grow your wealth steadily over time. No matter whether the crowd is trading calmly or panicking.
Greg Canavan
Money Morning Australia