The markets are tanking, some are expecting a crash, many are questioning the stability of the Eurozone, and everyone seems to think there are serious systemic issues in the financial system. It’s at times like these that it's worth keeping one’s head and remembering to stick to the plan. Of course, that’s presuming you remembered to have a plan! Warren Buffett said that it’s only when the tide goes out that you discover who’s been swimming naked, and we suspect the rising volatility in the market is going to show that a lot of swimwear has been left on the beach.
That got us thinking about what is the best way for stockpickers to capitalise on this kind of volatility. For those that have managed to raise some cash, one idea is to put some extremely low limit buy orders with a broker in case something silly happens. And silly things happen more regularly than one might imagine providing great bargains for the opportunistic. After all, it was only a couple of weeks ago that we saw the ‘flash crash’ and such household names as Procter and Gamble (NYSE:PG) trading momentarily down up to 60% before rallying as fast as they fell.
But which stocks are worth buying in a time when even the most bullish seems to be hovering their fat fingers over the sell button? We believe in sticking to what works in the long run, and what’s been shown to work by the best stock investors of all time. Buying good companies at cheap prices! So we'd certainly suggest building a checklist of companies that you've identified as ‘good’ and that you would buy at lower prices. Figure out a price level that you think would provide a rate of return on investment that compares favourably on a risk-adjusted basis against available returns on 5 to 10 year government bond yields. And put in some outrageously low limit orders well below your identified purchase price. You just never know what you might pick up.
Of course, that raises the question of what is a good or high quality company? A recent paper [1] by Jeremy Grantham of the successful fund management house GMO indicated that the only way to generate persistent excess returns in the market is to focus on companies that are able to generate consistently…
