The past week has been a tough one for many investors. The sudden, if inevitable, return of volatility woke many from their bullish slumber, as nervous traders tried to work out what to do — and whipsawing share prices were the result. The cause, if you’ve been asleep for a week, was some stronger than expected employment, wages and inflation numbers in the United States, which were released on Friday night, our time. All of a sudden, it seems, many in the market were confronted with what the rest of us had known was always obvious…
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The past week has been a tough one for many investors. The sudden, if inevitable, return of volatility woke many from their bullish slumber, as nervous traders tried to work out what to do — and whipsawing share prices were the result.
The cause, if you’ve been asleep for a week, was some stronger than expected employment, wages and inflation numbers in the United States, which were released on Friday night, our time.
All of a sudden, it seems, many in the market were confronted with what the rest of us had known was always obvious — that continued economic strength in the US would mean higher official interest rates (courtesy of the US Federal Reserve).
Yes, thanks, Captain Obvious.
And yet, that seems to have caught professional finance types by surprise. Now, to be a little fair, the “new news” seems to have been that rates would now increase faster than was previously assumed. And maybe, just maybe, to a higher eventual level.
And so, for three or four days, the market lost its collective marbles.
Or did it?
You see, one of the interesting things about auction-based transactions — and the sharemarket is largely just one long, continuous auction — is that pricing isn’t set by everyone who owns shares.
It’s set, only, by those who trade on any given day,
Assume for a minute that you owned shares in Kollymagnus, a Darwin-listed miner of a newly discovered mineral. The shares finished trading on the first day at $10 each. Then assume on the next day, everyone went to the Henley on Todd regatta. Well, everyone except the work experience kid at a broker’s office, and one guy who needs a few quick bucks to bet on the race.
Our hero, realising time is running out, decides to sell some Kollymagnus shares, to put a few bob in his kick. When the kid answers the phone at the brokerage, he’s asked what price Kollymagnus is trading at. Not too bright, he misreads the quote and confidently tells the punter the share price is $1.
Surprised, but keen to sell, the gambler gives the order: “Sell my 100 shares, quick”. That order triggers an alert on the iPhone of a day-trader in Bondi, who can’t believe his luck. He buys the 100 shares on offer, and no more trades happen for Kollymagnus that day.
Waking up in an alcohol-induced haze, and with a thumping hangover, 10,000 Kollymagnus shareholders from Tennant Creek to Daly Waters freak out. Not only have they returned from the race with one shoe and someone else’s jacket, but they’re now poor.
The market has decreed it. The value of their shares just fell by 90%. It says so, right there on the computer screen, and a call to their broker confirms it. The headlines only reinforce the problem: “$9 million wiped off the value of Darwin miner”.
And then something funny happens. At 9.31 Darwin time, the first trades are made for Kollymagnus shares. At $10.03 per share.
Which is, things return to normal. (Well, relatively normal, given no-one has ever heard of the Darwin Stock Exchange or Kollymagnus, let alone the new mineral it says it’s mining. But I digress…)
So what, dear reader, really happened? Was Kollymagnus really ever worth 90% less? Or did one trade by a desperate gambler simply give us that impression for a short time?
Because here’s the thing: if you think about the day-traders, the computerised trading, the speculators and the plain skittish — especially in times of sudden uncertainty — you have to wonder whether we should pay attention to the market movements at all?
You don’t get your house revalued every second, between 10am and 4pm (AEDT) every day. The cafe owner or local newsagent doesn’t have a business broker yelling prices through the front door every few minutes. There’s no LED display in my car, giving me a constantly refreshed price from the Australian Car Exchange, were I to sell the thing at that very moment.
And yet, we let ourselves believe that ‘the market’ is always and ever the arbiter of true value. Because? Well, because, in the absence of anything else, we’ve made a Faustian bargain that we will all, collectively, believe it.
And here’s exhibit B, C, D, and E: Think about the high point of the ASX before the 1987 stock market crash. Now think about the low point, post-crash. Which was right? Or the height and depth of the dot.com boom and bust. Or the pre- and post-GFC peaks and troughs.
They can’t — by definition — all be right. And once you realise that, it changes how you think about the market.
You stop taking market levels as gospel. You stop celebrating the short- and medium-term gains quite so heartily. And you stop despairing about similar losses.
You start realising that, as a measure of ‘value’, short- and medium-term market movements are largely just noise. Which is very uncomfortable for some people. After all, if you don’t have an index level to tell you what’s going on, what do you have?
The answer, of course, is a part ownership — a ‘share’, if you will — in a business. Hopefully many businesses. You share in the business success of the grocers, tech innovators, financial institutions and healthcare companies you own part of.
And while fluctuations in market prices are next-to-useless over the short term, they are very useful over the long term. Or, in the words of Warren Buffett’s mentor, Ben Graham, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
And when ‘voting’ isn’t compulsory, the results are often influenced by those who have the motivation (i.e. fear and greed) to vote. Is it any wonder we have price swings? But that just makes it all the more important to focus on the long term and leave the emotional ping pong to others.
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