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Stop the panic, buy quality

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by Peter Switzer

Yesterday the market was screaming “disaster ahead” but today it’s saying “maybe we will avoid disaster, though I’m not sure” and that’s why Wall Street was up but lost momentum as the New York Stock Exchange approached the closing bell.

For the record, the Dow finished 112.92 points, or 0.96 per cent, higher to 11,893.86 while the S&P 500 ended up 10.6 points, or 0.86 per cent, at 1239.7.

Bow and arrow

Goldman Sachs took a look at the quarterly profit results and came up with the following assessment:

Uncertainty prevails
Cost-cutting is still prevalent
Hiring of workers and investment is being delayed
Balance sheets are stronger
Profit margins are at peak levels
Emerging economies are still critical for growth.

This says the US economy is like a bow being stretched but the archer isn’t letting go and so the arrow is being held up because the archer isn’t certain if he is on target. However, when he does let go, things will fly!

Euro-concerns overnight

Of course the uncertainty is primarily coming out of Europe and the news was better overnight and while it makes a cautious bull like me happy to see yesterday’s sell-off curtailed, my knowledge of history tells me “ it ain’t over till the fat bull runs” and that’s got some way to go before that happens.

Rumours of an Italian rescue package helped the market but that won’t happen until the Italians pass the austerity package in their parliament. There’s also talk of a national unity government in Italy and the market likes that and it helps to explain why the 10-year bond there has dropped from 7.2 per cent yesterday to 6.958 per cent today.

Against this, the spread between French and German bonds are increasing and now a new fear is that the bond vigilantes are heading to Paris!

Market swing

History, in the absence of anything better, tells me that a rescue plan of sorts will turn up. It also says that the market will eventually swing around to the positive and it will happen when most people won’t expect it.

That means your best strategy is to stick to and be ready to buy great quality companies when the market sells off. The best game in town is to buy good dividend stocks that are fully franked and if you can buy them inside a self-managed super fund, then that’s an even more tax-effective strategy.

Great companies

Don’t get stressed out, despite the fact there will be more dramatic days ahead. I don’t care what my annual return is, but I do care what my five-year and 10-year returns will be. If I buy great companies and I have about 20 of them, I reckon my 10-year per annum return will be around 10 per cent or maybe better, which means my money will double about every six to seven years. History tells me that and yes I know there have been some episodes where this hasn’t always worked out, but those periods didn’t have the trifecta of juggernauts — China, India and Brazil — playing catch-up on centuries of pathetic economic growth and development.

As Bobby McFerin sang in 1988 — “Don’t worry, be happy.”

And you can only do that if you’re a collector of great companies — most of them will survive even the stupidity coming out of Europe.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Watch more from Peter on SWITZER TV.

Published on: Friday, November 11, 2011

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