This is the worst we’ve seen the stock market in more than four years.
If you invest in shares, there’s only one word to describe you…you’re a lunatic.
If you’re not much keen on insults, don’t worry, we didn’t mean to insult you. It was a compliment. In fact, if you invest in shares today, you should embrace your lunacy.
Because thinking about things in a way that’s different from the rest of the crowd is the single best way to invest in shares.
Read on and we’ll explain what we mean…
The Aussie S&P/ASX 200 Index has taken a hammering over the past month, as the chart below shows:
Since the peak on 12 March the index has fallen 4.9%. That’s not such a big deal, seeing as stocks had rallied 25% between June last year and March this year.
But the not so funny thing is, while it was the dividend paying stocks that gained the most during that rally, it’s the growth stocks that are copping most of the slack as the market falls.
In other words, growth investors have got none of the gains and all of the losses. Not fair.
We’ve seen that with the stocks on our Australian Small-Cap Investigator buy list. Our biggest winners from the past six months are still sitting pretty, while the stocks that didn’t get the growth spurt have taken some of the biggest hits.
It’s a trend we’ve seen across the whole market
Not Game Enough to Ditch the Yield
That tells you something. It tells you that investors are still super nervous. It tells you that the interest rate play is still playing out.
For instance, Australian banking stocks have only dropped 2.9% since the 12 March high, compared to the broader index’s 4.9% drop.
This means that while investors may be cautious about the market, they’re not about to give up the 5%, 6% or 7% dividend yields that they’re currently getting from stocks.
After all, if they sell dividend stocks what will they do with the money? They’ll probably buy a fixed interest investment that’s only paying about 3–4%. That’s not a very attractive proposition from an income perspective. On an investment of $100,000 it could mean a difference of $4,000 per year.
As a result, investors are dropping the stocks that don’t pay a dividend — growth stocks. Even though those stocks were already trading at the best (cheapest) valuation they had been for more than four years.
But that’s the way markets can work. It now puts the broader market at the low end of what we expect to be a year of volatile sideways moves. That could put the growth stock rally on hold for another few weeks as investors look to snap up the dividend paying stocks that have given up a small part of their gains.
This brings us back to the point we made at the top of this newsletter — the lunacy of being a share investor.
With growth stocks seemingly going down the toilet, why on earth would you consider buying them now?
We’ll show you why now…
Dead Wood Out, Growth Stocks In
For the simple reason that the spread between Australian small-cap stocks (red line) and Australian blue-chips (blue line) is the largest since the creation of the S&P/ASX Emerging Companies index nearly three years ago:
A point will come (maybe today, next week, next month or in six months) when investors will want more than seemingly steady 4% or 5% gains from dividends. That’s especially so in the institutional sector where fund managers live or die based on their record compared to their peers.
A 5% return may cut it for three months, six months, or even a year…but not much longer than that.
That’s why at a time when only a lunatic would buy this market, we’re clearing out the dead wood and pouring all our resources into finding the Aussie growth stocks, trading at the cheapest valuations, that have the best chance of clocking up the biggest returns when investors shift from income to growth.
Cheers,
Kris
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From the Port Phillip Publishing Library
Special Report: Australia’s Energy Stock BLOWOUT
Daily Reckoning: The Moment of Explosion
Money Morning: The Run-on Effect of Aussie Housing on the Australian Stock Market
Pursuit of Happiness: Why a PlayStation and Mining Technology Have More In Common Than You Think
Australian Small-Cap Investigator:
How to Make Money From Small-Cap Stocks
