Is waiting for a stock market crash to invest a viable strategy?

[ENP]

The "value investor" concept I personally think just makes sense. After reading Ben Graham and Warren Buffet books it is the type of investing that is relatively simple to pick up and learn.

Saying that...

If the whole idea is to buy good companies for less than they are worth, then stock market crashes provide a great time to do this.

However, stock market crashes only come around every so often. What happens to the value investor's investments when the stock market in general isn't in a crash/recession, etc.

[ratkin]

Great strategy , however the patience required is beyond most people.
Also when the market does actually crash then most people become too scared
to actually implement their strategy for fear things might become even worse.

I adopted a similar strategy during the GFC and it has ended up paying off very well,
however some of the timing was off , ie thinking the market had crashed when it still
had further to go. Worked out well in the end but was one scary ride.

[ENP]

Worked out well in the end but was one scary ride.

As long as you were certain you were investing in good solid companies though you would have been happy that you were buying them at bargain prices?

[winner69]

I think ENP is saying buying good solid companies after a collapse is the best time to buy ... presumeably for a long time hold ... after all you have bought something on the cheap

As ratkin says does anybody know when the sharemarket 'collapse' ends?

Here's a solid recession proof stock ... been plenty of times when it has looked like the collapse is over .... and this stock is now almost at an all time low ... so not a good buy and hold


Maybe the sharemarkets are still collapsing ... so how do we define a sharemarket collapse?



3366

[lou]

I adopted a similar strategy during the GFC and it has ended up paying off very well,
however some of the timing was off , ie thinking the market had crashed when it still
had further to go.

While waiting for a crash you are basically waiting to get in on the up trend. The problem is you may wait a bit to long to confirm the up trend and you start second guessing yourself with questions like how much longer will this trend continue for?

For example right now I have some excess funds to invest and we have had an uptrend since September 2010 (NZX +14%) do I get in now? or wait for the next correction?

[CJ]

The problem with the NZ market is that it is so small but surely the key is to find undervalued shares in any market.

I dont know anything about Goodman but it could be an example of a 'recession proof stock' that hasn't had the upswing with the market and is therefore undervalued.

Here is a NZ example: http://www.nzx.com/home/4892107/Ballylinch-seeks-control-of-Tourism-Holdings

Again, I dont follow that share but aparently its NTA is $1.32. Sounds like Ballylinch is doing a Graham/Buffett style value investment.

[Snoopy]

The "value investor" concept I personally think just makes sense. After reading Ben Graham and Warren Buffet books it is the type of investing that is relatively simple to pick up and learn.

Saying that...

If the whole idea is to buy good companies for less than they are worth, then stock market crashes provide a great time to do this.

However, stock market crashes only come around every so often. What happens to the value investor's investments when the stock market in general isn't in a crash/recession, etc.

While the market is going up, generally the value investor will under-perform. But then again the value investing method doesn't claim to track the market and never has. Nevertheless value investing has a history of outperforming the index. Perhaps not by as much as people think. Probably only around two percentage points per year. But that extra 2% does compound over the long term and make a significant difference in the end.

While it would be nice to have the time to wait for a market crash, I would suggest looking for the mini-crashes that are happening much more frequently. These tend to be sector or even one stock specific. For example many Oz shares are being marked down about now because of the high Oz dollar destroying their profitability. if you can find shares that are long term resilient despite this, you may have a good entry point right now.

SNOOPY

[ENP]

For example many Oz shares are being marked down about now because of the high Oz dollar destroying their profitability.
SNOOPY

How do you take into account foreign exchange risk? If a New Zealander buys Aussie shares right now at the exchange rate, it theoretically makes Aussie stocks quite expensive. I've been keeping an eye on WOW for sometime now.

[fungus pudding]

While the market is going up, generally the value investor will under-perform. But then again the value investing method doesn't claim to track the market and never has. Nevertheless value investing has a history of outperforming the index. Perhaps not by as much as people think. Probably only around two percentage points per year. But that extra 2% does compound over the long term and make a significant difference in the end.

While it would be nice to have the time to wait for a market crash, I would suggest looking for the mini-crashes that are happening much more frequently. These tend to be sector or even one stock specific. For example many Oz shares are being marked down about now because of the high Oz dollar destroying their profitability. SNOOPY


Is the Aussie $ high, or is it simply higher than it was, and against what ?

[Snoopy]

How do you take into account foreign exchange risk? If a New Zealander buys Aussie shares right now at the exchange rate, it theoretically makes Aussie stocks quite expensive. I've been keeping an eye on WOW for sometime now.

I think you have to ask yourself if a particular currency has suddenly become that much stronger is it justified? In the case of Australia with their strong commodity economy I would conclude it is. Thus although it would have been nice to buy those Aussie dollars when the exchange rate was more favourable to NZers, we have to consider time as a commodity that can only be exploited going forwards.

In the short term NZ-Oz currency fluctuations may give you a few splashes, but I doubt you will get a full bath. In the long term currency fluctuations are less important than the quality of the underlying company that you are investing in. In the case of Woolworths around 8% of their profits come from NZ. That means the low NZ dollar is actually hurting them too. So if the NZ dollar does strengthen, you should see a slight positive reaction in the WOW share price.

SNOOPY

[Animeart]

I think taking advantage of market crash is a good idea, but you should be prepared to have your funds tied up for the long run ie. 5 yrs plus. Don't worry too much about not picking the bottom of the crash as no matter how hard you try you will never buy at the lowest or sell at the highest. Hence, the main thing to keep in mind in not to be too greedy. Just set a target for the return you want to achieve and as soon as you've reached it, then you should sell your position to realise the gain.
Obviously, if you are in this for the long term and you want to invest quite a bit then it would be worthwhile investing in a share that pays a decent dividend. Not that a high dividend is necessary the best way to growth your nest egg. I noticed with some shares that it's better to sell before the ex-dividend date and buy back your position afterward, as these shares often drop several points, in addition to the dividend amount, after the cut off date. Also, don't forget that at the moment you still don't pay tax on capital gain, so it actually gives you a higher yield than dividend.

[Snoopy]

I noticed with some shares that it's better to sell before the ex-dividend date and buy back your position afterward, as these shares often drop several points, in addition to the dividend amount, after the cut off date. Also, don't forget that at the moment you still don't pay tax on capital gain, so it actually gives you a higher yield than dividend.

Animeart, what you say has some merit with Australian shares because NZers cannot access Australian imputation credits.

However with imputed dividends in NZ I don't think your argument holds. Imputed dividends are tax free to the NZ shareholder because the underlying company has already paid the tax for you. Selling the shares immediately pre dividend and buying the same shares back immediately post dividend should leave you with exactly the same amount of cash in your pocket (transaction costs excepted), as just taking the imputed dividend.

SNOOPY

[Lego_Man]

I think you have to ask yourself if a particular currency has suddenly become that much stronger is it justified? In the case of Australia with their strong commodity economy I would conclude it is. Thus although it would have been nice to buy those Aussie dollars when the exchange rate was more favourable to NZers, we have to consider time as a commodity that can only be exploited going forwards.

In the short term NZ-Oz currency fluctuations may give you a few splashes, but I doubt you will get a full bath. In the long term currency fluctuations are less important than the quality of the underlying company that you are investing in. In the case of Woolworths around 8% of their profits come from NZ. That means the low NZ dollar is actually hurting them too. So if the NZ dollar does strengthen, you should see a slight positive reaction in the WOW share price.

SNOOPY

Not at all - your FX strategy actually has a HUGE impact on returns, presuming you measure your wealth in your country of residence's currency.

An unhedged NZ portfolio of global shares (measured by MSCI in USD converted to NZD) invested in mid 1998 would still be underwater as of today. If i was investing in Aussie stocks now, i'd fully hedge my exposure as the NZD/AUD is at the low end of its historic range. Think what happened to the NZD/AUD last time the world economy fell out of bed (2008) - we were up at 0.90.

[Lego_Man]

Is the Aussie $ high, or is it simply higher than it was, and against what ?

AUD is overvalued against just about everyone.

[winner69]

I think ENP is saying buying good solid companies after a collapse is the best time to buy ... presumeably for a long time hold ... after all you have bought something on the cheap

As ratkin says does anybody know when the sharemarket 'collapse' ends?

Here's a solid recession proof stock ... been plenty of times when it has looked like the collapse is over .... and this stock is now almost at an all time low ... so not a good buy and hold


Maybe the sharemarkets are still collapsing ... so how do we define a sharemarket collapse?



3366

Everybody needs bread and flour and that of stuff so GFF has 'defensive qualities' ..... until the supermarkets screw them for every dollar they have eh

GFF down 50% since that chart of a months ago .... and the crash hasn't even come yet

[Snoopy]

Everybody needs bread and flour and that of stuff so GFF has 'defensive qualities' ..... until the supermarkets screw them for every dollar they have eh

GFF down 50% since that chart of a months ago .... and the crash hasn't even come yet

Winner I think you have correctly identified that it is the supermarkets that are the defensive play if you want to invest in foods. The food producers themselves are being screwed all over the world. GFF is simply our local example.

SNOOPY

[Snoopy]

Not at all - your FX strategy actually has a HUGE impact on returns, presuming you measure your wealth in your country of residence's currency.

An unhedged NZ portfolio of global shares (measured by MSCI in USD converted to NZD) invested in mid 1998 would still be underwater as of today.

Legoman, I take your point about an unhedged MSCI index investment being underwater, at least in capital terms, for twelve years, largely due to the appreciation of our NZ currency against the world currency basket. However, my comment was aimed specifically at Australian investments.

The $NZ/$A exchange rate has been far less volatile than any other $NZ other currency pairing that I can name. Primarily I think because both countries are underlyingly commodity producing companies at the bottom of the globe.

I have in my records the $NZ/$AUD exchange rate as at 31st March on all of the years from 1999 to 2011. These are as follows:

1999: $NZ1= A84.6c
2000: $NZ1= A81.6c
2001: $NZ1= A82.9c
2002: $NZ1= A81.7c
2003: $NZ1= A91.7c
2004: $NZ1= A87.3c
2005: $NZ1= A91.8c
2006: $NZ1= A85.6c
2007: $NZ1= A88.3c
2008: $NZ1= A87.0c
2009: $NZ1= A82.6c
2010: $NZ1= A77.3c
2011: $NZ1= A73.7c

The highest to lowest relative valuation is still contained within a 20% band.
The exchange rate gains on holding $A from 31st March 1999 to 31st March 2011 is 14.8% over 12 years, or 1.2% per year. This is not insignificant. But it shows far less volatility than performing the same exercise on other currencies.

I agree that a move from $NZ1 = A75c today to $NZ1=A90c as the global financial crisis might evolve would be significant in exchange rate terms. However the implication that I am suggesting buying today at A75c only to sell in 5-6 years at A90c is putting too much emphasis on these supposed end points.

My suggestion of ‘not worrying about the exchange rate’ and ‘just buying good Australian shares over time’ means buying some shares now at A75c, some shares next year at A77c, some the year after at 85c and some the year after that at 83c.

Perhaps at some stage we will get to $NZ1-=A90c again. But:

1/ There is no certainty when that $NZ1- to A90c exchange rate might happen, AND
2/ Even if the exchange rate does get to $NZ1- to A90c, there should be no compulsion to sell all of your shares at that point.

Suppose as a sub-optimal case the exchange rate did go to $NZ1 =A90c in five years, and you had to sell 20% of your portfolio in five years. Suppose you made a 20% currency loss on that sale. This loss would only be crystallized under my system on that 20% of $A shares that you sold. On a portfolio basis you would have crystallized a 4% loss over five years, or 1.2% per year. In overall investment portfolio terms a currency loss of 1.2% per year, while not nice, isn’t a game changer either.

SNOOPY