When confronted by uncertainty, doubt and fear, we have two distinct options.
The first is to stick our fingers in our ears, avoid the headlines and worry about what the future will bring. Self-evidently, this strategy is as destructive as it is pointless. It's also the response that humans innately adopt when a problem feels too big to get our heads around, or when we feel powerless to act.
The second option – the one The Motley Fool chooses to adopt – is one of positivity and action.
Just as the old sawhorse that 'change is the only constant' describes the world in which we live, so markets will always be volatile. Hopefully not as volatile as the last 6 months, but for as long as investing has been subject to uncertainty and human emotion, share prices have ebbed and flowed accordingly.
Volatility creates opportunity
Selfishly, I know that these market jumps and falls are actually advantageous if I can keep my fear in check. When investors are calm and believe the future is relatively certain, share prices are more likely to approximate fair value. That makes finding bargains a much harder task.
By comparison, when fear is pervasive, I'm likely to be able to find companies that have been swept up in the maelstrom of uncertainty, and have had their prices trashed to a degree that is out of proportion when compared to the business downside.
Regular readers will know that one of my favourite out-of-favour sectors at the moment is the retail sector. With almost every commentator bearish on retail – blaming everything from consumer confidence, internet retailing and changing spending habits – share prices have plummeted. Price/earnings ratios have dropped to a similar extent and dividend yields have jumped.
It's not for the faint of heart, but my money says that there is real value among quality retailers who have been oversold.
Shares on sale?
Just as retailers are discounting heavily to move excess winter stock in the lead up to the summer fashion season, the whole of the ASX is also clearly on sale.
A quick swing through the ASX industrials (using Monday's closing prices) shows over 200 individual businesses whose shares last sold at a price within 5% of their 52-week lows. The next 140 or so are between 5% – 10% of those same yearly low prices. That's around one-third of all of the companies listed on the ASX industrial market that are still available around the lowest price in a year.
If you look at the market from another angle, almost 250 companies on the ASX Industrials are down more than 50% from their 52-week highs (obviously these two lists overlap considerably). Almost 60% of ASX-listed industrial companies are down at least 25% from these same highs.
Money lost and money to be made
If you own shares, you'll only be too aware of the facts in that last paragraph. The recent drops have seemingly spared few companies and fewer portfolios.
Our challenge is to change our frame of reference. If you're currently in the market, you're probably anchored to previous highs, and your portfolio shows the scars from the last two to three years. There's no way to sugar coat it – these losses hurt.
We have the opportunity to learn from our losses where appropriate – unsustainable business models, excess debt and businesses which seemingly existed just to facilitate tax deductions are all best avoided.
We can't erase the falls of the last few years, but now is exactly the wrong time to shut up shop. Instead, try to reorient your frame of reference.
When we walk through a Westfield, most of us don't berate ourselves for buying a suit, dress or refrigerator that has subsequently been marked down in price – instead we look for the opportunity to buy something else we need while it's on special.
Among those languishing near 52-week lows include well known businesses such as blood products business CSL (ASX: CSL), last minute accommodation site Wotif (ASX: WTF), junk-mail specialist Salmat (ASX: SLM) and steel-maker BlueScope (ASX: BSL).
Foolish take-away
Many businesses selling near their yearly lows were previously overvalued and deserve their new, lower prices. There are undoubtedly others that have simply become victims of indiscriminate selling or for whom one-off setbacks have been assumed by investors to be permanent destroyers of value.
Next up, I'll highlight three businesses among this group that are selling at prices which I think may present good value for investors with a long-term view.
Scott Phillips is The Motley Fool's feature columnist. Scott owns shares in Westfield. The Motley Fool's disclosure policy is a buy. Do you want to know what to do if the market crashes again? Request a new free Motley Fool report titled Read This Before The Next Market Crash.
This article has been authorised by Bruce Jackson.
