Pete Wargent blogspot
Co-founder & CEO of AllenWargent property advisory, offices in Brisbane (Riverside) & Sydney (Martin Place) - clients include hedge funds, resi funds, & private investors.
4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.
"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the better property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.
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"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.
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Thursday, 17 January 2013
How to deal with investment market fluctuations
It doesn’t matter whether you elect to invest in stocks, gold, property or bonds, over the long term the market valuations thereof will fluctuate. You know that this will happen, so of more importance is how an investor approaches investing and how the inevitable fluctuations are dealt with.
The Intelligent Investor’s view
The godfather of value investing Ben Graham said that investors should be aware of market fluctuations and be prepared for them both psychologically and financially by retaining a buffer.
Graham also holds that investors should look where possible to acquire investments at advantageous prices and look to benefit from market levels as time goes on.
He does, however, note the risk that by becoming too focussed on market movements the investor may become dangerously drawn towards speculative attitudes and activity. The development of stock markets in particular has made it more difficult to see oneself as a part-owner of a business and instead there is far too much focus on price action.
If you are going to speculate over the short term, says Graham, do so with your eyes open and expect that you will probably lose money.
Graham notes that even the highest grade investments are subject to wide fluctuations in their prices (although the fluctuations are usually more pronounced in second rate investments) and that the intelligent investor looks to profit from the pendulum swings.
There are two ways in which an investor can profit from market swings: through timing and through pricing.
Timing and pricing
Timing is the practice of attempting to anticipate the action of the market.
Pricing is the practice of endeavouring only to buy an asset for less than its fair value and to sell when it is priced above its fair value.
A less ambitious form of pricing, noted Graham, is the simple act of ensuring that you don’t pay too much for an asset which you buy. Graham believed that the intelligent investor can achieve good result using either method.
However, if too much emphasis is placed upon timing – forecasting the market – the investor will end up focussing excessively on speculative activity and will achieve speculator’s results, meaning losses.
Graham believed that is possible for some people to forecast investment markets. However, he also noted that the idea that the general public can ever consistently make money from market forecasting is absurd (countless examples from the 1990s show that market analysts are often even worse at forecasting).
Why? Because in forecasting you are attempting to do what countless others are trying to do and do it better than them.
It is also common for many of us to bash fund managers for failing to beat the market. But to some extent, institutional investors are the market and therefore fund manager returns must reflect movements in the market and vice-versa.
The psychology of timing
The timing philosophy is problematic in that the speculator invariably aims to make a profit in a hurry. If the market does not respond in a short timeframe the speculator becomes agitated and exits the market, thus failing to succeed even if the investment selection was a good one.
In my book Get a Financial Grip, I discussed the concept of Dow Theory which hoped to enable investors to buy low and sell high by recognising the stages of investment markets and buying at the point of a special “breakthrough” on the upside (and selling at a corresponding “breakthrough” to the downside”).
From 1900 to 1960 Dow Theory seemed to fit the bill – it was sometimes possible to recognise at which stage of the investment cycle the markets were at and intelligent investors could in theory profit handsomely by timing the market.
However, upon closer inspection, it’s not quite so simple. Yes the Dow Theory gave a sell signal and thus would have allowed investors to be out of the market through the Great Depression. But from 1938 the Dow Theory would have had investors repeatedly dumping investments at reasonable prices and sending them back in to the market at higher prices.
They would have been better simply to buy and hold for nearly 30 years thereafter.
Graham also notes that investors invariably find it psychologically difficult to follow signals and triggers in the way prescribed.
The popularity of such theories seem to create their own vindication, but unfortunately, if you do what everyone else is doing, you will get the same results as everyone else.
Graham spent much time analysing market movements to ascertain whether shrewd investors could have moved ahead over the decades by looking to buy low and sell high.
What he concluded is that while market cycles are obvious in retrospect, there are sufficient changes through many of the market cycles to frustrate those who aim to time the market into entering and exiting at the wrong time.
For the majority of people, aiming to time the market in too cute a manner is no better than pure guesswork.
Where there is no bear market for a long period of time to move market prices back down, those waiting to “buy low” tend to get left so far behind that they dive into the market in desperation, often just as the market is peaking.
Psychologically buying low and selling high is much harder to do than you might think. Average investors are successful more often using a buy-and-hold approach.
The great Dow bull markets of 1949-1961 and 1990-2000 caught out many who were waiting to buy at low prices. They missed out on full decades of booming growth only to enter the markets just as they were peaking…
The perils of waiting for a crash
Graham cautions about sitting and waiting for low prices before making any investments. Doing so in itself must involve forecasting. What if you had listened to the forecasters’ property tip of the year of a huge crash in Melbourne real estate in 2001 (and again in 2003), and sold your home for $300,000?
More than a decade of your three score years and ten on the planet would now have passed you by and while others are sitting on a trifling mortgage and a property which has rocketed by around 80% in value, you would still be wondering whether to dive into the market at far higher prices.
It is for these reasons that often those with something of a mechanical approach to their investing finish so far ahead. Simply by following a plan of continuing to acquire quality assets over time at the best price they can and holding for the long term, investors take peace of mind in not trying too hard to be smarter than the market, and hold for the longer term.
If your time horizon is a long one of around 25-30 years or more “there is only one sensible approach” and that is to continue to acquire quality assets at the best price you can.
The biggest difference between an investor and a speculator is in their attitude to market movements: investors see an opportunity to buy, speculators panic about falling prices. The market is there to serve you, not to be your master.
This reduces transaction costs massively – particularly in assets upon which stamp duty is levied - and allows the investor to participate in the great bull markets when they do arrive (as they do in cycles).
Remember that investing is not a game of trying to beat others, it is a game of mastering your own behaviours in order to achieve your own goals.