Nick McDonald

Getting started in financial markets

Nick McDonald: Stocks are starting to look cheap

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Photo / Thinkstock
Photo / Thinkstock

The Dow Jones hit an all-time peak of 16,588 on 31st December 2013 and since then has declined as low as 15,340 - a 7.5 per cent decline that makes 2014 appear a bad year for stocks thus far.

Other stock indices around the world have shared similar declines and while the less experienced investors start to fear a repeat of 2008, the experienced stock market bulls are rubbing their hands together with glee.

This is a buying opportunity, plain and simple and even if prices decline further from here it does not matter for those with the bigger picture in mind. Bigger declines than we have seen already in January would only serve to make stocks cheaper again and if that does occur, it is a good thing for long-term bulls.

My prediction is that markets will go higher this year and I shared that along with other predictions in last week's column. A minority are predicting natural disasters and major bankruptcies among other things leading to economic doom.

Firstly, unless you are the crooked CEO of a major corporation that knows of its impending doom then this prediction is worse than pointless. Were the same people making the same prediction prior to Enron, WorldCom and Lehman Brothers? It is a hindsight-based prediction.

Secondly, unless you have the ability to predict acts of God, then let's leave the predictions of natural disasters neatly to one side. Lastly, there have already been bankruptcies and natural disasters this last decade on an unprecedented scale and yet here we stand today. Where is the continuing economic doom on a global scale? We hit some tough economic times for sure but we human beings are hardy creatures and things are starting to look better again.

Good traders and investors don't claim to have a crystal ball that shows them the future but many do outperform the market nonetheless. It's about putting the odds in our favour and making predictions where the probabilities align for one scenario over another. And we admit it when we get it wrong which happens often enough too.

Aside from the Oracle of Omaha whom I will discuss soon, there are some great local New Zealand examples of significantly outperforming the market too. Check out the returns that Mike Taylor at Pie Funds has made as an example - 23.6 per cent return in the last 12 months and 225.8 per cent return (according to his website) since inception in December 2007, just ahead of and right throughout the biggest financial markets crisis of recent times!

For the record, I did not research the top funds in the country to find that out so there will likely be similar and even better performers, I merely happened to meet Mike via a mutual contact once 3-4 years ago and have loosely followed his performance since.

In hindsight, I could easily regret not investing with Mike back when I met him. How many investment opportunities have you missed with the benefit of hindsight?

Most likely you have missed many, just like we all have. The optimists look to the future for the next opportunity rather than dwelling on the missed opportunities of the past. Right now I believe there is an opportunity in the stock market.

"Berkshire and its long-term shareholders benefit from a sinking stock market, much as a regular purchaser of food benefits from declining food prices. So when the market plummets, as it will from time to time, neither panic nor mourn. It's good news for Berkshire!" - Warren Buffett.

Given that I am largely a technical trader, so make most of my decisions by looking at charts, I sometimes piggy back off the fundamental decisions of those who are better at it than me. When it comes to fundamental stock market investors (or investors full stop) there is no one better than Buffet. There is little point me trying to be better than him at picking stocks, he is the best that ever lived so I will piggy back when I can.

As an example, I have recently been looking at the largest stock positions in Buffett's Berkshire Hathaway portfolio which he clearly considers fundamentally sound, seeing if they have gotten cheaper so far in 2014 and looking for potential trading opportunities that combine my own trading style with Buffett's profound fundamental stock picking abilities.

Given that Warren Buffet has the best track record on earth of outperforming the stock market in both good years and bad and given that I believe this will be a great year for stocks, I would not be surprised to see some stellar performances this year in his portfolio of stocks.

I plan to simply combine his foresight with my own trading strategies. This is just one part of my own strategy and I optimistically continue to look for more.

Nick McDonald is a New Zealander teaching everyday people how to trade the worlds markets via his company Trade With Precision.

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