Yesterday, a lot of stocks on the Aussie market went up…
…but a lot of stocks on the Aussie market went down too.
And many others did, well, nothing much. They went up a bit, then down a bit (or vice versa), but ended the day where they had started.
For some investors and analysts (including your editor) this action says ‘buy’. For others (including Murray Dawes) it says ‘sell’.
What’s an investor to do?
In fact this seemingly contrary advice often leads to us getting questions like this from readers, ‘How come you’re telling me to buy stocks when Murray says the market is about to crash? I’m confused.’
It’s a fair question, and we’ll answer it today…
Many investors make a common mistake.
They look at the market as though it’s black or white…it’s up or down…it’s a bull market or a bear market.
But you shouldn’t look at the market like that.
The ‘market’ isn’t just one big lump. It’s not like a school of fish that switches directions at the same time.
You’ve got the stock market, bond market, foreign exchange (FX) market, commodity market, derivatives market, property market…and hundreds of other markets.
And within those broad markets there are different sectors or sub-markets, such as utilities, finance, and resources in the stock market; government, semi-government and corporate in the bond market…
In the FX market there are major and minor currency pairs; base metals, precious metals and agricultural commodities in the commodity market; CFDs, options and futures in the derivatives market; and residential and commercial property in the property market.
You get the point.
And then within these sub-markets there are further sub-markets and then individual tradeable assets.
The point is, just because BHP Billiton [ASX: BHP] goes up in the stock market, doesn’t necessarily mean the silver price goes up in the commodity market.
Heck, just because BHP goes up, doesn’t mean other stocks have to go up.
However, that’s only a third of the story. The other two-thirds involve risk and asset allocation…
Do This Before You Even THINK About Buying a Stock
We won’t cover this in fine detail because we’ve gone through each of these in detail before. Just go to the Money Morning website and search for ‘punting money’ or ‘asset allocation’ and you’ll find the relevant articles.
But to put it simply, before you even look at the various markets you need to look at your finances.
You need to total up your savings and work out how much money you want to put in each investment. This is the ‘safe money’ and ‘punting money’ that we’ve written to you about in the past.
This is where you allocate 70-80% of your savings in cash, term deposits, dividend stocks, and gold and silver. This is money you can’t afford to lose…money you’re investing for the long term.
This is how we manage our family wealth. We’ve got money in cash and term deposits, and money in dividend stocks. We don’t ever plan on selling out of any of those investments – although that’s not to say we don’t review them.
You should plan to keep hold of these investments regardless of whether the economy is going up, down or sideways.
Aside from this you should have your ‘punting money’. How much you allocate to your punting fund comes down to your attitude to risk. That’s why we look at risk and asset allocation together.
If you’re happy with a lot of risk then you’ll allocate less to your ‘safe money’. If you’re risk averse then you’ll allocate more to your ‘safe money’.
And it’s here where you may think there’s confusion between your editor’s message to buy stocks against Murray’s message to short sell stocks.
The fact is, as odd as it may seem, the two strategies aren’t mutually exclusive. Murray looks at the market for big macro-economic moves. He’s looking at what the central bankers are up to, the latest economic releases, and what policy makers are doing in Canberra or Washington DC.
He then looks to place big leveraged bets to take advantage of short-term moves.
Why You Should Speculate to Build Wealth
To a large extent, when we’re researching stocks for Australian Small-Cap Investigator we don’t care much for central bankers, economic data, or dumb policy decisions.
We tend to focus on longer-term trends. We look at some of the most speculative stock positions available on any market – small-caps. We’re not looking for small short-term gains.
We’re looking for huge gains. We’re looking at companies that are developing a breakthrough technology, exploiting a market trend, or exploring for an undiscovered resource.
We look back at history to some of the wealthiest people, most of them got where they did by taking risks…by speculating. Many probably risked more than they should. People like John Templeton and William Knox D’Arcy.
Yet we’re not saying people should go ‘all in’ on small-cap stocks. We believe investors should understand the risks and then take a meaningful but calculated punt. That’s why we suggest allocating 5-15% of your savings in this end of the market.
If you punt on the right stocks at the right time it’s possible to make a fortune. In short, these are the kind of stocks that could either go belly up…or could make you a 300%, 400% or 500% gain.
And that’s the thing, because you can make such big gains, you only need to use a small amount of capital. And because small-cap stocks can take longer to reach their full potential, you also have to sit through some of the shorter-term broad market moves.
Right now, we’re looking at hundreds of small-cap stocks trading at bargain-basement prices. Yet only a handful of them will make the kind of explosive gains we’re looking for. It’s our job to try and find those stocks.
Yes, You Can Short-Sell and Buy Stocks at the Same Time
So, we get it. We know it can sometimes appear confusing when one editor says buy when another says sell, the key point is to look at the advice in context with your overall wealth.
To our way of thinking there’s no contradiction with the advice to use some of your cash to short-sell lumbering blue-chip stocks today, while at the same time trawling the bottom of the market for beaten-down small-cap gems.
We hope that helps.
Cheers,
Kris
PS. By the way, as Callum said in his story on William Knox D’Arcy, there are a number of things D’Arcy did to build his fortune. But in a report we’re due to release tomorrow, we’ll reveal the single most important wealth-building strategy that turned D’Arcy from a provincial lawyer to one of the world’s richest men.
From the Archives…
Why You Should Always Be Looking to Buy Small Cap Stocks
23-11-2012 – Kris Sayce
China is Now the World’s Biggest Gold Producer – and Consumer
22-11-2012 – Dominic Frisby
The Stock Market Gets Squeezed
21-11-2012 – Murray Dawes
Buy Quality Gold Stocks That Have the ‘Right Stuff’
20-11-2012 – Dr. Alex Cowie
Picking the Hot Commodity Stocks of 2013
19-11-2012 – Dr. Alex Cowie
Australian Small-Cap Investigator:
Why Invest in Small Cap Stocks and Why Now?
