When buying shares for outstanding returns over many years, you really need just three things:
- A selection of high-quality companies on your watchlist,
- A dirt-cheap price, and
- The mental fortitude to buy when share prices are in free-fall (easier to say than do)
This is far preferable to investing in a banking-and-resources-heavy index like the All Ordinaries which has provided a compound annual growth rate (CAGR) of -1.9% between 1 July 2007 and 30 June 2016 (source: Yahoo! Finance).
Even with dividends added, the returns as measured by the S&P/ASX All Ordinaries Accumulation Index have provided investors with a CAGR of only 2.4% over this same time frame (source: www.vanguard.com.au).
So, index investing in Australia isn't really my thing and I'd rather look for the best businesses out there on the ASX and wait for an offer by Mr Market that's too good to pass up.
With volatility always present, and the market down about 7.5% since early August, there's always a chance that a severe price correction downwards could throw up some real bargains, opportunities so good that they could set you up for life.
Just think, opportunities similar to those presented back in March 2009:
- the Commonwealth Bank of Australia (ASX: CBA) could have been picked up for under $27 and today is over $71,
- Ramsay Health Care Limited (ASX: RHC) under $10 then and today north of $70, or
- Domino's Pizza Enterprises Ltd. (ASX: DMP) under $3 and over $65 today
Of course, in hindsight, it looks so easy, but in March 2009 when real fear abounded, the market capitulated and many shareholders basically surrendered and swore to never enter the share market again.
I don't know if the market would ever again experience a fall like 2008/09, but anything's possible and it pays to always have cash aside to take advantage of opportunities (you certainly don't invest in cash for the investment return!).
If there was a substantial market meltdown anytime in the future, I'd look very closely at these three businesses which I rate as amongst the best:
- Cochlear Limited (ASX: COH). With a massive market opportunity for its cochlear implantable devices, a sound balance sheet and a history of providing decent shareholder returns, this would be an excellent business to buy when sellers of the stock are literally giving it away
- Have you ever thought that Sydney Airport Holdings Ltd (ASX: SYD) was always too expensive? Me too. However, if registered members of the "chase-for-yield" movement decided to walk en-masse from this stock, I'd buy this with my ears pinned back. With ultra-cheap flights driving demand for travel, the potential for greater Chinese tourism in Australia (the China-Australia Free Trade Agreement was only signed in December last year), and forecast earnings growth of 23%, Sydney Airport is not to be missed if the market offers you a silly price
- For truly global reach, you can't go past Altium Limited (ASX: ALU). Its software for the design of circuit-boards and electronic products is sold all over the world but despite its success to date, there is still plenty of opportunity for this business to grow. I remember looking closely at this business at below $3 and I simply waited too long. With earnings and dividends forecast to grow 26% and 22% respectively, this company's stock is a no-brainer at meltdown prices.
Foolish takeaway
I think the best strategy at all times is to never be fully invested in the market. It would be prudent to always have some dry powder (cash) set aside to take advantage of those big moves that do occur in the market from time to time.
If you find that, at some point in the future, shareholders of any of the stocks above have "unfairly" sold down the price (because they can no longer handle the gut-churning volatility), then that's your opportunity.
The only thing that remains for you to work out is whether you have the fortitude to buy when everyone else is losing their head.
I don't think we're at that point yet, but it's best to be prepared.
