The Market is Down, is it Time to Buy?

Opinion: Josh Callaghan

In the last week, we’ve seen both the US and Australian markets take on large losses. A correction which many attributed to the shock rise in the yield of 10-year US Treasury notes. Personally, I suspect that the market was looking for a reason to correct.

In September, investors were reminded of the GFC with the 10-year anniversary of the collapse of investment bank, Lehman Brothers. That, coupled with the longest bull run in US history, brought with it estimations of when the next crash will come. Rising tensions between China and the US, Brexit and a range of other factors, meant that the tinderbox was set for a small flame to ignite a selling frenzy.

Those of you who have been following me for long enough, will likely know that I’m more inclined to take action than add hot air to the hefty amount of market commentary already out there. So, I ask myself the question, should I jump in now?

Buy low and sell high

There’s an old adage in investing: buy low and sell high. Therefore, doesn’t it make sense that if the markets have had a steep decline it may be time to buy? Certainly, at the broad market index level it seems that markets have an inverted type of gravity where what goes down, must come back up. And shouldn’t it be true that if someone was willing to buy ABC Co (fictitious stock) for $50 per share a month ago, they’ll still be happy to pay that at some point in the future?

It can seem like a no brainer, but my warning to you is this: history shows that investors are notoriously bad at picking the direction of the stock market.

Perhaps, the most dramatic example of this was the cryptocurrency craze earlier this year. As the price of Bitcoin soared towards US$20,000 its proponents were talking about it hitting $300,000 per coin, and everyday investors were getting into crypto due to FOMO (fear of missing out). As the price fell, there were ‘rock bottom’ calls the whole way down as investors tried to predict how far it would fall. With the current price around US$6000, even if you got in at US$10,000 per coin, you’re still down 40%!

Whilst it’s an extreme example, there is a tendency for us humans to follow the crowd. You know, safety in numbers. This tendency though, can lead to buying in at the peak and then trying to mop up the losses after the fact. It’s why Warren Buffett says to be fearful when others are greedy and greedy when others are fearful.

Timing is everything!

To make the most out of market cycles, timing is everything. So, how do you get the perfect timing? You can’t! Instead, you’ll likely be better off getting back on the tools and doing your homework.

I’ve spoken a lot about creating your own models to value shares. And I’ll continue to keep talking about them because it’s effectively creating your source of truth, an objective measure to come back to in order to determine whether or not an investment is right for you.

Time to reassess

So, with the downturn in the market it may be time to reassess some of the stocks that you like but haven’t been cheap enough in the past. Setting up a watchlist is a good way of keeping track of the price movements of stocks that you may have run the ruler over in the past. Most online stockbrokers allow you to set up a watchlist. Alternatively, there are a number of other apps that can help.

It also might be time to do your sums on a few of the really hard hit stocks. This may help you to see if they’ve been the victim of overselling, and therefore, might be a bargain. Each Monday, subscribers to our free e-newsletter receive our ASX200 market wrap. The market wrap details the top five winners and losers each week by price move, as well as market capitalisation. Casting your eyes over the losers can sometimes be like having a poke around the bargain bin at your favourite store. Every now and then, there’s a gem in there at a great price.

My advice: don’t try to pick the market, do the hard work and let the market come to you.

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About Josh Callaghan
Josh Callaghan has accumulated more than 15 years’ experience in banking and finance, with in-depth product knowledge across retail banking, stockbroking, life insurance, health insurance and superannuation. Josh’s experience combined with his passion for new technology and active role in the fintech community has positioned him as a credible thought-leader on the future of finance. Josh is striving towards a goal of creating a world where building and managing wealth is easy for all consumers.

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