The year is not yet over and we're already into our fourth major sharemarket crisis. This too shall pass, writes The Motley Fool.
Greece was the word. Now Italy is the word.
World sharemarkets remain in a heightened state of alert. Investors remain fearful. The dark memories of the GFC, and the devastating effect it had on people's wealth, are indelibly etched in people's minds.
Sharemarkets climb a wall of worry. Overnight on Wall Street, the climbers won, with the S&P 500 index (chart below) gaining 0.63 per cent. The Dow rose 85 points.
The party didn't quite make it to Australia. As of writing, our S&P/ASX 200 index is up only 0.3 per cent. Reversing an earlier rise, Fairfax Media Limited (ASX: FXJ) shares fell, as did David Jones Limited (ASX: DJS) and OneSteel Limited (ASX: OST). Risers included Lynas Corporation (ASX: LYC), Ramsay Health Care Limited (ASX: RHC) and the beautifully named Montezuma Mining Company Ltd (ASX: MZM).
Europe crisis over?
Wall Street recovered from an early slump as the European Central Bank's Juergen Stark predicted the region's debt crisis will be controlled within two years.
How full is your glass?
Either we're in for two more years of extreme sharemarket volatility. Or, we're close to the end-game, and we can start moving on from Europe.
Crisis upon crisis
We're already well into our fourth crisis of 2011…
1) The January floods, Cyclone Yasi, and $3 for a single banana.
2) The Japanese tsunami and Fukushima nuclear disaster.
3) The raising of the U.S. debt ceiling, and subsequent cut in the U.S. debt rating.
4) The current Eurozone sovereign debt crisis.
We reckon there's still time for at least one more crisis before the end of 2011. As to what it might be, it's anyone's guess.
As we mentioned in our special Saturday edition of Take Stock, you're dead in the water if you're trying to predict the actions of a Greek prime minister or the short term gyrations of markets.
Add Silvio Berlusconi to the mix of unpredictable politicians. The Italian prime minister took to Facebook to deny rumours that he was quitting.
"Reports of my resignation are without foundation."
The last days of Berlusconi
Berlusconi is nothing but a survivor. But this time, finally, he may be on his last political legs.
Amid growing uncertainty, Italian 10-year government bond yields hit 14-year highs of about 6.67 per cent yesterday, before easing to 6.54 per cent.
"The financial markets are clearly saying today that it is better to have Berlusconi out of the picture," said Gianpaolo Rivano in The Australian.
The highly respected Lex column in the Financial Times says "Italians should look at the upside of a post-Berlusconi era and get ready to grasp it".
Massive tax evasion aside, Italy's problems are different to those of Greece. Rome can afford to pay the interest on its debt. If it can sort out its collapse in credibility – by dumping Burlusconi and collecting taxes – this crisis too will pass.
Why does all this macro-economic stuff matter?
It doesn't really. But it's in the news, people read about it, and ultimately want to know how it effects them, and their portfolios.
A recent email from Alex is somewhat representative of investor's feelings…
"Great newsletter as usual.
As always, its a very optimistic view your taking on the current market. My only issue with this is the consideration that world markets have fundamentally changed and this may not be a blip like previous crashes.
I feel macro factors are more prevalent and relevant than ever and the current Euro situation needs more weight in individual stock buying.
In past I have bought at times like this, and am usually happy to go against the tide and ride the bumps with my portfolio, but this time seems different. As if this whole thing could turn on its ear and hammer the global economy like nobody can envisage. For the first time in as long as I've been in the market, I'm cashed out and can't decide what to do."
We left it to our very own Motley Fool Investment Analyst Dean Morel to reply…
Thanks for the kinds words. We're glad you enjoy the newsletter.
If it is different this time – it isn't – then cash will not save you. The best store for long term wealth during cataclysmic times is investments in well managed companies.
If the world falls in a hole, soaring inflation will decimate cash, while companies with pricing power will maintain their value.
When I look back through history I see many times that were as bad as now and some that were even worse. We are now in a period of deleveraging. This occurs once or twice a century and the world will find a way to muddle through.
Remember there is no need to make a big decision between either cash or shares. A patient accumulation of great companies when they are cheap always reaps just rewards, just as they have in the past for you."
Wonderful advice, as ever, from Dean. When all around are panicking, he really is a picture of calmness. We're lucky to have him on our team.
Don't try this futile venture
Macro events are driving these markets, for now anyway. But ultimately, great stock-picking will drive your investing returns.
Trying to predict where the market will go next week or even next year is for the most part a futile venture.
However, from time to time, like in early October when we were banging the buy drum, the markets move far enough one way to allow us to more confidently predict future returns. Likewise, if markets or individual companies become overvalued we won't hesitate to call them out. We are not one-trick ponies.
Our goal with Take Stock is to help guide you through the day to day, week to week movements of the sharemarket. Controlling your emotions is one of the greatest challenges to generating true long-term wealth.
Don't fall for this simple trap
A weekend article in The Australian Financial Review reminded us…according to Vanguard, the average U.S. share fund returned 11.6 per cent between 1988 and 2007, yet investors only received 4.5 per cent.
The reason? They fell for the old schoolboy error of buying high and selling low.
You won't find Dean falling for such a trap. On the contrary, he positively encourages a market crash, relishing the prospect of picking up quality companies on the cheap.
Subscription newsletter update
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We like to see ourselves as one of the few who write the truth about financial matters. Judging by the pure volume of responses, and some of the horror stories we received, it seems like many people are planning on joining us for an educational, enriching and amusing ride. We're sure you won't de disappointed.
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