Is the stock market undervalued?

The worldwide recession has taken a severe toll on the financial situation in Jamaica and one of the institutions that has suffered is the local stock exchange.  Despite interest rates being at their lowest point for many decades there is little or no interest in buying equities.  But are we making the same mistake once again of not recognising the inherent value that is in the stock market.

If one looks at the history of prices on the local stock market one will see a pattern emerge of long periods of little or no change in prices followed by a significant increase in values over a short period of time.  There is a tendency for the Jamaican investor to have what is known as a ‘herd mentality’.  This means that the average person tends to follow the crowd and will only buy when there are lots of persons actively trading in the market.  This approach can result in major problems for the investor who often ends up buying stock at the top of the market and then has to hold it for extended period waiting for the next rise in the market.

Last year, I took the time to explain the ratios and financial information that can be used in order to assess whether to buy a stock or not.  Those items included the revenue, profit, earnings per share, price earnings ratio and return on capital employed.  The reason that we do not see much happening in our market (discounting the effect of the recession) is because the average investor does not pay attention to these factors.  By carefully analysing the companies or by consulting a financial advisor one can determine whether to buy or sell a stock long before our market reacts.  In my experience, dealing with our stock market for over twenty years, I find that undervalued stocks will usually rise to their true value and offer a return in excess of what could be earned from other investments.

There is no doubt in my mind that there are companies that are undervalued in our stock market which can provide an opportunity for you to get a great return.  The world is starting to come out of recession and even though we are still feeling the effects here now could be the ideal time to find some of those hidden gems.  Take the time to contact your local broker and discuss what opportunities there might be in the market.  Please remember though, that buying equities is a long term investment and you should not place all of your savings in buying shares.  A good guide could be about 25 – 30% of your portfolio could be invested in stocks but this can change according to your age and your financial situation.

Let the experts guide you in what to buy and how much to invest and this time try to beat the rest of the herd.