>Apocalypto<
20.03.2012
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don't buy shares! 
:
if u do, don't buy off the first minor rally!
:if u do, don't buy off the first minor rally!
Lessons learnt during a market crash
- Thread starter korrupt_1
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Attempting to identify market peaks and bottoms are highly un-reliable in today's complex financial environment. Statistics show only 10% of success at most, which means you will get it wrong 9 out of 10 times. And no reputable investor will ever recommend this technique.
If you think you have learnt to accurately identify market movements, all I could say is you haven't learnt anything positive.
From Fat Prophets. A good read for many of us here.
Losing Money Is As Inevitable As Taxes And Death
Losing money in a down market is not screwing up. It is just a natural and inevitable experience on the rollercoaster ride of long-term investing.
It is worth remembering that the market usually goes down a lot faster than it goes up, yet over the market's past hundred years, two out of every three years go up.
For example, in August last year, just as the US sub-prime crisis was first emerging, the All Ordinaries Index was actually down on the year. It eventually finished up 14% for 2007. At that point in time, it was all doom and gloom. Just as it is now.
Set-backs, corrections and pauses are part and parcel of the long-term investing game. Yet if you focus on the big picture, and remind yourself that stock market investing is a marathon, not a sprint, over the long-term you should be well rewarded.
What The Very Best Investors Do In Times Like These. What do you do during these times of periodic stock market wobbles?
a. Watch the market falling, but ultimately do nothing, waiting out the storm.
b. Sell everything to avoid further losses.
c. Buy some more of your favourite stocks.
d. Avoid looking at anything to do with the share market, including checking your portfolio, reading the newspaper and internet sites, and definitely not watching Alan Kohler's finance report on ABC evening news.
In many ways, how you react to these periodic stock market wobbles defines you as an investor.
If you react by selling everything as in options b) above, you are probably not suited to stock market investing.
We don't blame you if you sit on the sidelines, waiting out the storm.
But what really sets the best investors apart from the average investors is their ability to calmly and rationally assess the situation, to concentrate on the underlying value of the company and not its falling share price, and to take advantage of the falling share market to buy some more of their favourite shares at even cheaper prices.
Optimism Is Your Enemy
Last week we read a very interesting interview in the Australian Financial Review with Christopher Davis of US investment manager Davis Funds.
This quote in particular is very telling…
"You want to invest in times of pessimism. Not because you like pessimism, but because you like the prices it produces. Optimism is the enemy of the rational buyer."
Davis Funds shot to fame recently when they took a 5% stake in struggling US investment bank Merrill Lynch at US$48 a share.
Investing in the US banking sector takes guts. The more news that comes out about the extent of the US sub-prime losses, the more uncertainly surrounds the future prospects of many banks.
Yet, in that uncertain environment, Davis Funds have paid US$48 per share for their 5% stake in Merrill Lynch. Tellingly, Davis have no idea if the worst is over and that they have picked the bottom of the market.
But, they do think Merrill will turn out to be an attractive purchase over the next five or 10 years.
It reminds us of the Warren Buffett quote…
"It's better to be approximately right than to be precisely wrong."
At $US48 per Merrill Lynch share, on a 5 to 10 year perspective, Davis is banking on being approximately right.
We think his investing decision will be vindicated because…
He is buying at a time of pessimism, and pessimistic times produce attractive prices.
He is taking a long-term perspective.
How To Tell If You Are A Good Or Lucky Investor
It's always nice to make a profit. It's even nicer when that profit comes quickly. Quick profits are exciting. They give you the confidence to try to make more of them, and make them just as quickly, or even quicker.
Quite a few people we know have made quick profits by investing in mining and resources companies. Just like a rising tide lifts all boats, the share prices of many mining and resources companies have been lifted by rising tide of the stock market.
When people are making easy money, they get over-confident. They think they are good investors when in fact they may just have been lucky investors.
Are you good, or are you lucky?
Or don't you know?
If you don't know if you are good or lucky, we'd respectfully suggest you're likely to be just plain lucky.
The $80 Billion Wipe Out
Smart and experienced investors know exactly what they are doing. They know that when they buy shares, they are investing in a company and not a share price.
They also know they are making long-term investments, and that over the short-term, the share price can and usually does move independently of the underlying value of the company.
For example, it's hard to imagine the value of BHP Billiton has fallen by $80 billion in just the last 3 months.
But that is exactly what has happened to the value of the company. In October last year the shares traded above $47, valuing the entire company at around $265 billion. Today the shares trade around the $33 mark at which price BHP Billiton is valued at around $185 billion.
Poof. $80 billion gone. Just like that!
The share prices of some of our very favourite resources and mining stocks have been beaten down, in some cases, quite savagely.
This could be considered disappointing if…
you are an imminent seller of stocks to fund, for example, the purchase of a new car, an investment property or some other alternative asset.
you are a regular share trader, used to making quick profits, banking them, and moving onto the next quick win. There are no quick wins in this stock market.
As an aside, there is a saying amongst active stock market traders that a long-term investment is a short-term investment gone wrong. We suspect that all of a sudden, there might be quite a few more few long-term investors today than there were a couple of weeks ago!
you are investing on margin (borrowed money) and your broker is making margin calls, forcing you to sell or take losses when share prices are at a low point.
you invested in the stock market with money you weren't prepared not to touch for at least 3 years, ideally 5 years or more.
you don't like seeing the value of your assets going down.
You Have Our Heartfelt Sympathy
We completely sympathise with you if you have been caught out regarding your margin trading. The last 12 days have been brutal and although here at Fat Prophets we've been expecting increased stock market volatility, we certainly didn't expect the market to fall every single day for this long.
We also completely sympathise with you if you don't like the look of your personal assets in somewhat of a freefall. It's not pleasant.
But if you have over-extended yourself regarding borrowings, if you expected to make a quick profit on the stock market because everyone else was, or if you invested in the latest hot tip, knowing little to nothing about the company…well, we suspect you are learning a harsh and expensive lesson.
What Should You Do Now?
It partly depends on your attitude to stock market investing, your time scale, and your liquid resources.
But presuming you are willing and able to invest for the long term, realise that, over time, the stock market will go down as well as up, and you have some cash to invest in the market, around now is likely to be an excellent time to be buying shares.
That said, just like Christopher Davis of Davis Funds, we don't know if today is going to be the bottom of the market, and we don't know if the worst is soon to be over.
In the short-term, this stock market is driven by fear and panic. Those two emotions always produce irrational prices. Share prices can and will fall to levels that appear to be totally irrational.
Blood On The Stock Market Floor - Time To Buy
In fact, on Tuesday this week, with the stock market in freefall, the Commsec website crashed out, there was widespread forced selling due to margin calls and we had website headlines like "Blood on the floor as market slides".
Into that unwelcoming environment, amidst the fear and panic, Fat Prophets sent out a special BUY email alert.
Titled "Buy quality", we said…
"…after considering the market action this morning, we believe that some stocks have been sold off way too aggressively. Many investors are being hit with margins calls and this is leading to capitulation selling. The good is being thrown out with the bad.
Given this situation, we believe it is time to buy quality large gold and resource stocks.
We obviously can't be certain that this is the bottom for these stocks but we are still confident in our longer term bullish call on 'real' assets (gold, oil etc) versus paper assets.
The bottom line is that successful investing is counter-intuitive. Good long term buying opportunities emerge when the situation looks to be the most dire."
Losing Money Is As Inevitable As Taxes And Death
Losing money in a down market is not screwing up. It is just a natural and inevitable experience on the rollercoaster ride of long-term investing.
It is worth remembering that the market usually goes down a lot faster than it goes up, yet over the market's past hundred years, two out of every three years go up.
For example, in August last year, just as the US sub-prime crisis was first emerging, the All Ordinaries Index was actually down on the year. It eventually finished up 14% for 2007. At that point in time, it was all doom and gloom. Just as it is now.
Set-backs, corrections and pauses are part and parcel of the long-term investing game. Yet if you focus on the big picture, and remind yourself that stock market investing is a marathon, not a sprint, over the long-term you should be well rewarded.
What The Very Best Investors Do In Times Like These. What do you do during these times of periodic stock market wobbles?
a. Watch the market falling, but ultimately do nothing, waiting out the storm.
b. Sell everything to avoid further losses.
c. Buy some more of your favourite stocks.
d. Avoid looking at anything to do with the share market, including checking your portfolio, reading the newspaper and internet sites, and definitely not watching Alan Kohler's finance report on ABC evening news.
In many ways, how you react to these periodic stock market wobbles defines you as an investor.
If you react by selling everything as in options b) above, you are probably not suited to stock market investing.
We don't blame you if you sit on the sidelines, waiting out the storm.
But what really sets the best investors apart from the average investors is their ability to calmly and rationally assess the situation, to concentrate on the underlying value of the company and not its falling share price, and to take advantage of the falling share market to buy some more of their favourite shares at even cheaper prices.
Optimism Is Your Enemy
Last week we read a very interesting interview in the Australian Financial Review with Christopher Davis of US investment manager Davis Funds.
This quote in particular is very telling…
"You want to invest in times of pessimism. Not because you like pessimism, but because you like the prices it produces. Optimism is the enemy of the rational buyer."
Davis Funds shot to fame recently when they took a 5% stake in struggling US investment bank Merrill Lynch at US$48 a share.
Investing in the US banking sector takes guts. The more news that comes out about the extent of the US sub-prime losses, the more uncertainly surrounds the future prospects of many banks.
Yet, in that uncertain environment, Davis Funds have paid US$48 per share for their 5% stake in Merrill Lynch. Tellingly, Davis have no idea if the worst is over and that they have picked the bottom of the market.
But, they do think Merrill will turn out to be an attractive purchase over the next five or 10 years.
It reminds us of the Warren Buffett quote…
"It's better to be approximately right than to be precisely wrong."
At $US48 per Merrill Lynch share, on a 5 to 10 year perspective, Davis is banking on being approximately right.
We think his investing decision will be vindicated because…
He is buying at a time of pessimism, and pessimistic times produce attractive prices.
He is taking a long-term perspective.
How To Tell If You Are A Good Or Lucky Investor
It's always nice to make a profit. It's even nicer when that profit comes quickly. Quick profits are exciting. They give you the confidence to try to make more of them, and make them just as quickly, or even quicker.
Quite a few people we know have made quick profits by investing in mining and resources companies. Just like a rising tide lifts all boats, the share prices of many mining and resources companies have been lifted by rising tide of the stock market.
When people are making easy money, they get over-confident. They think they are good investors when in fact they may just have been lucky investors.
Are you good, or are you lucky?
Or don't you know?
If you don't know if you are good or lucky, we'd respectfully suggest you're likely to be just plain lucky.
The $80 Billion Wipe Out
Smart and experienced investors know exactly what they are doing. They know that when they buy shares, they are investing in a company and not a share price.
They also know they are making long-term investments, and that over the short-term, the share price can and usually does move independently of the underlying value of the company.
For example, it's hard to imagine the value of BHP Billiton has fallen by $80 billion in just the last 3 months.
But that is exactly what has happened to the value of the company. In October last year the shares traded above $47, valuing the entire company at around $265 billion. Today the shares trade around the $33 mark at which price BHP Billiton is valued at around $185 billion.
Poof. $80 billion gone. Just like that!
The share prices of some of our very favourite resources and mining stocks have been beaten down, in some cases, quite savagely.
This could be considered disappointing if…
you are an imminent seller of stocks to fund, for example, the purchase of a new car, an investment property or some other alternative asset.
you are a regular share trader, used to making quick profits, banking them, and moving onto the next quick win. There are no quick wins in this stock market.
As an aside, there is a saying amongst active stock market traders that a long-term investment is a short-term investment gone wrong. We suspect that all of a sudden, there might be quite a few more few long-term investors today than there were a couple of weeks ago!
you are investing on margin (borrowed money) and your broker is making margin calls, forcing you to sell or take losses when share prices are at a low point.
you invested in the stock market with money you weren't prepared not to touch for at least 3 years, ideally 5 years or more.
you don't like seeing the value of your assets going down.
You Have Our Heartfelt Sympathy
We completely sympathise with you if you have been caught out regarding your margin trading. The last 12 days have been brutal and although here at Fat Prophets we've been expecting increased stock market volatility, we certainly didn't expect the market to fall every single day for this long.
We also completely sympathise with you if you don't like the look of your personal assets in somewhat of a freefall. It's not pleasant.
But if you have over-extended yourself regarding borrowings, if you expected to make a quick profit on the stock market because everyone else was, or if you invested in the latest hot tip, knowing little to nothing about the company…well, we suspect you are learning a harsh and expensive lesson.
What Should You Do Now?
It partly depends on your attitude to stock market investing, your time scale, and your liquid resources.
But presuming you are willing and able to invest for the long term, realise that, over time, the stock market will go down as well as up, and you have some cash to invest in the market, around now is likely to be an excellent time to be buying shares.
That said, just like Christopher Davis of Davis Funds, we don't know if today is going to be the bottom of the market, and we don't know if the worst is soon to be over.
In the short-term, this stock market is driven by fear and panic. Those two emotions always produce irrational prices. Share prices can and will fall to levels that appear to be totally irrational.
Blood On The Stock Market Floor - Time To Buy
In fact, on Tuesday this week, with the stock market in freefall, the Commsec website crashed out, there was widespread forced selling due to margin calls and we had website headlines like "Blood on the floor as market slides".
Into that unwelcoming environment, amidst the fear and panic, Fat Prophets sent out a special BUY email alert.
Titled "Buy quality", we said…
"…after considering the market action this morning, we believe that some stocks have been sold off way too aggressively. Many investors are being hit with margins calls and this is leading to capitulation selling. The good is being thrown out with the bad.
Given this situation, we believe it is time to buy quality large gold and resource stocks.
We obviously can't be certain that this is the bottom for these stocks but we are still confident in our longer term bullish call on 'real' assets (gold, oil etc) versus paper assets.
The bottom line is that successful investing is counter-intuitive. Good long term buying opportunities emerge when the situation looks to be the most dire."
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I would tend to disagree with that, surely some kind of a top could be seen in early November. Look at the charts, that kind of correction and then massive rise in the space of two months surely spelled disaster.
I wouldn't say I could pick those moments accurately, but trusting my judgement I began liquidating when were close to the top, the reason I started selling then was because I did not feel safe holding such large positions. Quite a few people sold out during this period because they felt uncomfortable holding a massive amount of shares with such a large potential downside.
Same goes if this was in normal market conditions I would be more inclined to load up at the confirmed bottom of the correction. The real question is to you feel comfortable holding a large amount in shares given the present environment?
IMO I would say not at these prices, possibly if market has further falls we could see some real value come out of the woodwork.
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Ok ... I stopped reading this article right about here.
Comparing the correction in August last year to what is happening now is ridiculous. If the article's advice is based on this foundation... then it is mistaken.
We hit the bear market yesterday. We got out today... but we will be back in it tomorrow. This is a totally different scenario.
Strategies during a correction.
1. Topping up
2. buying at a bottom
will get u a headache at the very best.
Strategies during a bear market should be IMO
1. Waiting for the volatility to go away before getting back in
2. Holding on to what you have OR getting out.
This is not a market that should be played right now.
And if so... let the investors know that it is one BIG GAMBLE!
At what point do we concede that this is a bear market.
It is as if people need to see a one day crash similar to 1987... before they realise the cat has hit the fan... and there is nothing left for a bounce.
Plz explain.
If you hold quality stocks, and if you are a longer term investor, both of these strategies are wrong.
I never suggested anyone to 'play' in the market, see my post earlier.
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coke
Im not sure if you wrote that article. I wasnt implying "you" said anything.
Im merely suggesting that the strategies available in the August correction are not good options right now. Because... as the article wrongly implies... this is not like the correction in August.
We are in a bear market. And thus I would be suspicious of any advice the article provides.
If you are a long term investor... IMO your options are simple.
If you are already in the market...
1. you hold on or you get out. (depends on how long u are willing to be in)
If you are not in....
Wait for the volatility to go away. and then go in.
I suggest that everything else is a gamble in the market today. And in effect you are playing roulette if you try....
But what really sets the best investors apart from the average investors is their ability to calmly and rationally assess the situation, to concentrate on the underlying value of the company and not its falling share price, and to take advantage of the falling share market to buy some more of their favourite shares at even cheaper prices.
TOPPING UP...in a bear market is the wrong advice! IMO
Im not sure if you wrote that article. I wasnt implying "you" said anything.
Im merely suggesting that the strategies available in the August correction are not good options right now. Because... as the article wrongly implies... this is not like the correction in August.
We are in a bear market. And thus I would be suspicious of any advice the article provides.
If you are a long term investor... IMO your options are simple.
If you are already in the market...
1. you hold on or you get out. (depends on how long u are willing to be in)
If you are not in....
Wait for the volatility to go away. and then go in.
I suggest that everything else is a gamble in the market today. And in effect you are playing roulette if you try....
But what really sets the best investors apart from the average investors is their ability to calmly and rationally assess the situation, to concentrate on the underlying value of the company and not its falling share price, and to take advantage of the falling share market to buy some more of their favourite shares at even cheaper prices.
TOPPING UP...in a bear market is the wrong advice! IMO
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stop acting on the say so of others but take heed of what they say. Do your own research and look after your capital.
theasxgorilla
Problem solved... next bubble.
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Doesn't that just sum it all up nicely in one concise sentence!
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If you are trading with leverage, and the market crashes, then just before you can't afford anymore margin calls - cos your capital is dwindling... short the same amount to hedge against further falls.
It freezes your loss... as the market drops and you feel that a bottom is near, cash in on your shorts (which is equal to the amount that you would had been margined for)
As the market goes back up,.. you should be back in the green with extra funds as you've profitted from the shorts..
The danger is that at the moment you open a short, it could be the bottom and you've basically locked your losses in... even when the market goes up, you're stuck with that loss, at which time you may consider closing those shorts for a small loss...
Also, another danger is if you close your short too soon, you could still be faced with further margin calls as you now do not have anything to stop the bleeding... if you do open another short from the bottom... it's high risk as generally in a crash the market will bounce back very quick and your short may be stuck there.
It freezes your loss... as the market drops and you feel that a bottom is near, cash in on your shorts (which is equal to the amount that you would had been margined for)
As the market goes back up,.. you should be back in the green with extra funds as you've profitted from the shorts..
The danger is that at the moment you open a short, it could be the bottom and you've basically locked your losses in... even when the market goes up, you're stuck with that loss, at which time you may consider closing those shorts for a small loss...
Also, another danger is if you close your short too soon, you could still be faced with further margin calls as you now do not have anything to stop the bleeding... if you do open another short from the bottom... it's high risk as generally in a crash the market will bounce back very quick and your short may be stuck there.
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well I am no expert but i have recently lost money because I listened to others and didn't find out the facts for myself..Pretty basic stuff really.
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1973–1974 stock market crash - Wikipedia
The effect was worse in the United Kingdom, particularly on the London Stock Exchange's FT 30, which lost 73% of its value during the crash.[4] From a rate of 5.1% real GDP growth in 1972, the UK went into recession in 1974, with GDP falling by 1.1%.[1] At the time, the UK's property market was going through a major crisis, and a secondary banking crisis forced the Bank of England to bail out a number of lenders.[5] In the United Kingdom, the crash ended after the rent freeze was lifted on 19 December 1974, allowing a readjustment of property prices; over the following year, stock prices rose by 150%. The definitive market low for the FT30 Index (a forerunner of the FTSE100 today) came on 6 January 1975, when the index closed at 146 (having reached a nadir of 145.8 intra-day). The market then practically doubled in just over 3 months.[5] However, unlike in the United States, inflation continued to rise, to 25% in 1975, giving way to the era of stagflation. The Hong Kong Hang Seng Index also fell from 1,800 in early 1973 to close to 300.[6]
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In the 694 days between 11 January 1973 and 6 December 1974, the New York Stock Exchange's Dow Jones Industrial Average benchmark suffered the seventh-worst bear market in its history, losing over 45% of its value.[2] 1972 had been a good year for the DJIA, with gains of 15% in the twelve months. 1973 had been expected to be even better, with Time magazine reporting just 3 days before the crash began that it was 'shaping up as a gilt-edged year'.[3] In the two years from 1972 to 1974, the American economy slowed from 7.2% real GDP growth to −2.1% contraction, while inflation (by CPI) jumped from 3.4% in 1972 to 12.3% in 1974.[1]1973–1974 stock market crash - Wikipedia
en.wikipedia.org
The effect was worse in the United Kingdom, particularly on the London Stock Exchange's FT 30, which lost 73% of its value during the crash.[4] From a rate of 5.1% real GDP growth in 1972, the UK went into recession in 1974, with GDP falling by 1.1%.[1] At the time, the UK's property market was going through a major crisis, and a secondary banking crisis forced the Bank of England to bail out a number of lenders.[5] In the United Kingdom, the crash ended after the rent freeze was lifted on 19 December 1974, allowing a readjustment of property prices; over the following year, stock prices rose by 150%. The definitive market low for the FT30 Index (a forerunner of the FTSE100 today) came on 6 January 1975, when the index closed at 146 (having reached a nadir of 145.8 intra-day). The market then practically doubled in just over 3 months.[5] However, unlike in the United States, inflation continued to rise, to 25% in 1975, giving way to the era of stagflation. The Hong Kong Hang Seng Index also fell from 1,800 in early 1973 to close to 300.[6]
The year the economy went 'bung'
It was the year Australia's current account slid into deficit, never to return. From a surplus of 1.5 per cent of GDP in mid-1973, the balance of Australia's transactions with the world crashed to a deficit of 3.2 per cent by the end of the 1974.
It was the year when profits collapsed; industrial disputes escalated; and a housing boom gave way to the steepest bust on record. For the economy, 1974 was the end of the good times.
--------
This chart shows a calculation of buying power equivalence for $1 in 1974 (price index tracking began in 1635).
For example, if you started with $1, you would need to end with $5.86 in order to "adjust" for inflation (sometimes refered to as "beating inflation").
