As shares continue to plumb new depths, far-sighted investors are on the hunt for once in a lifetime bargains. However, while there’s a great deal of merit in that, it’s important to tread carefully.
Before you buy anything, consider the following.
Lower does not always mean cheaper
Just because a share may be down 50% from a previous high, it doesn’t mean that it’s cheap. Indeed, if the deterioration in the earnings outlook is severe enough, it could well be more expensive.
Price is what you pay, value is what you get.
Not everything will recover
No matter how far a share has fallen, it can still always go to zero.
Avoid anything that you aren’t 100% sure will still be around in five years.
Your slice of the pizza
A lot of companies that endure this crisis will do so only by the good grace of capital markets.
If a business needs to raise cash at a heavily discounted price, and in a particularly tight credit environment, it’ll likely be very dilutive for existing shareholders.
The more your stake is diluted, the less you benefit from any recovery.
Your timing will suck
Even the genuine bargains out there could be even better value down the track.
Be prepared to look foolish for a long time before some of your decisions are vindicated.
Risk = reward
It’s natural to want to wait for a more certain outlook before dipping your toe back into the market. Trouble is, by that point the best opportunities will have passed.
For many that will no doubt be a reasonable compromise, just understand that there is a (potentially large) opportunity cost to consider.
Don’t be stubborn
It’s OK to change your mind.
New facts can (and often will) emerge that radically undermine your previous assumptions. What seemed like a great bargain yesterday could well prove to be anything but tomorrow.
As we always say, the best way to enforce some self discipline is to write out your reasons for investing, and what would cause you to sell — before you buy (using Strawman, of course!).
Take your time
There’s rarely any need to rush an investment decision, and that’s especially true when we’re facing one of the biggest economic challenges in history.
Before you make any big moves, talk it through with someone you trust — ideally, someone with a different perspective — and then sleep on it.
Time is on your side.
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