14 September 2016
How To Capitalise On Market Falls
By David Kuo
On Friday the US market fell almost 400 points. At first, the drop was blamed on North Korea’s powerful nuclear test. That was kind of believable - a bit flaky but, nevertheless, probable.
Then the reason for Friday’s drop shifted to talk that the US Federal Reserve could raise interest rates as early as this month. If the first reason was flaky then the second is bordering on worrying.
Here’s why.
If professional investors are that concerned about a quarter point hike in US interest rates, then they are either totally unprepared or wholly inept – neither of which fills me with confidence.
Where on earth have these people been investing their money? Why should they be so badly shaken by a tiny increase in US interest rates? Wherever it might be, I certainly don’t want to be a part of it.
The dog’s tail
When we invest, we should consider carefully how our chosen asset could reward us over the lifetime of the asset.
Over that protracted period, interest rates could go up, go down or even stay the same. But we should never allow a central bank’s interest-rate tail to wag our investing dog.
We should invest in companies that can meet interest payments, comfortably. Better still, we should look for companies that don’t borrow money at all. If a company doesn’t have any debts, then it can’t possibly go bust.
We should also invest in companies that have the ability to withstand just about any economic upheaval. These companies have pricing power.
Our job as investors is to go out and look for these exemplary businesses.
Throwing out the baby
When markets fall, as they did on Friday, just remember that it has fallen because there were more sellers than buyers. It’s really that simple.
Why they threw the baby out with the bathwater is not that important. But why we bought a share is important.
If we had bought a stock for non-value reasons, then we are more likely to sell for non-value reasons.
But if we understand why we had bought a share, and if the share-price drop allows us to buy more of what we like at a better price, then instead of following the herd we should go against the crowd.
That is not being contrarian for contrarian sake. That is just common sense, which is something that the market often lacks. It is something we can count on and capitalise on.
On Friday the US market fell almost 400 points. At first, the drop was blamed on North Korea’s powerful nuclear test. That was kind of believable - a bit flaky but, nevertheless, probable.
Then the reason for Friday’s drop shifted to talk that the US Federal Reserve could raise interest rates as early as this month. If the first reason was flaky then the second is bordering on worrying.
Here’s why.
If professional investors are that concerned about a quarter point hike in US interest rates, then they are either totally unprepared or wholly inept – neither of which fills me with confidence.
Where on earth have these people been investing their money? Why should they be so badly shaken by a tiny increase in US interest rates? Wherever it might be, I certainly don’t want to be a part of it.
The dog’s tail
When we invest, we should consider carefully how our chosen asset could reward us over the lifetime of the asset.
Over that protracted period, interest rates could go up, go down or even stay the same. But we should never allow a central bank’s interest-rate tail to wag our investing dog.
We should invest in companies that can meet interest payments, comfortably. Better still, we should look for companies that don’t borrow money at all. If a company doesn’t have any debts, then it can’t possibly go bust.
We should also invest in companies that have the ability to withstand just about any economic upheaval. These companies have pricing power.
Our job as investors is to go out and look for these exemplary businesses.
Throwing out the baby
When markets fall, as they did on Friday, just remember that it has fallen because there were more sellers than buyers. It’s really that simple.
Why they threw the baby out with the bathwater is not that important. But why we bought a share is important.
If we had bought a stock for non-value reasons, then we are more likely to sell for non-value reasons.
But if we understand why we had bought a share, and if the share-price drop allows us to buy more of what we like at a better price, then instead of following the herd we should go against the crowd.
That is not being contrarian for contrarian sake. That is just common sense, which is something that the market often lacks. It is something we can count on and capitalise on.
