How to find investment opportunity in a chaotic market

Disclaimer: This article is written by Bruce Sheppard in a personal capacity. It does not constitute financial advice, and he is not a licensed financial adviser. Please seek independent financial advice before making any investment decisions.

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Global markets are rattled. Trump’s trade policies have introduced a level of uncertainty not seen in years, and for many investors, that uncertainty reads as danger. But for those who know where to look, periods like this have historically been among the best times to buy.

Over 40 years of direct investing across listed equities, property, currencies, and venture capital, I have watched the same pattern repeat. Panic creates selling. Selling creates discounts. Discounts create opportunity. The question is whether you have the knowledge and the discipline to act when others are retreating.

This article shares the practical framework I use for direct share investing, built around principles refined through two decades of measured results on the New Zealand share market. It will not tell you what to buy. What it will do is show you how to think about what to buy.

Why passive investing only gets you so far

Most New Zealanders invest passively, through KiwiSaver or platforms like Sharesies. These are reasonable starting points, but they come with limitations.

With KiwiSaver, your money passes through multiple layers of fund managers, custodians, and trustees before reaching the companies generating your returns. Each layer carries a cost, and the further your money travels from your hands, the less visibility you have over where it ends up. Platforms like Sharesies sit closer to the action. You pick the companies, read the reports, and learn more about how markets work. But you are still outsourcing custody and compliance, and you remain one step removed from your investments.

Direct investing closes that gap. You own the shares, manage the portfolio, and do the analysis yourself. That requires more work. But the work pays.

The principles that hold up over 40 years

At the core of my approach is a simple idea, borrowed from Warren Buffett and proven in practice. Buy great businesses with sound economics, run by capable and honest people, and buy them at a discount to what they are worth.

When others panic, get calm. The most productive periods of my buying activity over the past four decades came during moments of maximum market fear. 1989 to 1993. Around 1999. 2009 to 2011. And 2020. Markets gripped by uncertainty tend to produce those conditions.

Do not throw good money after bad. If a company keeps returning to shareholders asking for more capital without delivering results, that is the signal to exit, not to double down.

Act quickly when you spot bad behaviour. Management character rarely improves. If something looks wrong, sell and move on.

A filtering process that starts with dividends

The New Zealand Stock Exchange (NZX) lists around 180 companies. The goal of this first stage is to reduce that number to a manageable shortlist without spending hours on each one.

I start by filtering for companies paying a gross dividend yield of four per cent or more. On the NZX, that currently produces fewer than 30 names. Dividends matter because cash paid to shareholders is one of the few numbers in financial reporting that cannot easily be manipulated. It represents real money generated after tax, interest, and capital expenditure.

Next, check dividend cover. Divide earnings per share (EPS) by dividends per share, both of which appear on the NZX company page. If the result is below 1.2, the dividend is not well supported by earnings, and the company drops to the bottom of the list.

Then look at debt. Find the most recent annual or interim report and identify total interest-bearing debt, minus any cash the company holds. Net debt of zero or below is a strong sign. If net debt is positive, divide it by earnings before interest, tax, depreciation, and amortisation (EBITDA). A ratio above two means any meaningful fall in earnings puts the dividend at risk. The higher the number, the greater the risk, and the bigger the discount you should demand before buying.

At this point, a list of 30 typically narrows to around six companies worth investigating properly.

Going deeper on your shortlist

For each remaining company, I pull five years of financial statements and calculate annual growth in EBITDA, revenue, net profit after tax (NPAT), and dividends per share. I also track whether the number of shares on issue has grown, because dilution erodes per-share returns and needs to be factored into growth rates. Note that 2020 and 2021 figures were heavily distorted by the pandemic, so if those years fall within your five-year window, anchor your baseline to 2019 instead.

Calculate the price-to-earnings (PE) ratio for each company. Lower is cheaper.

Then calculate what I call the PEGY ratio: divide the PE ratio by the sum of the dividend yield percentage and the growth rate percentage. The company with the lowest PEGY is likely to offer the best value relative to its income and growth potential.

Rank your shortlist from lowest to highest PEGY and start your detailed research at the top.

The people matter as much as the numbers

Before committing any money, understand who runs the company and who owns it. Check for a dominant shareholder. Anyone holding 25 per cent or more can exert significant influence over management decisions. Their motivations may not align with yours. Research them.

Look at the board. A strong chair tends to drive sound governance and good leadership selection. Frequent chief executive officer (CEO) turnover is usually a warning sign, either of a poor business model, weak governance, or both.

Read all recent announcements and look for any structural reason the stock is cheap before assuming you have found a bargain.

As a final check, add the assessed growth rate to the current dividend yield. If the combined figure sits at least 50 per cent above your target return, you have a genuine margin of safety. For a 12 per cent target, you want to see a combined yield and growth figure of at least 18 per cent.

Buying with discipline

Once I have decided to invest, I do not deploy all my capital at once. When the price falls below my target, I buy one third of my intended position. Wait up to a month, then buy another third. Repeat. If the price rises above your target during this period, buy your full position the moment it dips back below.

During this time, I try to speak with the CEO directly. If they will not take a call from a prospective shareholder, call the chair. Indifference to shareholders rarely improves once you own the stock.

I keep my portfolio between six and twelve companies. Fewer than six concentrates risk uncomfortably. More than twelve spreads your attention too thin and adds little additional protection.

What my 20 years of results show

Over 20 years of direct investing on the NZX, I made 30 investments in total. The results split clearly along one line: whether I followed the full analytical process or not.

When I followed the full process across nine investments, those investments produced an average internal rate of return (IRR) of 13.62 per cent per year. IRR measures the annualised return on an investment accounting for the timing of cash flows, and is broadly equivalent to an after-tax interest rate. The strongest long-term performer in this group was Hallenstein Glasson, which I still hold today, returning 21.78 per cent annually over the holding period.

When I skipped the process or only partially applied it, results fell sharply. Sixteen investments made largely on instinct produced a combined IRR of minus 1.69 per cent.

My full portfolio returned 8.68 per cent IRR over 20 years, against an NZX 50 return of approximately 8.25 per cent after tax over the same period. Remove the undisciplined investments, and the return rises to 12.26 per cent. That gap of roughly four percentage points annually, compounded over decades, is the cost of not doing the work.

Small companies rewarded the work more than large ones. Spark, the only large-cap in my disciplined group, returned just 7.04 per cent. Smaller companies with sound economics tend to offer more room for mispricing, and that is where the opportunity lives.

Where to go from here

If the work described above does not appeal, a well-run managed fund will likely produce a comparable result when discipline slips.

But if you are prepared to be disciplined, a concentrated portfolio of quality New Zealand companies, bought at a discount and held patiently through periods like the one we are in now, has the potential to produce meaningfully better returns. The process compounds. So does the knowledge.