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Beware
the Share Market Bears!
A brief summary of
why we should beware the bears
("The 10 Key Lessons for
Investors and Traders")
Lesson #1 - Property values - they rise and they fall.
These will
probably fall every decade or two.
Some people have extensively studied the real estate cycles globally,
and have concluded that real estate pricing runs in cycles of some
where between 17 and 21 years, with about 18 years being the average.
It is beyond the scope of this material to try to explain this or
justify it. But let me refer you to the research and writings
of Phil Anderson of Economic Indicator Services at http://www.businesscycles.biz/.
Based on material like this, as well as other earlier researchers and
authors, there is a lot of evidence to support the theory of real
estate cycles. Phil has put together the details of the 24
hour real estate cycle clock, as well as a lot of other evidence, in
his 2008 book "The Secret Life of Real Estate and Banking".
The challenge for all of us is to be aware of these cycles, and to
anticipate them so that we don't get caught up in them.
Lesson: Be wary of over-priced property. Do not over-leverage borrowed
funds against over-priced assets. The trick here is to know
when the cycle is peaking. Back to Top...
Lesson #2 - Economic Cycles and stock market
corrections.
There are various economic
cycles underway. And we
will have major stock market corrections
periodically, and probably an economic recession, at least every 18
years, and very possibly every 7 years.
If you look back in time, you can see that there are stock market
corrections every few years. If you have been following the
markets for at least ten years, you will be able to recall previous
stock market corrections.
It is also possible to see that the major corrections are
pretty much in line with the real estate cycles described in Lesson #1
above. If you study the real estate cycle phenomena, you will
see the relevance and the relationship between them.
Lesson: When a stock market correction is looming, the idea is to move
share-type investments towards a cash position.
How can you do this? How will you know when to do
this? There are clues in the market. The study of Technical
Analysis is the key to this. Back to Top...
Lesson #3 - Bear markets - share
markets do fall (a long way).
The share market can fall
as much as 30%+ "from a recent peak" at least once each decade, and
maybe twice in some decades. This is
fact. As an investor you can either tolerate this plunge in
investment value, or you can use it to advantage to limit any losses,
and maximise your gains.
You could move share-type investments towards a cash position, to
minimise your exposure to the share market. But how do you know when to
do this, and when to revert to shares again?
Some people take advantage of bear market conditions and make money
when the market falls. They can do this by, for example,
shorting stocks or shorting the index using CFDs (for
example). BUT, be very careful with this type of strategy, because
there are things called bear market rallies that can mislead the unwary
investor.
It does not matter whether you call it a bear market rally, or a dead
cat bounce. Until the bear market is declared to be finished, these
temporary up-turns do happen. They can take you by surprise, and they
can turn a winning position into a losing one.
In the US between 1930 and 1932 (about the time of the so-called Great
Depression), there were 5 bear market rallies of between 20% and 35%,
and they lasted for an average of 35 days. It is so easy to think that
any of these bear market rallies are signaling the end of the bear
market; only to find the bear market continue another downward
leg. So take care.
The research for this information eventually led to
a detailed
analysis of Australian Bull and Bear Markets over two decades
(and even more details are available for my Toolbox Members).
Lesson: Watch out for the bears. Back to Top...
Lesson #4 - Financial advisors, brokers, bankers.
One important thing to
remember about making a decision about something, is that the decision
is made based on information that is available at the time. Over time,
the available information might change, making a recent decision no
longer the best decision.
When it comes to financial advice, your own financial advisor might not
be right 100% of the time.
Some financial advisors have been saying things like: "You
have your
investments for the long haul... Don't worry, prices will recover
(eventually)...". And this is true - they will recover -
eventually!
But let me say that there are many of us who take these comments with a
grain of salt, and we liquidate our investments at appropriate
times. Some bear markets fall by about 30%, and can take 5
years or more to recover back to where they were before the
fall. Many of us switch our investments to cash when a bear
market is nigh, and we don't lose capital value. Once the
bear market has passed, we start to move back in again. Our returns
immediately after the bear market bottom might not be as great as the
improvement from the market bottom; but we have not lost anything to
start with.
Lesson: Don't believe absolutely everything that you hear. Healthy
scepticism is, well, healthy. Back to Top...
Lesson #5 - "Timing" the market?
or "Time in" the
market?
Contrary to popular
opinion, you can "time the market".
What is the issue here? What does it all mean?
Well, "timing" the market refers to the situation where we carefully
time our entry into the market, and we time our exit from the
market. We do this in an attempt to maximise profits
and minimise losses.
"Time in" the market is similar to the
age-old adage of "buy and hold"
(see Lesson #10 below). That is, by spending a lot of time
invested in the market we can ride out the highs and lows, and
hopefully win in the long term.
Some experts convincingly say that it is not possible to "time
the
market". They say that it is the "time in the
market" that is
important. They go on to say that if you try to time the
market, and if you miss out on some of the "best" days in the market,
then your returns are limited.
What they don't tell you is that it really is possible to avoid the
"worst" days in the market, and to avoid significant losses. In this
way you can potentially have much better returns.
Some of these experts might have ulterior motives for you to leave your
monies invested with them, rather than take your cash and park it some
where else.
Frank Watkins (in Perth, Western Australia) sums it up
nicely in his book "Exploding the Myths".
Lesson: Many people do "time the market" to great
benefit. The trick
here is to understand how to do it. Back to Top...
Lesson #6 - Your investments and capital-protected
schemes -- safe?
Are your investments safe?
Are capital-protected schemes safe?
Well, your superannuation and other investments can at times fall as
much as 30%! But the good news is that they don't
have to!!
Many people in Australia have their superannuation monies invested in a
super fund where there is a choice of asset class - eg. cash, bonds,
Australian shares, overseas shares, and property. By default,
many super funds automatically invest your money in a so-called
"balanced" portfolio with a weighting of about 60% to70% in Australian
shares, and the rest spread across other asset classes. This results in
exposure to the fluctuations of the share market.
Many people in the later years of life move their money from an
aggressive asset allocation like shares to a more passive allocation
such as cash and bonds which is more "capital guaranteed".
BUT, there is something that many people either don't realise, or they
choose to ignore for some reason. For most of us, it is
possible to "switch" your invested superannuation within one super fund
from one asset class to another.
For example, in early 2008, I switched my superannuation from a geared
shares asset class across to cash and bonds. So guess how
much value my super lost during the bear market of 2008 and 2009?
And as for the capital-protected schemes that advertise to protect your
capital. Make sure to read the fine print. Because some of these come
at a cost (like higher interest rates or fees). Or some of them at the
current time have been impacted so badly by the GFC environment that
they will return exactly the same amount of capital that was invested
with them - but in a few years time with absolutely no interest
return. That is, an investor in these schemes might as well
as put their money into a bank account returning zero percent interest.
Lesson: Sometimes things are not as they seem. It is important to read
the fine print (the Terms and Conditions). Back to Top...
Lesson #7 - Leveraged investments and derivatives (eg.
CFDs).
Leveraged investments and
derivatives can be safe under certain conditions. Many people invest in
a variety of financial instruments (eg. CFDs, options, warrants,
currencies). If there is not enough care taken with these, they can be
disastrous. Losses can be magnified - in fact hugely magnified! It is
possible to lose a lot, lot more than you started with.
When you buy shares in a company, the maximum amount of money that you
can lose if it all goes sour is the total amount of money that you
invested. However, with leveraged instruments like CFDs, or with margin
loans, you are only putting up a fraction of the total value of the
item you are buying. If things go bad, then you can lose all of the
money that you invested (which is only a fraction of the investments
original value), PLUS you could owe a lot of extra money up to the
total real value of the investment.
BUT, under the right circumstances, each of these investment methods
can potentially be safe - that is under
the right circumstances! But this
is not guaranteed, and it can be hard work.
You need to understand the investment product you are using, and tread
very carefully. Take appropriate precautions to help prevent losses.
Lesson: If you don't understand the rules of the game, then don't play
the game. Back to Top...
Lesson #8 - Margin lending - can it be safe?
Margin lending can be safe
over the long term under some circumstances.
Some people take out a margin loan, and borrow funds to the max so that
they can highly leverage their available capital. Some people use the
borrowed funds to buy an investment (like shares) for the long term.
And then they park the investment and forget about it. And
they might pre-pay a year's worth of interest expense to gain a tax
advantage.
But, if the value of the shares they are holding starts to drop in
value, then warning bells should be ringing to take some evasive
action. If no remedial action is taken, then a calamity might be hiding
just around the corner.
If using a margin loan, also beware of the LVR (Loan to Valuation
Ratio). If you are borrowing more than about 50% of the total value of
the portfolio, then you are potentially skating on thin ice. A value up
to about 70% is getting dangerous and would need close attention and
active management. A higher value is very dangerous.
Lesson: Using a margin loan to buy and park shares might work in a bull
market - with the right precautions. But beware the
bears at the end of the bull market. Back to Top...
Lesson #9 - Can investments really fall 90% or more?
Can investments really
fall 90% or more?
Yes, this can happen, so take care and look out for the warning signs.
There is a long list of recent examples of companies that plunged in
value by 70%, 80%, and even 90%. And some of them went under with 100%
of their value gone. A list is in the hand-out notes.
It might be possible to do the detailed analysis to identify these
companies yourself. Or you could rely on expert advice about which
companies to invest, and which ones to avoid. You can also
invest funds with caution. A technical analyst would
watch the price charts and might invest but with
appropriate stop loss positions in place.
Lesson: Take care with your investments, and avoid the
bad performers. Back to Top...
Lesson #10 - The old "Buy
and Hold"
strategy is dead!
There are many people
these days who buy shares in a company with the intention of holding
onto them for the long term - "it's a long term investment".
Perhaps they have fallen in love with the company, and perhaps they
will stay loyal through thick and thin. But would they sell these
shares if they knew that the company was about to go bust?
Perhaps they just don't want to be bothered with reviewing their
investment. Maybe they don't know how to review the performance of the
investment, and how to take remedial action if something goes wrong.
Maybe they just don't have the right tools to monitor the performance
of their investment portfolio.
Or perhaps they have been tricked into thinking that
the dividend income will keep them in front. Sadly, this is a myth.
Whatever the reason, many people simply
accept this "buy and
hold" strategy. And they accept this same strategy with their
superannuation investments.
With the latest financial crisis, there are now some doubts
about the view that a diversified share portfolio that is held
over the long term will provide a sound retirement.
Well, every few years there are people who do this, and who lose a lot
of money. Some people say: "it is just a paper loss".
Well, when they need to cash in their investment because they need the
cash, then they will see how much of the investment is still left.
A key rule from Brainy's
Traders Creed says: "Preserve capital, and maximise
profits".
The buy-and-hold strategy is a good strategy during a bull market. But
it is potentially a recipe for losses at other times.
Lesson: There are times when the shares in some companies should be
converted to cold hard cash. Back to Top...
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Quick
Links:
The
research for this led to a detailed analysis of two decades of Australian Bull and Bear
Markets.
Robert runs
seminars from time to time:
Summary
list of seminars, workshops,
dates and
costs.
Share
Market Secrets seminar
formerly called my
Share Market Boot Camp seminar.
Blue
Chip Price Chart Secrets seminar
formerly called
Technical Analysis Introduction seminar.
And Robert publishes:
PLUS
Free downloads:
Robert's "The
Traders Creed" single page poster.
Robert's stock market "Gems".
Robert's "Lotsa
Web Links"
extensive list of web sites.
Other:
The Melbourne BullCharts
software User Group - meets monthly in Oakleigh for free.
The BullCharts User
Group Yahoo Forum resources.
The official BullCharts
software
web site.
Why
does Robert choose to use BullCharts charting and trading
software?
And don't forget,
the share market is like an elephant.
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Feel free to browse around my
Share
Market Toolbox, through the arsenal of weapons that you might
find useful as you attack the animal that we all call the Share Market.
And
watch out