Surviving a downturn (3)

In part two of this series of posts on surviving a downturn I considered financial survival. The next issue is financial opportunity.

Downturns are the best times to buy investments. You get lower prices, better yields and lower risks. Paradoxically, you get the opportunity to invest with the expectations of higher returns combined with lower risks. In a sense a downturn gives everyone a much better chance of finding values that will deliver excellent returns over extended periods of time.

As always things are not that simple. The first issue is the need to overcome the fear that typically pervades the financial markets at times like these. Putting your hard earned cash on the table at a time when the financial press is preaching doom and gloom, when you are worried about your job and when you have red ink all over your portfolio takes a huge amount of emotional fortitude. This becomes even more of an issue if you are buying using leverage.

Of course it also goes without saying that reduced risk does not equal no risk. Based on previous experience, the safest approach to buying amidst the gloom is to stick with quality. Quality in this context means security of cash flow. In the case of a company sustainable free cash flow and in the case of a property sustainable yield from tenants.

It is also necessary to accept that you will not pick the bottom of the market and may face a period of time, often a lengthy one, where you have depleted the security of your cash reserves for an assets which is declining in price. This is not fun. Of course in the longer term, the alternative is even worse - if you sit on your low return cash for too long you will be cursing yourself for the missed opportunities.