MARKETS have been in a state of disarray since the start of the year. One day might offer positive news from Europe and the market rises, and then the next day there are reports out of the US regarding rising unemployment which negatively impacts the market.
The markets seem crazy, wild and at times schizophrenic. But are they? If I was to ask the following question, "What are markets made of?" I may receive the following response: businesses and investors of course! While both are present and active, they do not constitute the market. The truth is that the market is made up of people, people just like you and I. While it might sound simplistic, it is a very real observation which I will explain.
The market is the sum total representation of all of our emotions; representing fear and hope, greed and happiness. Markets are exhibiting large amounts of volatility, in essence reflecting the large collective fear that people are experiencing due to the current economic situation. Understanding why markets move and what they are telling us, assists in making sound investment decisions. In times of uncertainty, how does one invest? I have a few pointers that I would like to share regarding what I look for when investing in general, especially during volatile times.
A business that has been around a long time is usually a good indication; in that, it has weathered many storms and is still surviving. The more adversity it has been through, the better its chances to survive future obstacles are.
Bigger companies have the ability to withstand larger fluctuations more than smaller ones. They are able to absorb economic downturns and have the experience to streamline business operations when needed. They are usually more diversified, pulling in revenue from different ventures. On top of this, sizeable companies have a lot of visibility. Many investors, including large institutions, watch the stock and this may present the opportunity for price appreciation over the short to medium term. A quick glance at Fortune's 2011 Global 500 will show you the world's largest companies.
Companies that pay cash, and pay often, are a very good defence against volatile markets. A very important factor that I like to look at is if the company was still paying dividends during the 2008 to 2009 financial crisis. A business that also increased its dividend during this period is an even stronger indication that it is worth researching. A quick example of this is Kinder Morgan Energy Partners LP. If a few dividends are missed, it can possibly be overlooked in conjunction with other factors.
Look for companies that have a lot of shares on the market. This enables you to get in and out quickly. An illiquid stock can possibly tie up your money for extended periods while viable opportunities pass you by. Liquidity is paramount unless you plan on staying in the investment for a long time.
These are companies that offer products at lower prices than their competitors. When the global economy gets tumultuous, it usually brings with it higher unemployment. Also, inflation usually continues to rise while global events take place. This means that less people can afford to buy items, on top of declining buying power. When this happens, usually persons will have to purchase comparative items at lower costs so as to maintain their standard of living. Companies such as Wal-Mart Stores Inc and LASCO Manufacturing Limited will benefit more from harsh times compared to rivals selling products at higher prices.
A business with good cash flow is able to pay obligations easier. Similarly, with low debt and good debt management, it will not burdened with cumbersome finance costs. The more solvent it is the better. You should also look at the company in regards to its competitors. Some segments operate with higher debt ratios than others and it is therefore important to look for companies in the segment that are performing more efficiently than others.
Companies that control a large portion of their industry are also worth looking at. If they are a niche company that produces goods or services that people cannot live without, even better.
Though this is somewhat off-topic, please indulge me. Precious metals are a very real means of storing wealth and guard you from currency devaluation. Gold and silver have been around for thousands of years and are used as money the world over. I can think of no better way to protect yourself, while simultaneously defending your hard-earned money, than investing a portion of your funds into precious metals.
When looking at the stock market, you may not get all the attributes in one company and that is fine. It is adequate to have a majority of the attributes when looking for investment options. In hard times, you want companies that have faced several battles and have lived to tell the tale. Stocks that fit the above criteria might not be "sexy" or "hyped" but they are proven performers that work diligently at protecting their livelihoods. At all times, remember the number one rule of investing: protect yourself.
Justin Jones is an Investment Analyst at Stocks and Securities Limited and can be contacted via firstname.lastname@example.org