The Australian share market suffered one of its worst days in a long time yesterday. At the closing bell of Monday's session, the S&P/ASX 200 Index (ASX: XJO) had crashed 2,85% lower to 8,599 points. That was after closing at 8,851 points on Friday and getting as low as 8,457.2 points (down almost 4.5%) during intra-day trading yesterday. Needless to say, were are a lot of people selling their ASX shares on the market on Monday – far more than are buying.
This market-wide sell-off could well continue today. As such, many investors might be preparing to hit the sell button as soon as the market opens.
It is always tempting to follow the crowd and sell your ASX shares amid this fear. For one, there always an evolution-induced comfort in moving with the crowd. For another, the temptation to sell a stock that has already lost you money 'before it goes down any further' can be hard to resist.
Yet I'm here to tell you that selling your stocks in a week this this one is almost always a mistake, and one that could cost you more money that it saves you.
Most of the time, markets behave rationally, assigning valuations based on a company's expected future profits and cash flows. But occasionally, this rationality is overtaken by emotion, usually fear or greed. An excess of greed tends to builds up over months into what's commonly called a bubble. The 'dot-com crash' of the early 2000s is a great example of how this usually ends.
But fear is the emotion that has clearly taken over investors' minds this week. Unlike greed, fear can suddenly consume a market, often sparked by some kind of catalytic black swan event.
Image source: Getty Images
War roils ASX shares as investors sell
Enter the US-Iran War. Markets were certainly not expecting the major disruption to global energy supplies that this War has resulted in. And it has been major. Brent crude oil went from around US$82 a barrel at the end of last week to over US$110 on Monday. It cannot be overstated how much of a game-changer this could be for the global economy, given the importance of oil and its derivatives as an input to almost every kind of economic activity.
Hence the fear. Investors have cause to be fearful. However, fear isn't a very good reason to just sell one's shares. When we buy a share, we should be aiming to purchase a piece of a company that is growing and will continue to grow for the foreseeable future. I like to compare it to buying a house in a suburb with good growth characteristics. That suburb might have issues form time to time. A street might be closed for repair. A house on it could burn down. Vandals could graffiti a wall or trample a neighbourhood garden. The local pub might close for a few months for a renovation. All of these issues can cause short0term pain for residents. But none will conceivably damage that suburb's long-term desirability.
Keep your eyes on the horizon
It is the same on the share market. Yes, companies could feel acute short-term pain from this latest Middle East war. But the ASX has seen far worse. After all, the 21st century has already seen many wars, a global financial crisis, a dot-com boom and bust, and, of course, a pandemic. Yet it has managed to come out of the other sides of all of these events to reach new record highs. I'd be happy to wager that this time will be no different.
So don't sell your ASX shares this week because oil just spiked. Instead, do what Warren Buffett would do and try to buy shares of top companies trading at what might be temporarily cheap prices.
