When the stock market is bullish, people think that the high valuation of a company is justified. Surely next year their profits will be higher, so the share price is now going up in anticipation of that. There’s nothing wrong! When the stock market starts its bearish mood, we suddenly think that the valuation for the companies should just go lower. After all, with such a situation, surely their profits would be lower next year. So, the share prices should reflect that performance now.
True? For the majority of us, it seems to hold true. For some, the opposite track seems more appropriate. Warren Buffett said this famous quote, ““Fearful when others are greedy and greedy when others are fearful.” In other words, he will sell when everyone wants to pay highest prices and he will buy when everyone wants to sell. What is not so clear is how do we choose what to buy?
Article in thestar.com.my Many tycoons and companies in Asia are looking for acquisition targets. The reason is because some of these assets are already at a bargain level due to the effects from COVID-19. Some of these include Victor Li of CK group of Hong Kong, Guo Guangchang the founder of Chinese conglomerate, Fosun Group. Group deputy head of research at CLSA Ltd Jonathan Galligan said, “This is a tremendous opportunity for any company with cash.”
This may not be easy as many countries are trying to ward off predatory buying. Policy makers from Australia to Spain, Italy and Germany are introducing or considering stricter rules to shield strategically important domestic companies. The COVID-19 pandemic will cause a lot of businesses to fail after people spent days in lockdowns and thus unable to spend. In the U.S.. 50,000 retail stores have shut within just over a week. Please refer here for a comprehensive Article in thestar.com.my
If I look back at the few crisis which has happened when I am mature enough, one thing I learnt is this: The crisis will find an end and the recovery will find a start. During such a crisis, many companies will fail while the few companies which survive will now become market leaders because some of their competitors have failed. If we look back in the history of companies, we could even see some strong companies deliberately sell at such a low price that its competitor could not follow or follow and die.
It is also during this time that we could find potential good buys which has become ‘affordable’ because not many people wanted to buy them. They were afraid of the uncertainties. Yet, for those who could hold on or have spare cash, they just need to do enough due diligence, buy and wait. When the markets recover, many are suddenly open up to buying that cheap asset they bought at a much more expensive price.
My good friend Ms. Agnes Wong the managing director of Syarikat Ong said in a recent FB LIVE, ‘Spare cash is king.’ This statement teaches us two things. If we have spare cash, better start looking for good assets to buy. If we do not have spare cash, we either find them or we start building it today for that next crisis. As for all those tycoons and their actions in looking for cheap assets, they are teaching us the lesson of how they got to where they are today. Happy understanding and learning.
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