What a start to the week! As I write, the Aussie market is down more than 2% as investors rush for the exits on ‘global fears’.
You’ve probably seen the headlines. A quick Google search for ‘wiped off’ — the subeditors’ favourite phrase when markets decline — delivered this:
Other than reinforcing the old adage that bad news sells (and these days, that bad news gets ‘clicks’), it’s true that it’s been a tough patch for sharemarket investors.
So in that sense, yes, this is serious.
Here at The Motley Fool, we don’t usually pander to short-term volatility — generally speaking it’s just background noise — but given the headlines, and some pretty extreme falls, we felt it prudent to offer our members some words of comfort.
On a day where most will be spruiking doom and gloom, we thought our Take Stock subscribers could also benefit from the same message — of which an abridged version follows.
Markets are (and have always been) seriously volatile. And investors have always faced a serious test of their temperaments when things get rocky. If you make the wrong moves in the face of fear and panic, you can cost yourself a serious amount of money.
So that’s why you’re receiving this email. Because on top of finding market-beating investment ideas, we want to help you become a better investor. And these are the times when you find out what sort of investor you are — and hopefully when you learn how to become a better one.
Nothing new in investing
There’s always someone trying to spruik the latest ‘trading system’, or encouraging you to actively trade (for a fee) — but it’s best to ignore them.
The basic fundamentals of good investing are eternal. The industries we invest in might be different, and the company names might change, but the key to great investing remains the same.
We make money investing, despite — not in the absence of — market volatility.
That’s one of the great lessons from history. Despite the Great Depression, two World Wars, the Cold War, Oil Shocks and plenty of other things besides, shares returned between 9% and 11% per annum, on average (depending on which index you use and what starting point you choose), through the 20th Century.
More recently, the ASX gained 11.7% per annum between 1984 and 2014.
And as I’ve said before — many times — that’s despite the 1987 stockmarket crash, the Asian Financial Crisis the Tech Crash, the introduction of the GST, terrorist attacks in the USA and Bali and the GFC, among others. And the market still delivered 11.7% per annum.
Put another way, if you’d have known, with perfect foresight, that any of the above events were on the horizon, it would have been very tempting to sell everything and keep your money under the bed, right?
If you had, you’d have turned $10,000 into, well, $10,000 — but thanks to the scourge of inflation, that money would have substantially less purchasing power. The investor who kept their nerve, despite all the fear and uncertainty, has instead managed to build real and enduring wealth.
But what if this is like 1987?
There are plenty of people predicting a crash — and maybe this time they’ll be right! Even a broken clock is right twice a day.
In October 1987, the markets suffered one of the worst crashes of all time. The US market fell 23% in a day. The next day, we followed suit with a 25% fall. Disaster, right?
Firstly, the market had been on a tear in the previous year. The ‘catastrophic’ loss set investors back almost exactly 12 months. Yes, that’s all. And they’d still more than doubled their money from three years earlier.
Next, while the crash was painful, anyone who was in the market in January 1987 was back to the same level by the early part of 1988. Indeed, the only people who were still underwater by the middle of 1988 were those who had only started investing — and had committed their entire investing worth to the market — in the middle of 1987!
But even if you’d put every dollar you had in the market on the day before the crash, you’ve still had a seven-fold return over the last 27 years!
In other words, even the unluckiest investor in the world has done very, very nicely since the peak of the ‘87 boom. And that assumes they didn’t add another dollar to the market since.
There is no way to know what’s going to happen this morning, this week, month or year. At all.
Anyone who tells you otherwise is either lying or hopelessly misguided.
There’s a pretty good chance it’ll be a bumpy ride — because it always is! Volatility is the price of entry.
At present, all of our subscription services are handsomely beating the market. And yet, we’ve spent no time trying to predict the short- or even medium-term share price movements — because it’s a mug’s game.
The tenets of great investing are simple. We find quality businesses. We buy them at reasonable prices. We hold for the long term. Period.
We can’t know what the future will bring. But we can apply timeless investing rules and put ourselves in a position to do very, very well.
Just look at the chart below and see if you can spot the 1987 — in the fullness of time, it’s almost inconsequential. Similarly, in the years ahead, the current volatility will likewise seem inconsequential.