Nathan Bell
August 8, 2011 - 12:00PMWarren Buffett famously said, 'be greedy when others are fearful'. That's easier said than done. With the market falling 10 per cent over the past week, 'being greedy' might be the last thing on your mind.
It shouldn't be.
Cast your mind back to March 2009. When everyone was panicking back then some of the best buying opportunities in years arose amongst the turmoil.
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A flood of disappointing news has panicked investors but this sell-off is offering some equally good bargains.
The US is slipping back toward recession, Europe is following, aided by sovereign debt fears and there are genuine concerns that Chinese demand won't keep Australia's economy bubbling along.
The health of the global economy is at risk but this time, governments' ability to manage spiralling deficits and cut interest rates is greatly reduced.
While the problems are real - governments do need to rein in spending and the economy isn't recovering as hoped - in many cases share prices already reflect the bad news.
Over the past 18 months we've been advising investors to increase their cash holdings. Now is the time to deploy some of it (but not all; we may well get more opportunities down the track).
The question is where?
Avoidance strategy
Firstly, we're steering clear of the big four banks. If the economy really falters, they will be hit hard.
Better to focus on best-of-breed companies with excellent defensive qualities: stocks like CSL, QBE Insurance, Sonic Healthcare and Woolworths, all now attractively priced (although our recommendations on them differ).
For the more aggressive, less conservative investor, real value is starting to emerge in those sectors most exposed to financial markets. Macquarie Group, a very different business to what it was two years ago, currently yields 7.8 per cent after falling 21 per cent over the past fortnight.
Computershare (down 12 per cent over the past week) and some of the funds management businesses like Perpetual (down 45 per cent since October 2010) and Platinum Asset Management (down 10 per cent over the past two weeks) are also on our shopping list, as is News Corporation, already suffering from corporate scandal but plummeting a further 8 per cent over the past week.
Don't speculate
This is a challenging environment for all investors and, despite the abundance of opportunities, it's no time to be cavalier.
If you're a conservative investor, ignore speculative situations altogether. There is less reward and far more risk in buying cyclicals and speculative companies right now.
In contrast, best-of-breed companies, many of which sport attractive prices and have already found a place on our buy list, offer defensive qualities and a far gentler ride.
This is no time to be riding bareback but for the first time in a few years, I'm getting quite excited by the value on offer.
This article contains general investment advice only (under AFSL 282288).
Nathan Bell is research director of The Intelligent Investor.
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