At large: Ross Greenwood
Sharemarket volatility is a sign that investors need to keep a good supply of cash
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.