Your success as an investor is largely defined by time in the market, not timing the market.
Yet the latter, attempting to profit from cycles through buying low and selling high, consumes much of most investors' time and resources.
Indeed, predicting market swings and short-term share price movements is a mug's game.
However traders and market timers use a number of anecdotal barometers to predict an impending market crash.
For example the proportion of shares being shorted or being bought on margin are used as a rough guide to suggest the bull market is coming to an end.
Today, The Australian Financial Review reports Global M&A activity has, "burst through the $US3 trillion threshold for the first time since before the financial crisis."
The USA is the single most dominant country for increased corporate activity, with $US1.43 trillion worth of deals in the past year. Asia Pacific has produced $US1.75 trillion worth.
The catalyst for more acquisitions is attributed to a lower weighted average cost of capital. If that sounds like gobbledygook to you, you're not alone. It's simply the average return of what investors, banks, institutions and so on, expect to receive on their money.
Obviously, it's influenced by interest rates (i.e. the higher the interest rate, the more it costs to borrow, the more return investors demand on their money).
As a result of the US Federal Reserve's ultra-low (near zero) interest rates, the cost of capital for US public companies has fallen from 9% to 6.5%, since 2011.
That means investors (and corporate managers) can justify the purchase of companies that would otherwise be unviable.
For investors when the cost of money is lower, shares in reliable companies such as Telstra Corporation Ltd (ASX: TLS), BHP Billiton Limited (ASX: BHP) and Woolworths Limited (ASX: WOW) look a whole lot more appealing.
That's why so many financial commentators believe stocks could be significantly overvalued today, at least from a historical point of view. Some are even predicting market crashes when interest rates rise!
Should you sell your shares now and avoid the losses?
As you can imagine, when interest rates turn around there will be a few losers. This can also spur on more M&A activity as businesses with high debt levels sometimes begin to struggle and savvy CEOs take advantage of the low prices.
However long-term investors shouldn't read into the increased corporate activity too much. At least no more than they normally would when analysing a security. If you receive broker reports or something similar, in order to make your stock picks, you should carefully scrutinise the growth and discount rates applied to your brokers' valuations on shares and ask yourself if they're reasonable. If they're using a discount rate of 6.5% and the stock looks undervalued – but not with a discount rate of 9% – ask them how they can justify a buy rating on it? Especially when interest rates are tipped to rise, it's far more prudent to err on the side of caution and be more conservative!
