3 Golden Rules For Finding Appealing Investments In A Volatile Market
Do you worry about the volatile markets?
During times like these it is natural to be concerned by the ever changing market sentiment. It can swing from downright despair through to excited elation depending on the next piece of US or Chinese economic data. However, smart long term investors know that tuning out some of this constantly changing market noise is possibly the best way to invest.
Having invested through the many financial market cycles, we have learnt some useful lessons for investing during volatile times. In addition to the regular analysis we complete for any company before investing, here are our top 3 golden rules for finding appealing investments in a volatile market:
1. Invest In Strong Pricing Power
This one is simple. Listed companies that can increase prices of their products or services without losing business are more appealing investments. These companies are much more likely to be able to protect their business and potentially even prosper during uncertain economic times.
An example is an international listed company called Luxottica. They are by far the largest glasses and sunglasses company worldwide with no major global competitors. If you have ever wondered why so many people are willing to pay hundreds of dollars for a pair of sunglasses that seemingly cost very little to manufacture, then look no further than Luxottica’s market dominance.
In contrast, the listed iron ore companies are a prime example of for what happens when there is no pricing power. Many smaller and medium sized iron ore miners are barely breakeven or are running at a loss. After frantically reducing costs, all they can do now is hope that iron ore prices will increase.
2. Invest In Real Innovation
The Oxford English Dictionary defines Innovation as “A new method, idea, product”. That is precisely what drives a successful company particularly during volatile market conditions. A company with a culture and track record of successful innovation normally results in much better long term returns for shareholders. For example when Apple launched the iPhone in 2007 it redefined the smartphone market and continues to be the major contributor to the company’s revenue and profits.
The iPhone is an extreme example. Innovation can also occur in smaller forms but still have major impact. Before investing in a company perhaps ask yourselves are they doing something different and clever compared to others? Are they making their customers’ lives much easier? When you find the right company, the answers to these questions can often surprise you.
3. Invest In The Right Long Term Trend
Until recently Australia was the beneficiary of a huge commodities boom. Although this has ended, the boom lasted a good decade. Anyone invested in this decade long trend would have enjoyed great returns. Time and time again, we have found that despite volatile markets, investing in companies that are benefiting from a long term trend or thematic results in better long term investment returns. It is like having the wind in your sails except the wind keeps blowing for a much longer time.
One particular long term trend that we really like is investing in companies that will benefit from the spending power of baby boomers. The amount of wealth that baby boomers (born between 1946 to 1964) have is staggering. They own the majority of net wealth in many developed countries and are estimated to have US$15 trillion of global spending power by 2020.
Do you think baby boomers will just leave this wealth to their kids?
Not quite. Some recent research suggests the majority of baby boomers would rather spend their wealth than pass it to their children. A number of listed companies worldwide (not just healthcare companies) are set to benefit greatly from the baby boomers’ spending trend. Stay tuned (or sign up to AtlasTrend) as we will be revealing more about this trend over the next few weeks.
Kent Kwan is a co-founder of AtlasTrend, a global equities fund manager that makes it easy for anyone to invest in the world's most thriving trends.
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