LONDON: Let me start by reminding our readers that the situation today continues to be gloomy with failing economies, troubled banks and a continuing danger of a global debt crash. This is happening despite the generous and most expensive government rescue plans in history.
Will they succeed? Perhaps in the short-term, but will they assume responsibility for the future or, will they be able to resolve the next crisis and the one after it? That certainly is the trillion-dollar question!
You don’t have to be a prolific investor to understand what the real problem was. It was sinking public confidence, and money does not buy confidence. Only with time, investors’ confidence will be restored and the markets prevail and recover. Since stock markets are incredibly difficult to predict, companies remain not nearly as difficult. But which companies you, as the investor, need to focus on in the medium-to-long-term.
Quality assets are found in companies with low P/E ratio by historical standards, good cash flow, efficient management, low debt and significant advantages with its market sector. They are likely to eventually make you a lot of money. The timing is important and here the investor needs to be patient as the explosive growth may happen this year, next year, or perhaps five years from now. If it takes longer, you just have a chance to buy more bargain shares in the meantime.
So, stay cautious. Focus on quality assets that offer reasonable upside potential in a recovery scenario that should survive this recession-depression period. I believe the next few years will be the best time to invest in stocks.
The quality assets referred to above, should be part of a more diversified asset portfolio of good companies with promising future performances. This strategy will serve as a cushion against specific unforeseen negative events and, with its extended time-horizon, will stand against panic selling. That’s how one protects against potential market uncertainties.
How can one predict which companies are going to lead the way out of this deep recession? So far, nobody dared to answer! Making predictions these days is indeed a fool’s game. There are hundreds of predictors and when one of them is right, only in hindsight, the press gives a full cover story and makes them geniuses so that investors rush to listen to them.
The risk-reward assessment is a pre-requisite for controlling risk and improving decision-making process in selecting the right assets within the diversified portfolio. If you believe that the market is close enough to a turnaround, it would then be advantageous to invest in growth stocks of emerging companies, for example technology or bioscience industries, where you feel they hit new lows from its previous low. Simply, invest before they start to recover using best judgment and having a strong confidence - mainly in yourself - with the proper tools to your timing and investment choices.
I am a strong believer that global stock markets will get back into the bull territory but will take a while. True, markets had moved down and are staying down for justifiable reasons, and unless these reasons are addressed and resolved, it will stay flat or perhaps drop more. To those investors who sustained losses over the past several months, I say to them: It’s not worth losing sleep over, just stay and watch from the sidelines. The market may not bounce back soon, as one wishes to happen, in order to recover even part of the losses over a similar period of time.
Most investors these days, and rightfully so, are stock market shy because they were battered so unmercifully. They are the one asking: Where is the bottom; where are the earnings and where are they going to come from? The bottom will be reached and the recovery is imminent just be patient and remain focused.
I say to them now is a good time to save some money and prepare to invest when the market stabilizes at least. There is no reason for them to jump in now unless they are really convinced that the market, as a whole, has reasons to move upward. Does it?
(Habib F. Faris [[email protected]] is CEO & managing director of FinaVestment Ltd., London.)