The global markets are inching towards the point of maximum pessimism. At the peak of pessimism, people will feel that there is a very gloomy future for the financial stocks and major economies like the United States are in a permanent slowdown. It will be the “death of equities”. Of course, at the moment the markets are quite a way off from that point.
Right now the Dow is at a PE ratio of around 10-12, which means we are nearing that point. It also indicates that we could see a sharp, precipitous fall when it comes. There are some business economists who are speculating that things won’t be as bad and that is holding up the market.
Whatever be the scenario, it should be given that when the market is drifting down, it is creating opportunities for investors in the long-term. For the short-term investors, it is time to get out or change their terms and become long-term investors. There may be some traders who have started doing event-based trading and benefit even in the current market conditions. But, we will leave discussions about that for some other time when the dust settles down and a bottom is reached and good quality M&As start once confidence in the regular course of business increases.
For all others, it is the time to opt for long-term investing. Start initiating purchases in companies that have sustained competitive advantage and which will emerge victorious once the dust settles. It goes without saying that purchase only below the intrinsic values.
Investors can search for companies that are fundamentally high quality, but are available at unjustifiably low prices. These are the companies that a long-term investor would want to form the core of his/her portfolio with before the start of the next bull market. Expect these companies to fall in price further before they go up. However, you cannot try to catch them at their lowest since you cannot attempt to call the bottom.
Though, it is natural to try to wait for the bottom since it may not seem to be a great move to have bought a stock thinking it was “cheap” or a “good bargain” and then see it drop down 20% or more. One of the best ways to overcome that is to do a buy in 3 to 5 stages. Whenever you initiate a buy you do only 20-30% of your target portfolio value and then phase out the purchase over next few weeks. So if it falls during that time you are able to average things down. However, if it goes up you will have to buy at the higher prices too.
One more thing to do is to create a portfolio with a high dividend yield. This will help you hold it even when the prices drop since you are still getting a good cash flow while you hold it at depreciated prices. This cash can then be further invested in averaging down on the same stocks that you hold or new ones that might have become available at even lower prices.
