Global market downturn: Time to think long term?

I am sure you have heard about the stock markets of the world losing large portions of their value. The mainstream media is really having a field day with it. Some finance blogs are noticing considerably high search volumes as people look for answers. The Australian market has not been immune to this global phenomenon with the market having its longest losing streak in a quarter of a century. You can see the steady decline in in the benchmark All Ordinaries Index from about the 8th of January, this is shown below with 13 straight days of losses.

In the February 2008 Financial Review Smart Investor magazine George Liondis has written an article “Kings of the Castle”. This article introduces the concept of “Economic Moats” and George nominates six companies that he thinks meet the criteria. As I am not very familiar with Warren Buffett’s investment style I hadn’t been introduced to the term “Economic Moats”.

Economic Moat

An “Economic moat” is a term that Warren Buffett made popular, the term is used in reference to a company or business relative position and how well the company can maintain competitive advantage over it’s competitors. Competitive advantage is a crucial factor to have as it allows a company to keep or increase it’s market share in a given sector. Companies with “Economic Moats” generally protect their profits and have good longer term return prospects.

The Smart Investor Article listed six Australian stocks that had “Economic Moats” and what those moats were. The five factors that provided moats for these companies were:

1. Technological Innovation.
2. Strong demand factors from China.
3. Brand Presence / product differentiation.
4. Market Dominance / economics of scale
5. Monopoly position.

The Stocks

The six stocks highlighted in the article all have large market capitalization and solid dividend yields. I will be creating a simulted portfolio based on a hypothetical $10,000 Australian dollars and track the portfolio over the next year to measure its performance. 

ASX Limited stock code:ASX.AX

The ASX limited is the sole share exchange in Australia and recently merged with the Sydney Futures Exchange. Below is a chart showing the last 3 month performance of ASX.

Woolworths Limited stock code:WOW.AX

Woolworths is a retailer in Australian that was recently ranked 25th in the world amongst retailers. Below is a chart showing the last three months performance of Woolworths.

BHP Billiton Limited stock code:BHP.AX

BHP Billiton  Limited is a global resource company. Below is a chart showing the last three months performance of BHP Billiton.

Cochlear Limited stock code:COH.AX

Cochlear Limited is an Australian based company that produce and sell a Cochlear implant system. Below is a chart showing the last three months performance of Cochlear Limited. 

Billabong International Limited stock quote:BBG.AX

Billabong is an Australian based surf wear company. Below is a chart showing the last three months end of day performance of Billabong. 

RIO.AX was also included in the list however I have choose to not include both BHP and RIO. I think these are very interesting stocks. In my next article I will go through the construction of a hypothetical portfolio based around these stocks. I will then track the performance over the next year. I believe that it is advantages to include longer term investments for a balanced portfolio. Stay tuned for the next article where we setup a simulated portfolio using Google finance to track and monitor our stocks for us.

About the author

Mark - Is a 28 year old form Australia. He has a Bachelor in Economics and a Major in CS. He is currently working towards his CFP. His interests include algorithmic trading systems, artificial intelligence, game theory and poker.