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We Love Falling Markets, And You Should Too

At last, we have some volatility in world share markets.

Over in the U.S, last week we had the S&P 500 slumping 1.6% Tuesday, soaring 1.8% on Thursday, and falling 0.74% on Friday.

The Australian market was somewhat less volatile, surprisingly so because our markets are joined at the hip with U.S. markets. Still, when you consider our index is dominated by BHP Billiton (ASX: BHP), followed by the big 4 banks, it’s not too surprising.

Where they go, our index goes. Boring. Why can’t the Australian market think for itself?

That’s not to say boring isn’t a good thing. It can be, over a long period of time. Just ask any shareholder, like my parents, who bought Commonwealth Bank (ASX: CBA) at its float price of $5.40 back in 1991, and reinvested all dividends all the way until today.

[A note for our legal people…Commonwealth Bank has been a great past performer. We don’t know how it will perform in the future.]

Boringly Wealthy

We like boring when it leads to long-term wealth. In fact, there have been plenty of studies show slow and steady generally wins the wealth race.

You can probably trade your way to your millions, for example using margin and trading CFDs and the forex market, but you’re more likely to lose everything at some stage.

Remember the wiz-kids at Long Term Capital Management? Using massive amounts of leverage, they were initially enormously successful with annualised returns of over 40% in their first years.

But it all went wrong in 1998, when in one of those inevitable “once in a lifetime” events, it lost $4.6 billion in less than four months following the Russian financial crisis.

Have you ever noticed how “once in a lifetime” events come about more frequently than the lifetime of a human? For all our brain-power, us humans have an amazing habit of conveniently forgetting past painful experiences.

Two Years of Bull

How long before we forget the pain of the great stock market collapse of 2007-8? I’d guess we’re forgetting at the fastest pace ever. Almost 2 years of an unadulterated bull market helps, with U.S. markets up 100% since their March 2009 lows.

Here in Australia, we haven’t been so lucky. Our main index is up ‘only’ 55% off its GFC lows. Still, we’ve got 5% unemployment, house prices at near record highs, and can earn a 6% risk-free return by leaving our money in the bank. Americans would die for such an economy.

Thanks China. And thanks Queensland and Western Australia for all your coal and iron ore.

Can you imagine what Australia would be like if we had 9% or 10% unemployment? It doesn’t bear thinking about.

Doom and Gloom

Whilst on the topic of doom, as ever there is no shortage of reasons to be pessimistic.

A flick through the morning newspapers, or an edition of the ever-dire Today Tonight will fill you with more than the required dose of daily despair.

Focusing on what matters to us as investors, take your choice from the following…

  • Chinese growth to slow from an average of 11% per annum over the last 5 years to ‘just’ 8%.
  • Libya.
  • $100 oil, and what it means for the economy. Petrol prices now at over $1.50 a litre transfer a little of the Libyan pain directly to our hip pockets.
  • Australian house prices overvalued by 56%. (More comment on this to come)
  • Fears of a commodity bubble, with some saying the price of iron ore has peaked, and others saying the copper market is ruled by speculators and has detached from fundamentals.

I could go on. There is always a reason to worry. There are always reasons not to invest in the share market.

It could be worse

What if one of those “once in a lifetime” market meltdowns was just around the corner? What if Collingwood or St George do win back to back flags, or England does win the cricket world cup?

Life will go on, except for the leveraged and overextended few. As sad as it is for them, their demise will also be inevitable. What are people doing thinking they can outwit investment bankers in foreign currency trading?

Prices can and do also go down. It’s just we’ve forgotten, in record time, just how far and quickly they can fall.

Here at The Motley Fool, we embrace volatile markets. High volatility often means lower share prices.

Embrace the fear

Rather than fear lower share prices, long-term investors, with a long investing horizon ahead of them, should embrace them.

That said, we are sensitive to the pain lower share markets can cause to those nearing retirement or retirees.

As Warren Buffett has said…

“We want to do business in a (pessimistic) environment, not because we like pessimism but because we like the prices it produces. It’s optimism that is the enemy of the rational buyer.”

Roll on the volatility.

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