“Be greedy when others are fearful” is an oft quoted line from the investment guru Warren Buffett.
At its core it is a simple concept, it is the application of it that is the greatest challenge.
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Conceptually, Buffett suggests that your investment cycle should run counter to the market. If the market is on a major run, that might be the time to sell whereas if the market is depressed and fear pervades, perhaps the time is right to think about buying.
Often we will see uninformed investors buying shares during a major market “bull” run. The key here is that for an investor to be a buyer into the market there has to be a seller on the other side, and often those sellers will be the smart professional/institutional investors that are realising their gains before the market gets overvalued.
On the other side, where there is a bear market, we will see many investors “jumping ship” which exacerbates further and “overstretches” the decline. Just as for the bull market, for these investors to be actual sellers, there has to be “buyers” on the other side of the transaction who believe running counterintuitive the market will provide value in the long term.
The key here that Buffett himself acknowledges is that you need to understand where value lies and the only way you can truly do this is if you understand well the company you are looking to invest in. If you don’t understand it, how can you make a sound investment decision.
It’s a trite but very true saying that a gain is only a gain when it is realised.
This is where obtaining sound investment advice from a professional you trust is absolutely critical. Most of us simply don’t have the time needed to truly understand potential investments so obtaining independent trusted advice is a must.
It’s also all well and good to seek out investment opportunities but this should be done in the context of a broader financial plan that takes into account your long term financial goals and most important of all your specific circumstances.
Just by way of example, your age alone will have a major bearing on the type and amount of investments. I saw a number of people who were close to retirement when the stock market fell sharply at the start of the GFC who were invested in a high proportion of growth orientated investments, some with margin loans.
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Why they would have that level of exposure so close to retirement was baffling – it really reinforced the need to obtain quality financial advice.
Many also would say that their superfund was poor; it was not the superfund that was the problem, it was what it had invested in no different to if they had made the same investments in their personal name. The superfund itself still offered significant tax advantages to members.
Compare the person close to retirement with someone in their thirties. Specific circumstances depending, it may well be that that someone in their thirties can afford to let the “time in the market” theory work for them with a greater emphasis on growth oriented investments as they have the time on their side to ride the ups and downs of the investment cycles that occur historically every 7 – 10 years before they will need to access their investments on retirement.
Lastly, regardless of what you see as a potentially great investment, you must still work within the constraints of your personal cash flow. With interest rates at historical lows, we are seeing the signs of major upswing in property prices which is tempting many to acquire an investment property. This strategy has a lot going for it in my mind, but it must meet two fundamental criteria.
1. Can I afford the negative cash flow even after taking into account any tax deduction I might receive and can I still afford it if interest rates are 2% – 3% higher than they are now?
2. Is it fundamentally a good investment at the right price in an area that is going to give me long term capital growth? Chasing an investment property for the tax deduction alone is a mistake.
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