How smart ASX sharemarket investors can beat fearful fund managers


The ASX proves ‘surprisingly’ resilient, with the All Ordinaries index falling less than 10 points. Look who’s fearful now, writes The Motley Fool.

It was only yesterday when we said we’d welcome a bout of sharemarket volatility.

It was as if the investing gods above were smiling on us, as overnight the Dow lost 71 points to close at 13,126.

Doing the damage in the U.S. was durable-goods orders coming in below analyst expectations and worries that Portugal and Spain will need to restructure its debt, heightening worries of slowing global growth.

Volatility, and Europe…oh how we’ve missed you.

After months of worries over whether Greece would default, a bailout package was recently passed, and all seemed well in Europe.

Now new fears have arisen on the continent, as Portugal’s economy is looking weak, and investors fear it could default.

That’s a problem for Spain, as many of its banks own Portuguese bonds.

Fears picked up when Citigroup’s chief economist said Spain is likely to require an international bailout much like the one Greece had.

Look out below
Is it time to look out below? Prepare for the coming stock market crash?

Maybe.

Is it time to be fearful?

Never.

As an investor, fear and greed are your two biggest enemies. Fear means you sell out at the bottom of the market. Greed means you pile into shares, often using margin, at the top of the market.

How not to go broke
Whilst we’re talking about margin, our Investment Analyst Scott Phillips discussed the topic in our most recent update to Motley Fool Share Advisor subscribers. Here’s a brief extract…

Margin, or leverage can be alluring, but can also be dangerous to your wealth.

Warren Buffett has said…

“Leverage is the only way a smart guy can go broke.”

Part of the reason is in another quote, this time from John Maynard Keynes…

“The market can stay irrational longer than you can stay solvent.”

There are three key drawbacks to leverage:

1. Margin loans are expensive.

2. They can magnify your losses. Imagine having borrowed to invest in Billabong International (ASX: BBG), BlueScope Steel (ASX: BSL) or JB Hi-Fi (ASX: JBH) in the last few years.

3. They are subject to margin calls.

Even if your long-term thesis is correct, you can receive a margin-call (the requirement to stump up large licks of cash and/or sell some of your holdings) when the market is in a short-term ‘funk’.

That’s the time you want to be buying, but you may be forced to sell instead, to meet the margin call.

Overall, we’d suggest treating leverage with extreme caution.

Be the smart guy.

Don’t go broke.

Surprise!
Yesterday the Australian sharemarket jumped to its highest level this year, the S&P/ASX 200 closing at 4345.

The Australian Financial Review said it was a trading session that “surprised many traders and portfolio managers.”

The same publication went on to say…(with our emphasis)

“Fund managers rushed to get exposure to shares yesterday, fearing they would miss out on any further gains.”

There’s that word ‘fear’ again.

In one sentence, we’ve perhaps learnt why, according to Standard & Poor’s data, in the year to December 31 2010, about 80 per cent of active fund managers in Australian equities did worse than the index.

Fear is no way to invest.

Be the smart guy.

Dump your funds. Take control, and take responsibility for your own financial decisions. You’ll feel liberated, and hopefully, ultimately wealthier.

Another surprise
The ASX today closed relatively flat, the All Ordinaries falling less than 10 points. Again, it was a good performance given Wall Street’s overnight slump.

Was it more fearful fund managers buying? Who knows?

Late to the QBE party
Was it something to do with Morgan Stanley adding QBE Insurance (ASX: QBE) to its ‘best idea’ list, moving its target price from $14 to $15.30?

Probably not, but we couldn’t help but think Morgan Stanley might be a little late to the party.

Bank in mid January, Motley Fool Share Advisor Investment Analyst Dean Morel named QBE his top pick of the ASX 20, replacing Telstra Corporation Limited (ASX: TLS). The shares then were trading below $11. Today they are above $14.

Investing need not be rocket science, although it appears some ‘fearful’ fund managers might have us believe otherwise.

As Dean Morel himself says…

“Once you conquer your emotions, investing is in a large part all about probabilities. It’s like a game of bridge, chess or backgammon.

You need to be mindful of the cards or moves already made, but looking ahead as far as you can and anticipating moves is how the game is won.”

In psychobabble, it’s called chunking. We call it experience.

Be the smart guy.

Are you fearful of a coming market crash? Read This Before The Next Market Crash is The Motley Fool’s free report. We strongly suggest reading it now might save you thousands of dollars. Click here now to request your free copy, before it’s too late.

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