Need A Good Broker for All The Cheap stocks out There? Try St. George’s Directshares.

Post by Sharat on November 10, 2008 · Under Featured Articles, investments, news, online trading · Comment

Warren Buffet thinks that stocks all over the world are attractively priced right now. He seems to have an awful lot of confidence in US equities and is putting his money where his mouth is. In fact I would have to agree with him and my own personal view is they do seem cheap to me. But just after I bought some equities at the beginning of November, world equity markets went into free fall and I found myself having to return time and again to Mr. Buffet’s op-ed piece in the New York Times for comfort, when the pain it seemed, was just too much to bare.

If you can stomach a roller coaster in the short and medium term, then it’s worth thinking about a punt. Perhaps the easiest way I can think of buying Australian stocks is through an online broker like St George’s directshares. They are my broker of choice, just because it was so easy to set up an account with them, If you already have a Power Saver bank account with St George like I did, then setting up a St. George’s directshares trading account is a complete doddle. Here is my logic though, and in large part I have plagiarised from the Sage of Omaha, because he is the world’s greatest investor and I am sure he uses a St. George’s directshares trading account when he buys a few billion dollars of equities!!!

The ASX has been correcting for the last 9 months almost solidly. Just like every other equity market in every other country in the world has. In fact year to date has been pretty grim, if you first bought into the market in January when the ASX hit a high of 6691. The Index has since climbed down from its highs and dropped over 2500 points this year, with a loss of about 40%. I feel the pain of anyone who made that trade.

One doesn’t need to be reminded just how bad the news is, everyone has suffered to some degree. The credit crisis story, well it’s getting very old pretty quickly. The crisis first started a couple of years ago with HSBC declaring a profits warning, which it never does, and then it kicked into overdrive about 14 months ago when two Bear Stearns hedge funds began imploding, and markets have been unwinding ever since. Frankly I am a little bored with the whole theme.

When a market corrects 40-50% in the space of a couple months does that mean that the companies that form the index are now half as valuable as they were a year ago? Have things changed so much, that profits, revenues and growth prospects are all going to be half what they were a year before? That seems rather unlikely to me.

NAB reported full year earnings at the end of last month and it has seen a drop of some 11% for the year, CBA reported just a couple of weeks ago and posted a 12% gain in its yearly profits, though both are cautious about future performance. Now obviously equities price in the future profits. But one has to wonder whether it is fear that is driving the markets rather than the fundamental notion that future profits should drive equity prices and their valuations.

The point being made is this. These kind of sell off’s in equities, well they are once in a lifetime opportunities you see. Opportunities to buy shares in solid companies at decent valuations. Forget about mutual funds and diversifying your risk for the moment, or all of the other malarky that people usually talk about when investing. Those rules do not apply in troubled times such as these. Everything has corrected simultaneously.

In this kind of situation investing is a lot more basic than the principles of correlation coefficients, standard deviations and individual stock beta’s. Statistical analysis of historical returns, well they go out the window in times like these, and in fact that is a large reason why people have been so badly burned. The models sophisticated investors were using became useless when the markets were at their most stressed. Historical returns were not able to accurately model what actually occurred in financial markets during the months of September and October 2008

The story now is the most simple it will ever be, Mr. Buffet in my view has it down. Be fearful when everyone is greedy he says, and be greedy when everyone is fearful, and I couldn’t agree with him more. It will never get easier than this. Though stocks may indeed become cheaper in the short run, there are going to be companies with great prospects in spite of an impending recession, companies that have been oversold, there just are, because everyone is selling everything at the same time right now, or were at the start of last week anyway. If that is the case, then obviously there are some good buys out there, provided you’re willing to wager for the long haul and for the long haul only.