With the European debt crisis making daily headlines and the share market having fallen since the high in April last year, the question about whether or not to invest in shares is fresh in people's minds. Simon Bylsma reports.
With so much focus on short-term share price movements, the reasons for investing in the underlying businesses are being overlooked, and this provides opportunities for savvy investors.
A key misunderstanding that most people have about the share market is that prices always go up. In Australia and around the world, we have experienced a number of years of consistent growth in all asset classes - ranging from property to shares and even gold. A major driver of these large and reliable returns has been the western world’s love affair with debt, and as individuals and households have borrowed more they have pushed up the price of all these assets. The last few months and in fact years have once again proven that prices do not always go up - between November 2007 and March 2009, the top 200 Australian shares fell by 54 per cent!
So why do we get such large movements in share prices? It is important to understand that a stock price reflects two things, the earnings of the business and sentiment (general feeling about the share market). Remember, companies only report earnings twice a year so the remainder of the time a stock price is driven by sentiment; sometimes the sentiment is positive other times it is negative. During the course of market cycles, sentiment can overshoot on the upside and this pushes share prices extremely high and also on the downside pushing share prices extremely low.
Logic would say that when it overshoots on the upside it is the time to sell, and when it overshoots on the downside that is the time to buy. However, most people tend to get this around the wrong way. When the market is strong and prices are increasing, people get caught in the positive euphoria and decide that it is a good time to buy, and when sentiment is negative and prices are falling buying is furthest from people’s minds.
So with the current negativity surrounding the Australian share market, is now the right time to buy?
The answer really hinges on one condition – what is your investment time frame?
This fundamental question must be asked before investing in the share market. If your time frame is only six to 12 months, then an investment in shares may not be appropriate in this environment - the current short term uncertainty will not favour those with a short term outlook.
If you have a longer term time frame, greater than five years, then the current market conditions are providing opportunities. Current sentiment is negative and doomsday scenarios are being put forward, but when you look through the fear and panic at the underlying businesses, value is presenting itself. The following table is a quick snapshot of the dividends being offered by the top four Australian banks. While not being comprehensive these numbers do provide some food for thought.
|
Company |
Dividends per share per year |
Dividend Yield |
Gross Dividend Yield* |
|
ANZ |
$1.40 |
6.59% |
8.57% |
|
CBA |
$3.20 |
6.38% |
8.35% |
|
NAB |
$1.72 |
7.05% |
9.16% |
|
WBC |
$1.56 |
7.22% |
9.39% |
Source: Iress, 8th December 2011 *Gross dividend yield includes franking credits
A long-term time frame helps put any short-term movements into perspective and allows the investor to see through the day-to-day noise. I have selected the banks to highlight this as most Australians have some affinity with banking shares either through a direct investment or indirectly via their superannuation fund. However in saying this, the value is not limited to the banking sector and time spent researching will reveal other opportunities throughout the market.
The reality about investing in the share market is that you will never pick the lowest price, and the short-term volatility will push the share market up and down but those who view this current negative sentiment as an opportunity will be able to slowly start building a great base for the long-term. The world’s most successful long term investor, Warren Buffett, puts it this way, “be greedy when others are fearful, be fearful when others are greedy”.
Simon Bylsma,
Investment Adviser
Bellmont Securities
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