The Best Time to Invest in the Market in 5 Years

“Stock Market Crisis”…”Market Meltdown”…”Stock Market Crash”…”Government Bails Out Banks”…”Credit Crisis”

Those seem to be the only type of headlines we’ve seen during the last few months. There have been very few bright spots. It has culminated – so far – with the S&P/ASX 200 having fallen by 50% since the market peaked in November 2007.

Because of that we have reassessed all of the positions in our Australian Small Cap Investigator portfolio. With the exception of one position we continue to rate them as a Buy. Even so, some have performed better than others, and some have a higher risk profile than others. When analysing stock holdings you always have to ask yourself whether you would be prepared to buy the stock today.

Now is an appropriate time to explain our strategy and outlook during the middle of a historic period on the markets.

When all you read from the press are negative headlines telling you your shares are falling through the floor, it takes a lot of effort to ignore it. It can be equally damaging to read about the market rising by 8% in one day. The first reaction is to think the worst is over and to pile in with any spare cash you may have, only to see prices fall the next day as investors sober up.

In our view, the best small cap investors focus on long term speculative trades in innovative or promising companies. When you do that, your timeframe is longer than just short-term market action. You’re looking for game-changing companies and technologies. Because of the big rewards on offer, you try to be willing to wait awhile to see if they can deliver what they’ve promised.

And although it may not seem it, the current market conditions are ideal for small cap investors.

You see, small cap investors are used to big movements in the market. And when markets go up, small caps almost always lead them. That’s one of the main reasons for buying in at the small end of the market. As a small cap investor you want to see big percentage gains in the shares you own, yet we also know it can mean big percentage moves to the downside.

The last few months have given us very good examples of that. Nearly every share in our portfolio has had double-digit falls followed by double-digit gains. So, what are the opportunities?

If we put aside all of the negative headlines we should be left with a plain view of the outlook. Think about this:

  • The Australian market has fallen back to levels not seen since 2003.
  • Regardless of the fundamental condition of the business, nearly every small cap company has been beaten down
  • With the exception of Gold, commodity prices have slumped.
  • There has been an unprecedented level of global government intervention designed to prop up financial markets.

This means investors are being given the opportunity to ‘Take 2.’ You can roll back to 2003 and have another go.

That’s why we are continuing to deliver Australian Small Cap Investigator subscribers our best new investment idea every month – even in the worst bear market since 1929.

This month we have introduced subscribers to a company that is in the middle of a multi-billion dollar government backed investment in Queensland’s resources industry. An industry that could be Australia’s single biggest export within the next twenty years.

We can’t say for certain that we have seen the bottom of the market, even though it is giving off the smell of one. But we can say that for a small cap growth investor opportunities haven’t looked as good as this in five years.

Kris Sayce
for Markets and Money

Editor’s Note: Kris Sayce is the editor of the Australian Small Cap Investorgator. In his latest report “My Top Five ‘Bounceback Belters’ for 2009” he explains why panic-sellers are running riot through world stock markets. To get your hands on a copy, click here.

Kris Sayce
Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Markets and Money e-newsletter in 2005. He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.

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Coffee Addict
Kris Sayce reports that the ASX has dropped 50% but the real drop (against other major currencies) is much much higher (about 70%). Tiny resource juniors have lost a massive 90% in real terms and they have nowhere else to go but up. If managed well , these hopefuls WILL manage their cash, and if need be, may leave the stuff in the ground for a while. Such action does not greatly effect the NPV of the underlying resource. This is particularly so in the case of prospective gold juniors. I expect that the Chinese (in desperate need of spending… Read more »
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