Sorting Fact From Fiction
As we all know, we live in the information age which has had as great an impact on our lives as the industrial revolution had on our antecedents. There is so much information out there, much of it contradictory, that it is at times difficult to sort through it all. This is no less so in the area of investing.
Much of what we read in this area is either guesswork or opinion masquerading as fact. Much is ill informed, sensational in nature and in some cases designed to lead a person to a favoured conclusion. So what should you take notice of?
There is no doubt that markets go in cycles, those who say ‘it’s different this time’ are wrong. Sure the circumstances may be different as might the causes but in the long term, the outcome is always the same. The hardest part is stripping away the emotion and looking at the cold hard facts. It is an unfortunate fact that the doomsayers amongst us get the most press. Nothing sells newspapers like bad news!
Let’s look at the share market as an example. The Australian share market has fallen about 33% over the last year, but it is up 174% over the last 10 years. In the last 50 years of the Australian share market, there have been 13 years when a negative market has occurred, but there has not been one 10 year period which has been negative. It is laughable to suggest as some have that the sharemarket is doomed, that it will never come back and investors will lose all their money.
Consider for a moment what they are saying. Who really believes that the Commonwealth Bank will lose all its depositors or that the bulk of its loans will default? Do you really think that people will stop buying their groceries at Woolworths from which the bulk of Woolworths’ income is earned? Do you think it likely that demand for BHP resources will stop? Do you think people will stop using Telstra to make calls, or shopping at Westfield, buying Rio Tinto’s resources or manufacturers will stop using Toll Holdings to transport goods to market?
There is no doubt that even the best of companies will lose revenue as the economy contracts and this will affect prices. The banks may have increased defaulters and demand for our resources may reduce, which will lead to reduced share prices. Sure some companies are going to fail and others will take a long time to recover. But all this will pass.
Sharemarkets run on fear and greed. At the moment fear is gripping the market and this is forcing the market down further than is warranted on the information available. Inevitably this will wash through the system and rational thought will come to the fore.
Try therefore to look at the information available without the hype and emotion and look at the evidence. It is not different this time. In investing it is not about what happens today but what happens over the long term. Investing is not about getting rich quick. It is those that buy good companies now when prices are low who will benefit in the long term.
POSTED: 06-Nov-2008
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