Investors have a dilemma right now. There seems nothing to buy. Well, perhaps there are things to buy but having the confidence to buy them is another thing altogether.
Money in the bank earns 2% or 3% – but at least the risk of capital loss is minimal. Dividends from banks and other high-yield companies such as Telstra are better – so long as you’re prepared to take the risk they will maintain the payout rate and are happy to sit with a possible 20% paper loss if markets keep falling.
The housing markets appear to have had their run in the two largest cities, Melbourne and Sydney, and there has been a lot of development in Brisbane. Yields here are close to record lows, implying that prices are at or near their peak.
There are times in investment markets – especially periods of transition from one phase of the economy to the next – when sitting tight and waiting is the right strategy. This is where the art of timing comes to the fore – and, as I have explained before, I feel I am deficient at that.
Perhaps the real issue with market timing is to accept you may not get it perfectly right. So long as the strategy or individual investment are sound (the business is not going to zero or the property doesn’t have too much debt), then time is the real essence.
For example, those people who bought houses in Moranbah or Dysart for upwards of $800,000 during the height of the coal mining boom would be rueing their timing and their strategy. Some of these houses have failed to sell for less than $200,000 in the past year. The same is true for those who piled into BHP Billiton at $35 as oil and iron ore prices started tipping over.
Around the world, economies are adjusting: China is moving from a building phase to a consumption phase; the US is moving from a period of low interest and high growth to lower growth and slowly higher rates; and Europe is moving from one malaise to another, saddled with government debt, the restrictions brought by a common currency and a refugee crisis.
Australia is also changing, from an economy based on building private infrastructure for large mining and energy companies to one where the consumer and the smaller manufacturer will have their day. And perhaps – timing being right – this is where investors need to look: to see the transition in a company such as Treasury Wine Estates, or Bega Cheese dropping a contract to supply cheese to Coles because it can sell processed milk as infant formula to China at much higher prices.
So there are stories to learn about and to buy – but when the timing is right. The secret is trying to find companies that can generate large cash flows compared with the amount of capital they hold. This is why companies that use e-commerce are a hunting ground; it’s why medical research and development offers great chances.
But remember that virtually all companies get damaged when general sentiment turns down. Many smaller ones can struggle when there is a drought of capital. Housing markets can quickly run dry and asset values will be reassessed.
Right now is a time to have spare cash on hand and an eagle eye running over balance sheets and company statements for the businesses that can survive and will grow faster than average. You’ll be a winner … if you get the timing right.