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01 June 2019GETTING READY (Part 1)
The major indices all fell last month as the market uncertainty continues so perhaps we should talk about the psychology of buying a share that has fallen perhaps quite considerably, and perhaps very quickly, in a market crash. Firstly, as has been said before, you should be using this time of uncertainty to compile a list of all those companies that you think would be a good investment according to your own criteria. It is perhaps worth repeating that perfectly good companies who are trading normally or have hit a temporary blip, will be dragged down along with every other share in the event of a market collapse, and this is where our opportunity lies. We are in cash so have plenty funds patiently waiting.
So study your list of candidates and place a price where you believe you would be buying a bargain if you were offered that price. Set up an alert system so that you will automatically be notified if one of your companies fall to that price. Before buying check for any market announcements to ensure that the fall is not due to company specific issues and you will be ready.
29 March 2019VALUE & QUALITY 1
Last month major indices either declined a little or went up a little but really not much of anything.
We are not buyers, but we are looking hard at quality and value as we may be at or near to arresting the decline of the last few months.
So, what would value look like? It could be a share that is selling for less than its book value ie it has intrinsic value built in. An example might be of a share selling at $£Euro/Yen 1 with a asset value of 2. In other words you are buying $£1 etc for 50 cents which is good. However it is not that simple as the company may be selling at these levels for a reason. It may be suffering losses, its Income may be in decline because competitors are taking its market share and so on. You need to look at how it is generating cash, whether it has high levels of debt, whether it spends as much to generate the cash as it generates in cash ie Cash Flow – Capital Expenditure = Free cash Flow.
To illustrate the difference, you could argue that a business like (say) insurance will not have to spend a lot on generating its Cash Flow, while an Iron Foundry might have to spend a great deal on heavy equipment just to keep producing the product. If the company is paying a Dividend has it been cut or even stopped as profits decline. Check the Dividend cover to ascertain the sustainability of the Dividend.
If none of the above is present and the company is profitable and generating cash consistently over the past few years then you may have hit on a market anomaly. Perhaps the sector has “fallen out of favour”, perhaps an event which on examination would not impact on the ability of the company to continue being profitable, whatever the reason, if the company is still sounding optimistic with its forward guidance you may wish to make an investment. After all should the very worst happen the assets will be worth more than you paid for them so you should be alright.