Buy low, sell high, rinse and repeat, writes Dean Morel of The Motley Fool.
"You make your money during bear markets; you just don't know it at the time." – Shelby Davis
Australia is now more dependent on Asia than the USA or Europe. However, we will be buffeted by our legacy trading partners for years to come. Their economies will continue to deteriorate until a final catharsis occurs in the 2014-18 timeframe. That has been my working thesis since the mid naughties and I see no reason to change it now.
Caught by the cross winds of Asian growth and developed world debt, Australia will continue to trade sideways for a number of years. There are two major choices for Australian investors. Sit on the sidelines earning a decent 6%+ return on cash or, to paraphrase the ex-CEO of Citigroup Chuck Prince, keep dancing to the music. I prefer to dance and remain invested in the market with accessible cash on the sideline for opportunistic buying and a non-callable source of leverage for generational lows.
Here's what I'm doing
We're all different, and there are many roads to investing success. So rather than tell you what to do, I'll describe what I'm doing and why.
We're in a sideways market – a secular bear – which, if you take a long term perspective, is as easy to invest in as a secular bull market. Over the last few years I've written about the death of buy and hold investing. I hope you were paying attention, and now have the cash to swoop on bargains as they appear.
In secular bear markets it is more important than ever to buy low and sell high, then rinse and repeat. When all seems rosy I find it easy to sell, as in a secular bear market I know I'll get an opportunity to load up again. I also want to have cash ready for when table thumping, back up the ute opportunities arise. Therefore, I sell when the market offers me a good price.
My simple plan
While most people learn better by doing than from example, let me offer one example. I sold out of banks, Westpac Banking Corporation (ASX: WBC) and Australia & New Zealand Banking Group (ASX: ANZ) in particular, between November and February. I'm now looking closely at them.
If that sounds like market timing then you may have taken too big a swig of the 'time in the market, not timing the market' Kool-Aid. I don't attempt to time the market. I let the market dictate when to buy and when to sell. Timing implies a degree of forecasting, which like most people, I am unable to do.
I do not know what the market will do tomorrow or next week or even over the next year, but I do know it will provide me wonderful opportunities to bag some bargains and sell companies at or above fair value. So that is my simple plan.
Buying stocks really cheap
I'm looking out for companies selling below their tangible book values. I'm looking for companies with low trading turnover that are getting crushed as desperate investors take any price. I'm looking for stalwarts crushed in the rush for exists, CSL (ASX: CSL) under $25 is but one example.
I'm planning on entering a number of opportunistic buy orders. Orders placed at ludicrously low price points that offer a huge margin of safety.
There are three reasons for this.
Firstly, I'm not a trader, I don't watch the market closely, though at times like this I am sitting up paying attention. So, I could easily miss a bargain when it goes on sale.
Secondly, if we go lower it will become difficult to place buy orders. Fear will become so pervasive that pressing the buy button will make even the most rational of investors feel like being sick. Placing these opportunistic orders lets me tune out the noise and look forward to falls rather than fear them.
Finally, make sure you have a plan that fits your investment philosophy and strategy.
I'll leave you with the wise words of the Dean of Wall St, Benjamin Graham.
"Do those things … that you know you can do well, and only those things. If you can really beat the market by charts, by astrology, or by some rare and valuable gift of your own, then that's the row you should hoe. If you're really good at picking the stocks most likely to succeed in the next twelve months, base your work on the endeavour. If you can foretell the next important development in the economy, or in the technology, or in consumers' preferences, and gauge its consequences for various equity values, then concentrate on that particular activity. But in each case you must prove to yourself by honest, no-bluffing self-examination, and by continuous testing of performance, that you have what it takes to produce worthwhile results."
Dean Morel is The Motley Fool's Investment Analyst. In the interests of full disclosure, Dean owns shares in Australian companies, but not ANZ, CSL or WBC. The Motley Fool's disclosure policy is as sane as they come.