Welcome to the new investing world.
A race to the bottom in interest rates.
Crashing commodity prices. Low global growth. Negative bond yields.
And surging share markets…
Around the world, many share markets are trading at or near record highs.
Not Australia, however — our share market is nowhere near a record high, meaning we could still have plenty of room to run.
That said, we're not entirely missing out on the global share market party, the S&P/ASX 200 Index trading close to 5,900 in early afternoon trade.
Step right up, Foolish investors. With interest rates this low, the share market remains the only game in town… unless you fancy earning negative yields on Danish and Swiss five-year government bonds.
How low can interest rates go?
BetaShares chief economist David Bassanese is predicting the Reserve Bank of Australia (RBA) will cut the cash rate to just 1.5% by the end of this year.
Holy goodnight, term deposits.
One thing is for sure, in comparison to the rest of the world, the RBA has ample scope to cut interest rates even further, the next move down likely coming in just a few short weeks.
Make no mistake. The global economy is on Struggle Street. Outside the U.S., growth is anemic and inflation is low — witness the UK's record low January inflation rate of just 0.3%.
China's economy is undoubtedly slowing — witness new home prices falling 5.1% in January, the fifth consecutive month of falls.
Interest rates simply have nowhere to go BUT down. And share markets little room to go anywhere but up.
Speaking of China, I hope you've been enjoying Motley Fool Pro's Joe Magyer's dispatches from his recent research trip to the Middle Kingdom — I particularly enjoyed the video from one of China's infamous Ghost Cities. Click here to check it out.
If there has been one key takeaway from Joe's China trip, it's don't even think about buying shares in Australia's junior iron ore producers, or even Fortescue Metals Group Limited (ASX: FMG) for that matter.
The over-building in China is on a vast scale, something you can only appreciate when you take a "boots on the ground" approach to your research. Slowing demand for iron ore coupled with increased supply from the likes of Rio Tinto Limited (ASX: RIO) means the price for the red dirt simply has to stay low, and could maybe fall even lower from here.
It's that extra mile of research that gives the Motley Fool Pro team an additional edge over the office-bound spreadsheet jockeys.
As well as avoiding iron ore miners — and I must admit, Joe's research has given me pause for thought about my somewhat overweight position in BHP Billiton Limited (ASX: BHP) — a low, and potentially lower iron ore price weighs heavily on the Australian economy.
Hence David Bassanese's call for a 1.5% cash rate. And his prediction that the Aussie dollar will fall to US68 cents by the end of this year.
Then there's the recent note from JP Morgan, where The Age reported them saying the Australian economy is "sliding down the precipice" with a weakness in domestic demand that was "recession-like."
What was I saying about interest rates, and the only way being down?
So what's a Foolish investor to do?
Let's start by listing what you shouldn't do…
- Panic
- Sell all your shares now, wait for the inevitable share market crash, and buy back in at much lower prices
- Buy gold
- Sit in cash
- Go "all-in" to the share market today, before it's too late
- Buy an investment property at today's over-inflated prices
Although Australia's not in an official recession, for some at least, including retirees trying to live off their savings, it sure feels like Struggle Street.
Thank goodness for our surging house prices, huh? Problem is, you can't spend the house, save taking one of those awfully expensive reverse mortgages, or empty nesters downsizing to a smaller, but almost equally as expensive property.
You gotta live somewhere, and nursing homes are hardly a bundle of joy.
I can't tell you what YOU should be doing, but here's what I'm doing in this low interest rate environment…
- Keeping a healthy cash balance
- Reinvesting dividends back into the share market
- Adding new positions on a regular basis, buying a combination of growth and income stocks, or both.
- Using the still relatively strong Aussie dollar to continue buying U.S. stocks
A healthy cash balance, although it's earning diddly squat sitting there in the bank, does two things for me…
1) It helps me sleep better at night, in the knowledge that when the share market goes through one of its inevitable market wobbles, I have the firepower to quickly act, taking advantage of the lower share prices on offer.
A case in point — less than one month ago, the S&P/ASX 200 Index was trading at 5,300.
Today, the same index is trading close to 5,900.
All that in just a handful of trading days. Pity the poor souls who sold out in January hoping to buy back in later, at much lower prices.
Me? I was a buyer then, not a seller, snapping up a few high-yielding growth stocks from the Motley Fool Share Advisor list of buy recommendations, at cheaper prices. I was able to buy only because I was sitting on a healthy cash balance.
2) Cash gives you options.
It gives you the option to buy shares when markets crash.
It gives you the ability to deal with any unexpected situation — like a sudden illness, replace a clapped-out car, or unemployment.
It means you don't have to sell shares in order to pay for school fees, an overseas holiday, or a new fridge — all very real expenses the Jackson Family has had to deal with in the last couple of months.
Back to these markets…
Earnings season is in full swing. The shares of individual companies can jump or fall 10% or more after they release results — witness the 13% shellacking handed out to shares in Ardent Leisure Group (ASX: AAD) today after the company behind the Dreamworld Gold Coast theme park reported a fall in profits.
Almost always, especially on the downside, the market over-reacts. Day traders head for the exits, and fast. They only care about the share price, not the underlying company, or its future prospects.
This very brief exchange this morning tells you all you need to know about what Scott Phillips and I think about day trading…
[18/02/2015 9:26:52 am] Scott Phillips: Mate if I was a day trader I'd be broke in, well, days
[18/02/2015 9:27:16 am] Bruce Jackson: Emotional wreck too
[18/02/2015 9:27:28 am] Scott Phillips: You got it
Scott Phillips is the Chief Investment Advisor at Motley Fool Share Advisor, our flagship subscription-only share-picking service.
He knows a thing or two about investing, as you may have seen from his regular appearances on Sky News Business.
What you may NOT have known is how he's translated that theory, and knowledge, into picking tangible share market winners.
It's easier said than done, believe me. Danger lurks around every corner — the profit warning, the dividend cut, the unexpected loss of business, the product recall or the crashing oil price.
Take Patties Foods Limited (ASX: PFL) for example. Earlier this week, its shares were crunched after the company was forced to recall some of its Nanas frozen berry range
Today, witness the 18% plunge in the share price of recent IPO Genworth Mortgage Insurance Australia (ASX: GMA) after it lost its Lenders Mortgage Insurance (LMI) contract with Westpac Banking Corp (ASX: WBC).
I'll let you into a little secret — no matter how far the share price of those two companies falls, you're highly unlikely to ever see either of them recommended to Motley Fool Share Advisor members.
Patties Foods has little to no competitive advantage — seen one frozen berry or frozen pie, and you've seen them all.
Genworth's fortunes are not only tied to the over-blown housing market, but their revenue streams are highly concentrated, making them very susceptible to they type of event befalling the company today. Westpac made up 14% of Genworth's annual premium revenue. Ouch.
Instead, Scott looks for companies with sustainable competitive advantages. He looks for companies with long growth runways ahead of them. Unusually, he doesn't mind paying up for quality, going by the Warren Buffett school of thought that…
"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
So many ignore this simple piece of Buffett advice. They dig around in the dregs of the ASX, looking for bargains, often deluding themselves into thinking a stock trading at 10 cents is cheaper than one trading at $10.
If that's you, seek help, now.
Grab a subscription to Motley Fool Share Advisor — for just $150 per year, for the educational element alone (and the ability to ask Scott and his team of analysts any question you like), it will likely be the best investment you ever make.
Certainly Steve from Melbourne thinks so, recently writing to us to say…
"$299 for two years is great and very good value for money, too. Subscribing to the Motley Fool Share Advisor was the best investment decision I have ever made."
Swear off the dross. Find out why a company trading at 10 cents is not cheaper than one trading at $10 or even $100. Embrace quality.
As judged by the returns of the stock recommendations made for Motley Fool Share Advisor members, we're doing something right, including two 400% winners and a host of 100%+ winners.
It took Warren Buffett years of "cigar butt" (dross) investing before he too embraced his current investing style, as characterised by the quote above, one that has seen his net worth grow to a staggering US$73 billion.
You may never be Warren Buffett. But with Scott Phillips, you can learn off him, invest like him, and ultimately profit like him. You may never become an investing billionaire, but you don't need to be. As Clive Palmer said last year…
"After you have about $5m to $10m, your lifestyle doesn't really change that much."
Onwards to $5m I say, and like Clive, my own political party. Can't do worse than the ones we've got now…
