A sharemarket on sale & 2 things every investor must know

World sharemarkets continue their long, sharp decline. Yet whilst all about panic, we Fools calmly look to buy ASX shares when they are on sale.

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

World sharemarkets continue their long, sharp decline. Whilst we at The Motley Fool are an optimistic bunch, we're realistic enough to realise this bear market has claws.

And, coming so soon after the GFC, where the S&P/ASX 200 index fell over 50% from peak to trough, it's perhaps not surprising that many investors have simply thrown in the towel.

Those selling out now, when markets are tanking, are probably making a terrible investing decision, one that could adversely affect their wealth for the rest of their lives.

Firstly, let's look at some facts…

The S&P/ASX 200 is dancing to Wall Street's tune. You can forget what's happening in the local economy – share prices are being totally influenced by what's happening on global sharemarkets.

Cautious Fools
That said, we've long been cautious on the Aussie economy. Heck, we've even bearish on the Aussie dollar, saying back in July, when it was trading at $US1.07, that it was "living on borrowed time."

Today it trades at close to $US0.95, and like world sharemarkets, is in free-fall. Look out below if The Reserve Bank of Australia (RBA) cuts interest rates this afternoon. We wouldn't count it out.

Three lessons for forex traders
We're no currency traders here at The Motley Fool, so we can't claim to have profited from our seemingly prescient call. But we do hope readers can take away three important lessons…

1. When you see ads everywhere urging you to dump the day job, attend a 'free' seminar, and become a full-time currency trader, you know you're close to the top of the market.

2. Timing the market is virtually impossible. We thought the Aussie Dollar (AUD) was over-bought at parity, yet it went on to hit $US1.10. Now the sharemarket is in full-blown bear market mode, picking its bottom is equally as difficult.

But you don't have to pick the top, or the bottom, to be right. As Warren Buffett said, "It is better to be approximately right than precisely wrong."

3. Speculation, and over-leverage, is a one-way ticket to the poor farm.

The AUD at $US1.10 was pure and simple speculation. The fundamentals simply couldn't justify such an elevated level. Eventually, as it always does, sanity prevails. In the case of a highly-geared, highly speculative investment like the AUD, the rush for the exits is anything but orderly.

(As an aside, if any Motley Fool readers have been wiped out by forex trading, we'd like to hear from you. Of course, we'll keep your name and details confidential. Just reply to this email.)

Two things to know about this tanking sharemarket
Now, what about this sharemarket?

Overnight, U.S. shares sank further, falling another 2.9%, sending the S&P 500 Index to a one-year low, closing at 1,099.

Naturally, puppy-dog Australia has followed suit, although it has fallen less than feared, down just 1.4%. Still, investors in companies like David Jones (ASX: DJS), Resmed (ASX: RMD), Lynas Corporation (ASX: LYC) and Cochlear (ASX: COH) are feeling more pain, their shares all slumping 2% or more.

Apparently the problem remains Europe.

We beg to differ.

The problems are twofold…

1. On a day to day basis, high frequency traders, with their souped up computers, control the direction of the market.

This paragraph on Bloomberg sums things up well…

"Losses increased in the S&P 500 after the gauge fell below a series of levels considered significant by analysts and traders whose investment decisions are influenced by charts."

Have you ever heard such baloney? The charts are taking over the asylum.

What happened to good old fundamentals? Like, buying good quality companies at attractive prices, and holding onto them for the long-term?

2. We've just seen the biggest quarterly increase ever in the VIX, the volatility index, commonly referred to as the fear index.

Bloomberg reports it trades above 40, a threshold exceeded only 3% of the time in 20 years, and a level that has preceded stock rebounds.

"A very high VIX level suggests investors have given up, they're out of the way, and that's a great entry point," said James Paulsen on Bloomberg. "It's a contrary sentiment indicator, so when the VIX surges, it says bearish sentiment verging on panic is surging. And the market's a good buy."

One excited, Foolish analyst
Our own Investment Analyst Dean Morel agrees. Dean is generally a very cautious investor, parting with his own hard-earned cash very infrequently.

So when he said this morning it was time to get excited about shares, it certainly piqued our interest.

Over to Dean…

"With fundamentals up, why is the sharemarket down? The answer is fear and fear alone. The market has fallen as investors have become fearful of the near term future.

That would make sense if investors had a track record of accurately predicting the future. But alas, they don't.

The economy and sharemarkets are too complex for even the best economists to accurately predict.

What hope do individual investors have?
The good news is there is no need to predict the future to succeed in investing. In fact the more time you waste predicting the future the less time you have to focus on what's right in front of you.

What is in front of us now is a sharemarket on sale.

Yes the market could get cheaper, but so what? That merely means even better bargains. Falling markets are only a concern to those unfortunates who are leveraged or need the money in the next couple of years.

Hopefully that is not you.

Spread your investments over the months and years ahead. Spreading your investments reduces the psychological pressure of investing. Doing so during market sales increases your likely returns and reduces your real risk.

Holy grail of investing
Buying during market sales is the holy grail of investing. Higher potential returns for less risk.

As my crystal ball is as cloudy as everyone's, I can't tell you when this market will bottom. But I am confident that we're in a value phase of the market.

Buying during this part of sharemarket cycle is an excellent path to market outperformance."

Sage words, as ever, from Dean.

As for individual share-buying opportunities, you can always check out the action at Fool.com.au. Below we have listed a couple of recent articles packed full of ideas.

We've also today published an article titled 1 Stock To Buy In October.

It's a U.S. quoted company, but one you may have already heard of.

The Australian sharemarket offers investors plenty of opportunities, and that's where we'll focus most of our attention. But U.S. markets, home to companies like Google, Apple, Microsoft and Coca-Cola, also offer excellent investing opportunities.

And with low-cost brokers like OptionsXpress and Interactive Brokers offering cheap trades, you'd be a fool not to take a look.

1 Stock to Buy in October
There's a stock in the market that just seems too good to be true. This company has a 160 year track record and comes with growth opportunities and dividends. It's both boring and sexy at the same time and best of all it's cheap. More >>

More investing ideas:
The ultimate high yield dividend portfolio

3 growing ASX companies at value prices

Dividends: The great wealth creator

Another place to look is this free report by our top equity analysts that profiles two companies they think will be well insulated from any bursting of the dollar, gold and commodities bubble. Grab this report – 2 Safe Ways To Play The Commodities Boom – while it's free and still available.

Bruce Jackson has an interest in Google, Apple and Microsoft. Dean Morel has an interest in the sharemarket. The Motley Fool's disclosure policy is a must-know.

 

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »