February, 2009
By now we’re all aware that the financial world has gone pear-shaped. Words such as recession, unemployment, and credit crunch being thrown about with monotonous regularity. It seems that money news these days is all bad.
But what if it’s not? What if it’s actually possible to profit from the world’s economic woes? A fairytale? Perhaps. But with a little nous (and a bit of luck) it could be that the global financial crisis could deliver you a happy ending.
First up, however, the disclaimer. Most of the people who do well in unsteady financial times know what they’re doing. “There’s no substitute for doing the hard work and research,” says Matthew Walker of Sydney’s WLM Financial Services. “You don’t get anything for free. Share trading, for instance, is not as easy as it looks – you can fudge a bit in good times because everything’s going up anyway, but it’s much more difficult to get it right when things aren’t so good.”
To market, to market
When all news of the Dow Jones is about its downward motion, and some of Australia’s staunchest shares have taken a dive (Westfield anyone?) it’s hard to see where the money is. US shares guru Warren Buffet is all about buying smart and buying low – he’s also about looking forward to falling share prices because it simply means you can buy more of a good thing. The trick is to pick the good thing.
“The price of a share is not where the bargain is,” says Walker. After all, you can pick up shares at any time worth 6 or 7 cents each. What you need to look at is how expensive a share is relative to its performance criteria. Walker explains: “You need to look at the Price-Earnings Multiple (or Ratio) – the higher that is, the more expensive a share is deemed to be because it takes longer to earn back its purchase price.”
O-kay. The P/E Ratio is defined as the valuation ratio of a company’s current share price compared to its per share earnings. It’s calculated by dividing the share’s market value by its earnings. So if a company is currently trading at $40 a share and earnings over the past 12 months were $2 a share, then the P/E Ratio for the stock would be 20. If you’re looking at a company, you can compare its P/E Ratio to other companies in the same industry to help you work out how much of a ‘bargain’ it is.
But it’s not the only indicator.
“Today, you have to look at how robust the company’s balance sheet is – debt levels, quality of management, do they have cash flow, sales of product (what’s the market doing),” says Walker. “Consumer discretionary stocks, for instance, are being hit today because nobody’s buying anything, but the big picture is that long term they’ll pick up again.”
Other areas he suggests might be worth a look are Gold (buy shares in companies that mine gold if you don’t want to stock up on the yellow stuff itself) and bond funds – particularly if you think interest rates will fall further. “If you really want to be competitive and you don’t have the time or resources or depth of understanding to do it yourself, go through a managed fund,” he recommends.
Bricks and mortar
Of course, when the sharemarket is uncertain, investors look for other areas for their money. While real estate hasn’t exactly been what you’d call booming of late, John McGrath, CEO of McGrath Estate Agents, is enthusiastic about buying now.
“I think the next 6-9 months are a great time to buy,” he says. “Prices in most parts of Australia are 10-20 per cent down on their peak, interest rates are down – and likely to fall another 1.5-2 per cent, the First Home Buyers grant has gone up, and rents have gone up considerably – we’ll probably see more growth, not as strong but still there this year.”
When he puts it like that, why wouldn’t you? “Astute investors buy when there’s some level of fear around,” says McGrath. “They take the opportunity to act when others aren’t. We’ve been in a down cycle for 18 months to 2 years, and they usually last around three years. So it’s perfect.”
Which is not to say you can buy just anything. McGrath has the following tips:
* “Focus on capital growth more than rental return. Rental yield is important in that it helps you to buy the asset, but the real money in property is made when you can pick at area that outpaces the market in terms of capital growth.”
* “Houses generally outperform units in terms of capital growth. So if you can afford to buy a house with a garden you’re likely to get a better return.”
* “Older style apartments or apartments that are not brand new often have better capital growth than brand new. There’s often a premium attached to buying new, in much the same way as a brand new car loses value the minute you leave the showroom.”
* “Location, location, location. Where you buy is more important than anything else. Buy a prime location and it will always be a prime location. You can improve a property down the track, but never the location.”
* “With the internet, there is no excuse not to research areas and values in those areas. Treat it like a second job. If you get your buying decision right, you’ll make more from your investment than your fulltime job.”
* Don’t buy outside an area with which you’re familiar – if I’m in Sydney I wouldn’t be buying in Brisbane, for example. Stick to an area you can research and know well
A big question of when
One thing that both McGrath and Walker reiterate is this: don’t try to pick the bottom of the market. Sitting around when things are bad and waiting for them to get worse is not the way to find a bargain.
“Don’t try,” says McGrath. “The bottom of the market will be somewhere between last September and this September. I’m not convinced we haven’t seen it already. But the bottom is something you only see in hindsight. I’ve been in the market 25 years and you can never pick the top and you can never pick the bottom.”
Matthew Walker adds: “I like the quote by Jane Bryan Quinn: ‘The market timer’s Hall of Fame is an empty room’.”
http://money.ninemsn.com.au/article.aspx?id=736768
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