Wealth Within - All Ords Report 14 August 2007
The last few weeks on the Australian share market has definitely highlighted how our desire for high returns through the over use of leveraging can create significant volatility. While I strongly believe leveraging is a smart way to increase wealth, I also believe it is important to apply safety margins when using this facility in case of unforeseen circumstances.
For example, when using a margin loan to buy shares, I always recommend that investors only margin on a 1 to 1 basis, which means their margin never increases above 50%. And if an investor is purchasing property they should never borrow more than 80%.
The old adage that ‘cash flow is king’ still rings true today and in my mind good investments should not only deliver capital gains but income as well, where the income generated is used to fund the leveraging. Remember it is important to not only invest in assets that increase your wealth but to avoid those assets that remove money from your back pocket.
So what is happening in the market?
Following my last report the market continued to fall away to 5922.0 points on Monday 6 August, resulting in a total fall to date of 547.2 points or 8.45% over 16 trading days, which was in line with the expectations I stated in my last report. While this type of fall often presents challenges for traders and investors, the one thing that is constant is that a market pull back always presents opportunity.
It is not surprising to find that when the market is rising I receive very few comments from clients and the general public, yet when it turns bearish the opposite occurs which is often fuelled by lack of knowledge and fear of losing. Let’s face it everyone likes sailing in fine weather but when the seas get rough you find out who the real sailors are, and history shows that the best opportunities always abound following the rough times. In the past 10 years the best time to buy shares has been following the Asia crisis, the tech wreck and September 11, and once the market stops falling, it will present some great buying opportunities.
Since the low of 6 August the market has continued to rise with the exception of last Friday (10 August) which I believe was an over reaction to the Dow falling heavily the night before. I believe the market will continue to rise for around 5 to 10 trading days from 10 August, which has so far been the case, before falling away again. That said there is a probability that the market won’t rise, however, the All Ordinaries Index would need to fall below the low of 5922 achieved on 6 August and do so in the next few days for me to change my mind.
For the market to prove it is bullish, it needs to rise for at least 4 to 6 weeks - if it fails to rise for more than 2 weeks, we can expect another fall to occur with price moving down to below 5800 points and possibly as low as 5600 points. Following this I believe the market will rise and present some great buying opportunities. Therefore now is the time to get cashed up to take advantage of the pending opportunities that will present themselves in the not to distant future.
Until next time
Good luck and profitable trading.
Dale Gillham
Chief Analyst
