The Time to Buy is Now

Well, despite the financial world being in an absolute mess - I believe the time to buy is now - a sentiment which is shared with the worlds most famous investor - Warren Buffet. Over the weekend, Buffet posted a very interesting editorial for the New York Times (you can read it here). His thoughts:

“Be fearful when others are greedy, and be greedy when others are fearful, bad news is an investor’s best friend because it lets you buy a slice of America’s future at a marked-down price.”

His assessment of the market is refreshingly blunt, and I am glad that he posted this article.It’s clear that the market downturn is going to run - point-to-point - around about three years. This is how long it will typically take for a new American Government to come in, implement new financial policy and regulatory guidelines, restore market confidence and reduce unemployment. What happens then ? Well as Buffet puts it:

“What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.”

As I stated previously in my tips pointing to a market recovery - people invest in underlying commodities when the market turns sour. People who don’t do this, or who just hoard cash, are just asking for trouble. It seems, Buffet agrees - he puts it simply:

“Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.”

His strategy, which he emphasis is for the long term - not the short - is to buy and entirely focus on equities. It’s pretty clear that the things to focus on when buying equities are:

1. No Debt - The less debt a company has, the less interest it has to pay, and the more cash it has for operations. Since this financial crisis has been dubbed the “credit crisis” - it’s pretty clear that credit is very tough to get. So the key for equities, is to focus on companies who can finance their own growth without a large amount of debt and the resulting interest expense. Target companies whose “debt-to-capital” ratio is low.

2. Free Cash Flow ( FCF ) -This is essentially a companies account surplus. That is, “free” or “excess” cash that the company has available which is not included in its budgeting. FCF is a fantastic measure of a companies flexibility because it provides investors with a great “cash measure” of how quickly the company can responds to problems, and importantly, opportunities. The reason it’s a key measure of valuing companies is that it is very hard to “fabricate” on balance sheets. Remember, the only thing that will drive a company out of business is a lack of cash flow - so “cash is king” in the current market.

3. Management Team - Do your research and find out as much as you can about the management team. The “who, what, where, why, when” analysis of the management team is critical to finding out about what a companies management have previously done, what their “style” of management is and how they lead people. If they have worked at other companies, how are those companies performing ? It’s commonly said in the market that “People are a companies best asset” - if thats true, why wouldn’t you research the companies best asset?

4. Defensible Business - Of course, this is true for any business - but paramount for large publicly traded ones. Large and stable market share is where you want to focus your dollar if you are investing. Focus on companies who have a business model that is not so complex you can’t understand it, but who are leaving a very big national or international footprint. Warren Buffet invested in Coca-Cola (KO) for one simple reason -

“It’s a simple product and one that has a huge market share. More so, everyone loves Coke - and that isn’t going to stop anytime in the next 100 years.”

5. Good Valuation - A company that is not valued accurately, is not worth investing in - in the current market. These are stocks that are going to get “thrown around” by the market in wild swings because no one “really” knows the state of there business. Of course on the flip side, if it does have all the elements listed above and the share price is low - it means it’s a bargain stock and soon the market will correctly value it and you will have secured a huge profit. Look for stocks with plenty of upside potential, and not all that much downside.

Do you agree with me ? Drop a comment below.