#1: Context matters
Have you been in a situation where two friends are fighting and you’re the one that has to sort it out?
Usually the first thing you do is, get context. What happened? Why? Etc.
It’s the same when it comes to investing. Context matters.
Take the JSE for example…
There has been a huge amount of selling. The All Share index is down around 10% this year. And it could fall even further by the end of 2018.
Now is this because the majority of JSE listed companies aren’t making money or growing? And does this mean you should avoid investing in JSE listed companies?
Not at all.
You see, you need to put the state of SA’s economy into context - we’re talking about:
a zero-growth economy,
falling investor confidence,
a strong US dollar and,
a sell-off in emerging markets
These are the real reasons for the 10% fall in SA stocks.
So in fact, there are quality companies listed on the JSE right now, that are selling well below their real value
#2: What you pay is important
You must know how to calculate value to know what's cheap or expensive… it.
One of the best ways to measure value in stock markets is to use the cyclically adjusted price-to-earnings (or CAPE) ratio, which smooths out short-term price fluctuations.
Investing in markets that have a low CAPE ratio, on average, results in much better returns than buying markets with high CAPE ratios. Of course, this is the same for individual stocks...
Naturally, your odds of making money improve when you buy stocks that are selling well below their real value.