With growing apathy in the share market, The ASX 200 is struggling to make any meaningful breakthrough 6000 points.
Cash or correction. What is the difference?
A downward movement of 10% or under is considered a correction and anything larger, leading to a prolonged period of economic hardship is considered a crash.
It could be argued we’re still in the process of recovering from a crash. Some sectors have recovered more than others.
I am convinced that we are looking at another correction taking place before the year ends. It may not affect all sectors and companies.
Some companies are trading at insane premiums, and this can’t be sustained. We understand the role of fear and greed in investing, however, the more understated, but impactful emotion, is hope.
A base built on hope is shaky and the underlying sentiment driving retail investors (a non-professional individual investor) into the ASX.
We’re passionate about educating readers why a correction is not a bad thing, the factors that lead to it, and how to identify the tell-tale signs preceding it.
Corrections or crashes are buying opportunities
Astute investors should always look for companies that are trading at a discount to their fair value.
Over the next few months, this mini recovery will likely end and lead to a correction.
Corrections, like the word implies, are a reality-check for a market flooded with retail investors with the “fear of missing out”. This results in money pouring into the market and inflating prices. More demand = price increases.
If everyone is buying, why would the market correct itself? Shouldn’t it keep increasing?
Unfortunately, this is where large investors come into play. Think banks, super funds and other large financial organisations.
Let’s take an example of a popular company that, BHP. Over 60% of the company is owned by major entities like HSBC, JP Morgan, Citicorp, BNP Paribas etc.
When large investors want to realise profits and think prices for BHP are inflated, they sell their substantial amounts of BHP shares.
What happens when these shares get sold? More supply = price drops.
When retail investors, like you or me, see large volumes of shares being sold, we instinctively feel panic and think, the price is dropping, maybe something is wrong and get tempted join in the selling. This triggers a further price decline.
Large institutions, who are active investors, are looking to sell high and keep selling even if the price drops.
What they’re looking to do next is sometimes not obvious until it’s too late.
They are waiting to buy the same shares back at even lower prices from retail investors who will end up selling.
80% of the share market is owned by large investors, governments and pensions. The remaining 20% is us, retail investors.
So how can we as retail investors, make money?
Simple. You play a long game.
Watch, understand the market and the companies. Look for buying opportunities or invest regularly in the same companies, so your average price ends up being discounted.
Finally, we’re not in the game of making grand, fluffy predictions at Tabarruk. We do make educated estimates of the probability of certain movements in the market. We look at all the facts, analyse macro-economic indicators and have a plan to act on, regardless of the market moving up or down.
This is not financial advice. Please view our disclaimer.