Don’t listen to the panic merchants

Sometimes it's hard to tune out

Sometimes it's difficult to tune out when everyone wants your attention

Over the last week or so we have again seen a proliferation of emails, articles and newsletters suggesting that the Australian sharemarket is headed for a fall. 

There is no real problem with this – you would be correct something like one in three days if you simply said that every day. The real problem is that this interpretation is increasingly being presented as advice. It is usually accompanied by glowing “member stories” or sample trades that have made 80%, 140% or 280% in incredibly short timeframes. These stories usually also suggest that your best way of obtaining these returns is to subscribe to their website/newsletter/email list or what have you. All of this is usually wrapped around dire words of warning about the doom rolling on towards all investors, like an unstoppable tsunami-style wall of disaster – except that you can find out how to avoid that wall of water by simply subscribing to our website/newsletter/email list…. We all get the drift, don’t we?

It wouldn’t really matter if the world was full of informed, thoughtful and considered investors… but you and i both know that this is simply not the case. All human beings feel worry and fear and concern when they consider themselves losing in some forum, whether it be investment, sport, business or love. It also wouldn’t matter if the sharemarket was reserved for speculators, the wealthy and the ambitious. However, what happens in the sharemarket DOES matter, and it matters to us all. Let’s ponder for just a moment, why…

The sharemarket is a source of funding for businesses, separate from banks and lenders. This adds a level of flexibility to what can be done within a business to make it grow, and encourages new ideas, processes and ways of creating value. When the world is looking its gloomy worst, there is no point looking to the banks for salvation – by that stage, they are closing down businesses in areas they don’t like (by withdrawing funding renewals/ asking for more security/ changing valuations etc, etc, etc) and are hoarding their cash for when things are ‘better’ again. It is at this stage that businesses can turn to other businesses, institutions and individuals, quietly and carefully explain their story and ask for investment funds. If you doubt me on all this, consider Rio Tinto. At the height of the Global Financial Crisis (now part of the English language as simply “the GFC”) there were concerns about Rio’s ability to rollover its debt. There were concerns whether one of the worlds largest and most efficient iron ore producers was a worthwhile borrower – in a world where the demand for iron ore is being underpinned by demographic fundamentals stronger than any in almost a hundred years! Yet, Rio was able to sort out its business plan, explain it to the ‘market’ and ask for cash to boost its capacity to survive and take advantage of opportunities in a price-reduced world. And thousands of businesses, institutions and individuals did just that. As they did for Wesfarmers, . The ASX tells us that a total of $106,000,000,000 was raised in Australia in 2009 by companies listed on the sharemarket. To put this in context, a rough search of the internet suggests bank lending at September 2009 to corporates stood at $676bn. The level of cash raised and the confidence that this expressed in the value of Australia’s top companies is truly impressive. Of course, there is more to it than that – floats, rights issues and all sorts of means by which those with a business proposition can be matched with those who are looking for the potential to beat bank interest rates.

So, investors are fearful, sharemarkets are volatile, global imbalances are high, civil unrest is spreading across Arab nations and far-right nationalist movements are making gains across Europe, Greece may default on its debts, with Spain and Italy and Portugal and Ireland all looking awful. Did i miss anything? Maybe we should look at the demise of print media, the Amazon Kindle outselling both hard and softcover books for the first time, the obesity epidemic, increasing religious intolerance globally and the polarisation of political debate. Please add your own notes on current worries, concerns and fears here __________________________________________.

Let’s focus back on the sharemarket. What happens to the companies listed on the stock exchange is important to most Australians as the bulk of Australians have super funds, and most superannuation funds have an exposure to Australian shares. Those shares in super funds are generally held there as a form of long term investment that seeks to obtain a return over that achievable through cash, and hopefully in excess of the inflation rate. The investment concept that makes shares a viable asset class already accepts that there will be times of ‘irrational exhuberance’, fear, crisis and panic. Otherwise you would never buy shares to hold in a super fund.

A day or so ago, a friend sent me an email they had received from one of these ‘self-help / trading’ businesses. The headline started “How to avoid…”, followed by a special presentation that talked about risk, and how their tips would “help you try and harpoon gains of 316% in 10 weeks…”, etc. The note then follows the profile of many of the United States newsletters that i receive – setting out the gloom and doom statistics to paint just how bad the background picture is, followed by rays of light and sunshine as you are guided on the steps to be part of the select group that will avoid all of that.

Time is scarce (especially when trying to work through the backlog caused when you have a move of office premises), so we can’t cover all of the ways in which these articles create angst in my mind but here are the key points:

  • Investing in shares involves a long term holding of companies that satisfy a filter criteria that suit your timeframe and objectives.
  • Speculating in shares involves picking an entry price, and hoping for a short-term lift in price so that you can sell for more than you bought it for.
  • Trading is a position in which you speculate that your timing will be such that you win more than you lose, and your trading costs/taxes/opportunity costs will provide you with a return in excess of the market return over the time that you trade.
  • The bulk of information available within the investment market is speculating.
  • It is possible to be both a long term investor and a trader both at the same time. It’s just that most people aren’t very good at doing that.
  • The bulk of the self-help/online material is being sold as personal advice to help you make money and avoid losing money. It is almost NEVER spelled out that this in actually GENERAL ADVICE. Where it is, the fine print is almost invisible, and usually placed in such a way that most folk will never read it, never mind taking a moment to sit down and work out just what it means to them. This kind of advice does not take into account your cashflows, your overall asset position, your tax position, your personal experiences or your short term/long term expectations. This makes it very easy for the source to appear to be consistently right, and very difficult to work out which part of the commentary you should act on and which part is simply informational. If you doubt me on this one, take a look at a few of these spruikers works… you will often find that one article recommends a course of action while another article recommends the exact opposite.

So, what is my point in all of this?

My point is that the global economy is currently struggling to recover from a serious hit to the core infrastructure on which it is built. This is not a time to increase selection risk and start forays into trading, unless you accept that you are speculating and not necessarily investing. So there is no problem operating on that strategy – it’s just important that you don’t kid yourself into thinking you are investing.

This is not the first hit to the economy though, is it? There is a very long history of recessions/depressions/ booms and busts and recoveries. All such recoveries are far from smooth. There may still be inefficiencies to be flushed out of the system, and bubbles to be pricked in smaller areas. There may be false-starts, second-dips and social unrest. The free-market system relies on millions upon millions of individual decisions leading to an overall sense of logic – it doesn’t require logic all the time, and it doesn’t assume straight line progressions.

The sharemarket reflects a lot of things. In part it reflects the overall economy but it would be dangerous to assume that it is a mirror image. The economy can be doing well while the market is falling, and vice versa.

In other words, fears and worries about various segments of the domestic and global economy aren’t necessarily good indicator points of when you should take action on your listed investments. So you should seriously question any promotion that suggests it is.

This particular post is long enough now… we’ll return to this topic a couple of times over the near term… but here is a quick look at why some of the fear mongers are shrieking at this point in time, as well as a bit of a longer term view to put things into a little more perspective.

The S&P/ASX Metals and Mining Index

The Metals and Mining Index reflects reduced commodity prices and the unwinding of some speculative positions

S&P/ASX 20 Index

The top 20 companies in the index are poised to either fall further or resume their gradual increase in a very well-defined trading band

S&P/ASX 200 Price Index

The S&P/ASX 200 price index is also at a rather watershed moment

However, all of this needs to be kept in a long term perspective…

A look at the 5 year return for the Australian sharemarket

Ignoring dividends (which have been quite good), the sharemarket overall remains at a price lower than that which applied in 2006. Hardly a bubble environment...

So the short term traders and speculators are fretting and losing sleep over the next move – whereas longer term investors, who take a genuine multi-business-cycle approach are casting a careful eye over their portfolios to see where they are exposed and how they can take advantage of lower prices for the accumulation of long term income-producing assets.

DISCLAIMER : Remember the Great Disclaimer – This is just a blog of opinions and thoughts. You cannot take anything written or inferred here as personal advice as it does not take into account your individual aims and objectives, nor does it account for tax, risk, social security, portfolio, estate or structural planning issues as they impact on you directly. For this you will need to seek the personal advice of a suitably qualified individual. So you are completely free to treat the title “Ignore the panic merchants” totally, and to start tearing your hair out, while running in circles with a phone at your ear, as you arrange the transfer of all of your assets into cash to avoid the imminent doom that awaits all those foolish deluded long-term investment suckers.


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