World is not over

The Sunday Mail (Queensland) - - NEWS | PERSONAL WEALTH - NOEL WHITTAKER

IT’S BEEN a tur­bu­lent week on world share mar­kets, with the Dow Jones falling 4.6 per cent in just one day. Of course, this led to the usual head­lines about car­nage, blood­baths and the end of the world be­ing nigh. Sadly for the in­vest­ing pub­lic – there was the usual amount of mis­in­for­ma­tion put about.

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 per cent. Con­trast this with Black Mon­day, 19 Oc­to­ber 1987, when it fell 22.6 per cent.

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 per cent, which is not too se­ri­ous when you con­sider their su­per fund has prob­a­bly risen 10 per cent in the past 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 cashtype in­vest­ments to en­able them to with­stand the nor­mal share mar­ket fluc­tu­a­tions.

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.” Noel Whittaker’s ad­vice is gen­eral in na­ture and read­ers should seek their own pro­fes­sional ad­vice be­fore mak­ing any fi­nan­cial de­ci­sions. Email: noel@noel­whit­taker.com.au

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