At large: Ross Green­wood

Share­mar­ket volatil­ity is a sign that in­vestors need to keep a good sup­ply of cash

Money Magazine Australia - - CONTENTS - Ross Green­wood is Chan­nel 9’s fi­nance edi­tor and Ra­dio 2GB’s Money News host.

Here are some ba­sic truths about in­vest­ing: 1 You in­evitably cre­ate less wealth buy­ing at the top of an in­vest­ment cy­cle than you make by buy­ing at the bot­tom.

2 Given that you never know ex­actly when the top or bot­tom of a cy­cle oc­curs, you must make judge­ments based on his­tor­i­cal highs and how long the so-called bull mar­kets go on for. The in­vest­ment and ad­vi­sory group First Trust says that since 1926 the av­er­age US bull mar­ket has lasted 9.1 years (with a to­tal re­turn of 480%). The av­er­age bear mar­ket has lasted only 1.4 years, with an av­er­age cu­mu­la­tive loss of 41%. In other words, your “win­dow” for buy­ing dis­tressed as­sets is short and does not come along very of­ten.

3 You must for­get any sug­ges­tion that “this time it’s dif­fer­ent”. Though time moves on, eco­nomic cy­cles and the driv­ers of booms and busts do not. They are ruled largely by the con­sis­tent fac­tors of fear and greed.

4 If there is in­creased volatil­ity in mar­kets, it is a sig­nal that the bat­tle of wills be­tween buy­ers and sell­ers is reach­ing a tip­ping point. Do not be­lieve for a minute that the volatil­ity is some­thing that will blow over. It rarely does.

5 If you reach the top of any cy­cle with­out any cash on hand, you will find it al­most im­pos­si­ble to take ad­van­tage of cheap val­u­a­tions if/when prices fall. 6 When there are dis­tressed as­sets to be bought, buy them big time (it does not mat­ter if it is prop­erty, eq­ui­ties or com­modi­ties). Re­mem­ber War­ren Buf­fett’s quote: “Op­por­tu­ni­ties come in­fre­quently. When it rains gold, put out the bucket, not the thim­ble.”

7 It is im­por­tant to be nei­ther a pan­icked buyer or seller. But if you are buy­ing as­sets, find a pan­icked seller. If you are sell­ing, find a pan­icked buyer. Again, this strat­egy will al­ways reap re­wards.

Based on these seven ba­sic truths, here are a cou­ple more ob­vi­ous ob­ser­va­tions.

Hous­ing mar­kets in Syd­ney and Mel­bourne have reached their short-term peaks and are head­ing down. If you are a buyer, don’t hurry into the mar­ket. You have plenty of time. If you’re a seller (and it will de­pend on whether you are sell­ing a house or an in­vest­ment prop­erty), you must de­cide how far you think mar­kets will fall and whether you need to move quickly or to hang on (who knows, per­haps seven to 10 years) un­til the next boom.

With the stock­mar­ket, re­cent volatil­ity is a real sign that a weight­ing to­wards cash needs to be con­sid­ered more ag­gres­sively. I recog­nise that many peo­ple (in­clud­ing many as­set man­agers who are paid in­vest­ment fees based on growth) strug­gle with this con­cept. Of­ten it can be be­cause tax plays a big part in a per­son’s think­ing, so cash­ing in might also trig­ger cap­i­tal gains li­a­bil­i­ties. Peo­ple are un­der­stand­ably wary of this, so will hang onto eq­uity or prop­erty po­si­tions in the face of po­ten­tial losses. Sen­si­ble, or not?

I also won­der how many peo­ple sit on tax losses with­out us­ing them (per­haps with­out even know­ing the ex­tent of them) for years at a time. Surely one of the great ad­van­tages of los­ing money on shares is the abil­ity to off­set it against fu­ture gains.

The trick in all this is tim­ing. I’ve ex­plained sev­eral times be­fore that I have dis­cov­ered I am a far bet­ter buyer of as­sets than I am a seller. I won­der if oth­ers have the same prob­lem. The rea­son, I have iden­ti­fied, is that I find it eas­ier to recog­nise a bear mar­ket (in shares or prop­erty) than I recog­nise the du­ra­tion and the end of a bull mar­ket. Like so many oth­ers, this leads to me hang­ing onto eq­ui­ties for far longer than I ought to, or I end up hang­ing onto loss mak­ers when I should have sold them.

Oddly, hav­ing seen the sta­tis­tics about the av­er­age du­ra­tion of bull and bear mar­kets, it makes me un­der­stand more about the tac­tics of buy­ing and sell­ing. I won­der if it’s this: buy in­fre­quently, sell in­fre­quently. But when you do buy or sell, do it ag­gres­sively. Then sit. If you make mis­takes (and I do, all the time) again act de­ci­sively to cull the un­der­per­form­ers, then sit tight again.

Af­ter all these years, maybe it’s high time that I started putting this into prac­tice for my­self.

If you are a prop­erty buyer, don’t hurry into the mar­ket. You have plenty of time.

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