Being Optimistic in a Pessimistic World
Lance Spicer, Editor - Trident Confidential, 20 Oct 2011, 2:42 PM
Being contrarian and optimistic in the face of people’s negativity is sometimes the hardest thing in the world and does bring with it a rather “un-natural” feeling of “concern” that “I am the only one who sees this”. The emails from concerned readers start reaching crescendo heights and I sometimes think, “how long can this market nonsense last?” and “has the world gone mad?”
However, just as you think the market should go on medication, it turns, and turns violently in the favour of, maybe not optimism, but not as much negativity. The last 6 months of panic should be proof enough for anybody that markets are not efficient! They should have proven to you that also the “crowd is often wrong” and that fear is always twice as strong as greed.
These are valuable investing lessons to understand. To be a good investor in turbulent times, you have to understand these truisms.
· The market is not efficient and does not get it right over the short term. Investing greats Benjamin Graham and Warren Buffett were so right with their proven theory that “In the short run, the market’s a voting machine and sometimes people vote very non-intelligently. In the long run, it’s a weighing machine and the weight of business and how it does is what affects values over time”. The simple fact that volatility exists to a level that can swing a market 2 or 3% one day, and then the opposite the next, proves that efficient market theory is a complete nonsense.
· Fear makes the crowd react badly and fear is stronger than greed. It is the fear of something bad happening that makes markets selloff. Worst case scenarios are often built into prices, but rarely actually occur. Remember always, FEAR is Fantasised Expectations Appearing Real. You have to get your emotions under control and look at the facts. All of the facts, not just the ones that support your view.
· Placing too much emphasis on the “opinions” of others will 100% lead you astray. When you hear or read an opinion that supports the way you are feeling (fearful) you give it extra priority it may or may not deserve. How do you know they have all the facts? How do you know whether they have a “market short” agenda whereby they make money by spreading fear? How do you know whether they are completely nuts or not, or whether you have in fact temporarily “lost it” too?
· The facts and common sense (big doses of it) are the only things that will help you be successful in investing. If you are prone to bouts of “running about screaming with your hair on fire” then you have to either learn to get this under control or get out of the market and resign yourself to possibly not reaching your financial goals.
The recent rally was in the main due to the hope that the European Union will probably get it’s house in order over the Greek debt situation. It’s true at this stage we don’t know how, or exactly when, but it will happen. The people at the European Central Bank and the International Monetary Fund are not complete fools with no idea on how to fix the problem. The problem is gaining consensus on the details. The problem was always going to be fixed and we are edging very close to that end. The big thing was recognising that the European banking system needs more support in light of the fact that Europeans banks are carrying Greek debt that will be marked down and some losses will occur, as the debt forms part of their capital base. The Europeans also recognised that the EU bailout fund needs to be boosted so it was large enough to ensure that this chaos was covered if it ever happened again. The Slovakians were the only ones not in favour of doing this until someone had a “quiet word” in their collective ear and their decision was reversed and there is now unanimous support for boosting the fund.
The G20 (20 largest world economies, including Australia) will support moves by the IMF to ensure countries like Greece don’t fall into a hole again and that there is a mechanism that will allow “early intervention”. This would allow for earlier action to be taken and more substantial intervention, so this type of crisis is avoided in the future and also in the short term, will avoid any further problems related to Portugal, Spain and Italy. When the G20 meet on November 3, we’ll all hear the details of the plan the ECB and the IMF intend to implement that will probably entail re-structuring Greek debt (in other words writing some of it off) and how to deal with the French and German banks, who will suffer some degree of pain due to losses. The plan will also deal with the re-capitalisation and strengthening the banks in light of this. I expect it will entail some sort of ECB “bailout” to support them and keep the banking system operating normally. Of course, market nervousness will continue until this meeting. If the meeting is a success, the market will rally very hard.
The other major market concern is the United States. While the economy is growing slowly, the underlying economic data is strengthening. The one fly in the ointment is unemployment, and this will take time (years) to fix, but is always regarded as a “trailing indicator”. However, unemployment has not prevented US corporate earnings from rising and we can expect yet another record quarter for US company earnings even though the September quarter is traditionally the weakest. There is a real disconnect between the economy and the US unemployment rate and many economists are still coming to terms with this.
Our “Attitudes” often get in the way
One the biggest problems we face going forward from here are going to be our own attitudes. Some of us get caught up in the headlines and the “fringe lunatic” opinions who base their beliefs on distorted half truths and made up stories to suit their own end. Allowing this rubbish to create fear will always – repeat, always – cost you money.
The fact is bull markets last much longer than bear markets. 75% of time, over the long term, market rise, 25% of the time they fall and often violently due to fear, not necessarily facts, but fear of something bad happening. This “bad event” often doesn’t occur. However, what does the “crowd” do? They sell at the worst possible moment and lose money. Emotions will always get you into trouble when it comes to investing.
Successful investing in stocks (or property) has a long-term horizon and you should think about all your investments that way, not get caught up in short term events, as many do. To try and predict what markets will do day-to-day or week-to-week and base your long-term strategy on these irrelevant short term “fear” or “greed” swings will be unsuccessful. The idea is to remain informed, and in touch with the events surrounding your businesses and to take advantage of the irrational behaviour of others as and when those opportunities arise. At all times, remain calm, patient and informed. The worst, as we have seen, rarely happens.
Where to from here?
When market sink like they have since April, nearly all stocks sink as well, regardless of their terrific fundamentals and earnings results – fear is pervasive! Even the “fundamentally superior” stocks we invest in go down with the market – not a lot you can do about that. However, what you can do is buy them when nobody else wants them and that’s one of the things you should do at times like this (as hard as it may seem sometimes).
All during the dip in September we were buying stocks and now find that due to our belief that things don’t go down forever, Trident Confidential has returned a 37% profit so far in 2011 and we expect that after the November 3rd G20 meeting this will extend further as the year ends. 2011 has not been an easy year, but it may end with a flourish just as 2010 did, as I expect the EU situation will be well on it’s way to resolution and fears about the US economy double dipping into recession will have totally abated, if they haven’t already.
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