by Scott Pape - July 5th 2008
I have been a bear (as in cautious, not Joe Hockey) on the economy for longer than I know.
So seeing blood across the share market over the past few months has left me feeling both validated and poorer at the same time.
Let’s be honest though, it doesn’t take a genius to see that record debt levels, over-valued asset prices, dwindling savings and record oil prices would eventually end in tears.
With the markets turning out stellar returns for longer than most of us can remember, pausing only for the occasional breather, it’s easy to get panicky when confronted with headlines such as “worst market in 100 years”, especially when they’re laced liberally with words like “panic”, “stress” and “crisis”.
Experience as a teacher
Investors’ reactions to a downturn can generally be divided into three categories:
(a) Huh?
(b) Perhaps Starbucks will soon accept a freshly slaughtered chicken for a mocha latte.
(c) Where’s my cheque book? It’s time to buy.
Which camp you cook in will depend almost entirely on your experiences to date. If, after a market share slowdown, you snagged ANZ shares for half the price they are now, that will probably be your investment strategy (regardless of economic fundamentals).
But if you’ve been tracking Australia’s foreign debt on the back of the dunny door, you’ll probably feel that share prices are heading down the toilet.
Subjective assumptions
The problem with each of these assumptions is that they’re subjective, relying on personal assumptions that were made in the past. As any good corporate lawyer worth her billable hours will tell you, “past results cannot be relied upon to determine future returns”. But we still use them anyway.
The economic boom we’ve experienced over the past 20-or-so years is over. It was built on the back of the spending patterns of the largest generation, the Boomers. “Spend, Borrow, Spend” is their middle-aged mantra.
Everybody says the next growth stage will be the increasing affluence of the middle classes of China and India. Sure, they will fuel the next phase, but not until the world sorts out its scarce resources.
Getting the message
So, while investment markets digest the sins of the past, and confront the coming challenges, expect lower returns now and in the foreseeable future.
But are we getting the message? According to a survey this week conducted by Industry Super Network, some 68 per cent of Australians believe their super fund balance has gone up over the past year when in reality we’ve had the worst super returns in 20 years.
And when these people see their negative returns, their first reaction may be to head to the safe haven of cash but that could be a disaster. People say “your money’s safe with cash”, but with prices rising by as much as 4 per cent a year (inflation), you’re losing money anyway.
Research has shown that very few investors can pick the best time to get in and out of the market – no matter what your brother-in-law might say.
Most get it wrong and end up short-changed in the long term.
So without a crystal ball, what should we do?
Follow the leaders
My job puts me in the privileged position of meeting many people who are trying to make a buck. I get paid to see what they’ve achieved in the past, analyse their strategies, and watch their progress.
Most stink.
That’s why I make it a point to learn from the best investors.
John Templeton is considered by many to be one of the best of his generation. The 95-year-old pioneered international investing, becoming a billionaire in the process.
Templeton says: “People are always asking me where the outlook is good, but that’s the wrong question. The right question is where is the outlook most miserable? The best time to invest is when you have money. This is because history suggests it is not timing which matters – it’s time.”
Templeton was brought up in the Depression and therefore has an aversion to debt (he reportedly paid cash for his home). This frugality has formed part of his individual investment style – buying strong companies on the cheap and then holding for the long term.
Of all the shares trading on the market, the ones that best fit this description would have to be the big Aussie banks which have all been hit because of the global credit crunch.
Investors are reacting as though Australian banks are as vulnerable as their problem-prone European and US counterparts. They aren’t.
On this week’s prices they’re all trading at around their 12 month lows, but the dividends (returns) they pay their shareholders are at historical highs of around 7 per cent. And when you add on the tax advantages (franking credits), the real return is closer to 10 per cent, provided they continue to pay the same rate of dividends, that is.
Nature of change
The biggest mistake most investors make is thinking that “this time it’s different”.
Believing that, miraculously, the markets will bounce back in the not-too-distant future ignores the fundamental problems that financial markets face.
However, bracing for a 10-year Japanese-style malaise (as some commentators have suggested), ignores the power of technology, innovation and the billions of Chinese and Indians set on improving their lot in life.
In times of trouble, it pays to stick to the fundamentals.
As Sir John Templeton said: “Throughout history, people have focused too little on the opportunities that problems present in investing.”
The next few months will give all of us ample opportunity to test this truth.Tread your own path!
Photo: www.flickr.com/photos/shawdm/2485514554/
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