The Australian stock market is less than 2% of the entire global equities market and doesn’t contain any of the world-renowned high flying stocks like Apple, Amazon or Facebook. So why then is there huge upside potential in investing down under? Three main reasons give us Australians a huge advantage when it comes to buying stocks in our own backyard.
In his bestselling book One Up On Wall Street, Peter Lynch told investors to buy what they know. He explained that recognising high quality businesses in our day-to-day lives can be an incredible starting point for retail investors like you and me – and that we can beat the Wall Street guys by using this advantage! By noticing things like competitive advantage, pricing power, innovation and scalability we can see the hallmarks of a great company as we go about our regular lives.
Noticing that Afterpay had been popping up in more and more stores and that it’s a business that has a mainly positive relationship with consumers would have been an awesome indicator that this might be a business to investigate further. Additionally, seeing the growth of A2 Milk in supermarkets across Australia could have been an outward indicator of it’s growing adoption and consumer interest.
Being aware of these local businesses that Wall Street wouldn’t be as aware of is a huge advantage as Australians, and that because of their lowkey status in the Australian market, they can be underreported by analysts and the global stock market community.
Australia’s greatest weakness may also be its greatest strength – being less than 2% of the global market means it doesn’t receive as much granular coverage as China or the United States.
For us, this means if we have some local knowledge, we can use it to our advantage before the masses flood into the stock. Finding companies in their infancy is a great opportunity to enter into the stock at a great value price point and potentially make those multi-bagger gains. Afterpay was trading at $1.00 five years ago – an entry point some investors enjoyed immensely as the now juggernaut didn’t receive much international nor local acclaim.
Capitalising on online investing communities like Strawman can help us find under-the-radar companies that haven’t had the type of exposure that large-cap companies attract in markets like the United States.
Small cap opportunity
Last but not least, loads of Australian companies sit in the small cap sector – a category of stocks that have relatively low market capitalisations. This means that the potential upside is greater due to the law of large numbers.
It’s harder for a company like Apple, which has over a $2 trillion valuation, to double in value, as it would have to have revenues or profits increase in the billions of dollars to justify the value increase. Conversely, smaller companies have longer “runways” and greater opportunities to double, triple or octuple in price due to their comparative size.
Being in Australia doesn’t just mean meat pies, AFL and Vegemite – we also have an exciting, growing and dynamic stock market at our fingertips. With a little knowledge, some environmental awareness, a fundamental understanding of the stock market and a long term view, you might just stumble upon the next gold mine – and I’m not talking about the Eureka Stockade.
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