Market Turbulence

It’s been a turbulent few days on world share markets, with the Dow Jones falling 4.6% in just one day. Of course, this led to the usual headlines about carnage, bloodbaths and the end of the world being nigh. That is – sadly for the investing public – there was the usual amount of misinformation put about.

The headlines on the front page of the Australian shouted, “Our day of reckoning” – whatever that is supposed to mean – but one of the best was the pronouncement that Wall Street had suffered the “biggest fall in history”. That’s a kind of half-truth: it was the biggest fall in points, but it was a fall of only 4.6%. Contrast this with Black Monday, 19 October 1987, when it fell 22.6%. If that had happened this week it would have been the equivalent of almost 6000 points. Now that would have been a fall. It’s percentages that matter, not points.

I was stunned to hear ABC announcer Fran Kelly ask AMP economist Shane Oliver in a concerned voice, “What is going to happen to people who are retiring soon?” In response, Oliver pointed out that the fall last Tuesday may have cost the average superannuant about 1%, which is not too serious when you consider their super fund has probably risen 10% in the last 12 months.

Unfortunately, time did not permit him to add what should be obvious to anybody who understands investment. A person age 65 retiring today could reasonably expect to live for another 25 years. Who in their right mind would convert all their financial assets to cash on the day they retired, and then try to muddle through by living on the pathetic returns that cash is going to generate in the next quarter of a century?

The smart retiree would have done what I’ve been recommending for many years, which is to make sure they have at least a year’s planned expenditure in cash-type investments to enable them to withstand the normal share market punctuations.

A major problem is that many investors don’t think logically. They jam the aisles when the Boxing Day sales start because everything is marked down, yet they rush for the exits when the share market falls and good companies are available at bargain prices.

The reality is that share prices go up and down all the time in the short term and mostly it has nothing to do with the company itself. Companies report their progress every quarter, and in between they occasionally announce something new, like a new product or new acquisition. But their share price will jump up and down every day, and even every minute, for reasons completely unrelated to the company’s performance or prospects.

The strange thing is that investors’ reactions to share price rises and falls are exactly the opposite of their reactions to the changing prices of everything else they buy. People love to jump in and buy shares if they have been rising – the higher the price rise the more excited buyers become. But if a share price is falling, people sell. The lower the price goes the more frenzied the panic selling. It’s the same in every cycle – when the price of every company rises in the general euphoria, and then the price of every company falls in general market sell-offs. In almost all cases the causes of the euphoric rises and the panic sell-offs are unrelated to the long-term prospects of individual companies.

The message to all of you who have invested for the long term, is to sit tight and not worry.  Price fluctuations caused by traders don’t have a thing to do with the inherent value of the share itself.  Get some revenge on the traders by using price dips as a time to buy, not a time to sell.

Let’s close with some wise words from Warren Buffett: “Long ago, Ben Graham taught me that, ‘Price is what you pay; value is what you get.’ Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”