It is not that I did not find any attractive investment
opportunities,
I was just frozen like a rabbit in the headlights by the banking
crisis, Lehman bankruptcy and sudden market decline.
Frustrating but too late to do something about now.
In 2009 my
number one what if question was:
What if there is another
sharp decline should the economy stall after its jump start and steroid
boost through stimulus spending? Which led me to think that: As the
markets hit new low it will be time to get in!
It never happened and I watched the market take off with me just
watching.
I did however earn a return of 6.5% on my portfolio while being about
70% in cash. But it could have been a lot better.
So what to do?
What I realised is that at
any point in time there are a thousand things that can go wrong with
the world economy, country economy and the company you invested in.
At
the same time however there are a thousand things that can go right.
Companies
aren't static entities, they constantly change, new products get
developed, businesses or divisions get sold or closed, and they fight
for survival. So there are a lot of positive things that can happen as
well.
The key to profitable investing is not paying for all the positive things that may happen
and to invest if you find
something undervalued. Irrespective of market conditions.
What we must do then is to look for companies where the worst or all
negatives are
reflected in the price. That way we get all the positive developments
for free.
How do we find these companies?
The best places to look are:
- The daily 52 week or all time low share price list
- Companies with the highest dividend yields
- Companies with the lowest price to earnings ratios
- Companies with the lowest price to book ratios
But
wait a minute, you may be thinking. There are also a lot of junk
companies in these lists.
Companies that are in a dying industry such
as newspapers, companies with inflated past earnings due to a bubble or
industry tailwind such as commodity companies and US, Irish or Spanish
construction companies last year.
You would be 100% correct. But
you know what, it does not matter.
Because
numerous long term studies have shown that indiscriminately buying the
cheapest companies using for example price to book or price earnings
ratios leads to index beating performance. Not every year, but on
average over long periods of time.
Even if you do not
indiscriminately want to buy cheap companies this is good news. What
you need to do is further analyse the companies on these lists to
identify worthy investments.
Look
at it this way.
Analysing companies on these lists are like digging near a rich
vein of gold. There may still be some rubble around but it's a lot
easier to find gold than for example just starting to dig anywhere. For example analysing current hot companies being talked about
in the media. Apple is an example where the current price reflects
only positives developments.