Why I Couldn’t Care Less About The Next Bailout When it Comes to Buying Shares

By MoneyMorning.com.au

Since 2008, three central banks have created at least $2.95 trillion in new money.

They’ve done this for two reasons: to stop a complete banking collapse and to stop an economic collapse… Oh, and to help keep them and their paymasters in a job.

You’ve seen…

U.S. Federal Reserve

Quantitative Easing I – USD$600 billion (AUD$566 billion)

Quantitative Easing II – USD$600 billion (AUD$566bn)

Bank of England

Asset Purchases – £325 billion (AUD$485bn)

European Central Bank

Covered Bond buying – €60 billion (AUD$74.6bn)

LTRO I – €489 billion (AUD$607bn)

LTRO II – €529 billion (AUD$657bn)

But as the U.S. and Europe get set for the next multi-billion-dollar bailout, we couldn’t care less.

In fact, if you’ve taken our advice and invested your money in the right place, it should be business as usual. And that means looking for dirt-cheap investments…

Getting Back to Share Buying Basics

Before we explain where to look, let’s explain why the next and any further central bank bailouts will be non-events.

Look at the following chart of the Vanguard Total Stock Market ETF [NYSE: VTI]:

We’ve drawn the rough periods of major central bank money printing on the chart. As you can see, with each new round of printing, the effect on prices has been less.

That means investors whose only strategy was to buy shares in the hope of cashing in on a stimulus-fuelled rally have run out of luck.

In the old days (four years ago!), investors bought shares they thought would do well. They did the research and bought stocks based on fundamentals.

(By the way, we’re not talking about technical analysis here. That’s a whole different kettle of fish. For a technical analysis view, check out Murray Dawes’ latest free stock market update by clicking here).

But then, when the share market and economies went into a tailspin, things changed. Governments and central banks decided they wouldn’t let the system collapse on their watch.

So, what did they do? They started the printing presses. And since then they’ve cranked out about $3 trillion-worth of new money.

This helped push up nearly all asset classes at the same time. It was hard not to make a buck what with all the new cash flooding the market.

But as we’ve pointed out, the more money they printed each time, the more they had to print the next time for it to have the same impact. That’s not viable.

And so, now share investing has come full circle. Because if you can’t rely on money printing to push up asset prices, you have to go back to basics. That means looking at the fundamentals of individual stocks…

Buy Half the Share Market for Less Than 20 cents

That’s why we’re looking hard at the hundreds of small-cap stocks on the Aussie market.

You see, with all the excitement about the economic recovery, the Aussie economy not going into recession, and the U.S. market almost doubling in three years, most investors don’t realise how cheap many Aussie shares are.

For instance, you probably don’t know that half the shares listed on the Australian Securities Exchange (ASX) trade for 20 cents or less.

Based on this morning’s prices, it’s actually 984 of them!

Of course, a cheap share price doesn’t always mean a bargain stock. In many cases, a share is five or 10 cents because that’s all it’s worth.

But in just as many cases, there are shares that have taken an unfair beating. Those are the stocks you should be interested in…

Last Week Was For Selling Shares, Today is For Buying

The key thing to remember is that regardless of big picture events, some shares can still make investors big returns. Conventional wisdom is that when things are bad, you should ditch risky stocks and buy safe stocks instead.

Trouble is that’s bad advice.

Safe stocks (such as good dividend payers) are investments you should hold all the time.

And for the most part, you shouldn’t trade in and out of them. By contrast, you can trade in and out of the risky stuff (such as small-caps).

But, that doesn’t mean ditching all your risky investments at the first sniff of trouble. In fact, if you’ve allocated your assets properly, your first reaction should be to look for chances to add to your portfolio rather than take away from it.

Of course, you should have a risk-management strategy. And you should be prepared to ditch shares that aren’t as good as you thought.

But right now, we’re looking to use ongoing market volatility as a chance to buy beaten-down stocks.

That means picking high-risk plays that have the potential to discover a new resource, exploit a booming sector or take advantage of changing consumer habits.

Those shares could do well whatever happens to the broader economy.

It’s a high-risk approach. But when used within a carefully allocated portfolio, it can offer high rewards too.

Cheers.
Kris.

P.S. Slipstream Trader, Murray Dawes says the market has just hit a key inflection point. This morning he told us, “Bad economic news globally – including China’s forecast lower growth rate and the aftermath of Europe’s LTRO – and today’s bad Aussie GDP number (0.4% against expectations of 0.8%) means the market has turned bearish.” But before you panic and rush to sell everything. Remember there is a way to make money from falling markets. To find out how Murray plans to help his subscribers do this, check out his latest free stock market update…

Related Articles

The Conference of the Year for Australian Investors

This Could Be A Very Profitable Couple of Months for Small-Cap Mining Stocks

Why You’ll Want to Watch This ‘Bad’ Retail Stock Very Closely

Why I Couldn’t Care Less About The Next Bailout When it Comes to Buying Shares