Wednesday, September 2, 2015

Be Fearful When Others Are Greedy and Greedy When Others Are Fearful

"Be Fearful When Others Are Greedy and Greedy When Others Are Fearful" is Warren Buffet's famous quote. 

The market is really taking a dive currently due to the woes in China. Mr SMG and I have been accumulating stocks over many years now. I'm rather impervious to the ups and downs of the market emotionally. When it's taking a dive like right now, I just want to buy more stocks. I've been blogging publicly for six years now and all my investing strategies, thoughts and opinion has been there for the public to read and critique. So far, so good, really good.

The huge volatility that we see in the stock market over recent years have been in part due to economic reasons, swing traders, technology such as online trading, the ability to short stocks instantaneously and the average and ordinary Mum and Dad investors out there reacting out of fear. Margin loans and activated stop losses further compound the volatility. 

Central Banks, politicians and investors tend to turn the other way when it comes to acknowledging the intrinsic problems such as the US federal deficit and the Japanese deficit ballooning as opposed to shrinking or that most nations are struggling with growth, however, people get richer so there's simply more and more money out there being ploughed into investments.

Over the duration of the GFC subprime crisis I picked up a lot of stocks at ridiculously cheap prices. I haven't had time to follow the news intensely these last two years, so I'm not as well versed this time around in terms of forecasting how long the downturn will be for and when the recovery is expected, however Buffet's adage has worked perfectly to our benefit in the past and I fail to see why it wouldn't apply over the next hundred years. Warren Buffet is the investment version of the economist Adam Smith. 

Jessica Irvine published an article in the Sydney Morning Herald where she quoted Roger Montgomery, the private fund manager of $800 million worth of funds. "We've been a net buyer...we purchased some additional shares in Challenger and iSentia. Globally, we purchased some more Apple...When they're on sale, you get a bit more excited. Although you have to be selective- the outlook has deteriorated."

Montgomery is quoted as a follower of the value investor, Benjamin Graham who is famously quoted saying, "choose (sic: stocks) them the way you would buy groceries, not the way you would buy perfume...Individuals who cannot master their emotions are ill-suited to profit from the investment process." That is, don't be driven by emotion but be driven by values and the business/stock fundamentals.

Personally, I really dislike the whole doom and gloom mentality and those who constantly spruik that the sky is falling. If you keep banging on about the crash, doom and gloom happening, eventually you will be right. But meanwhile, miss out on the gains. If you had waited for property to crash 40% like how some economists were forecasting during the GFC, you would have sat on the sidelines while property has been appreciating in value. The Sydney median property price was approximately around $600k during the GFC and now the Sydney median property price is over $1m. 

What 40% crash? Short of pulling out that $400k from your back pocket, you could now be renting for life.

Another doom and gloomer quoted by Irvine is Damian McBride, former adviser to British Prime Minister Gordon Brown, "Get hard cash in a safe place now-don't assume banks and cash points will be open, or bank cards will you have enough bottled water, tinned goods and other essentials at home to live a month indoors? If not, get shopping." McBride appears to be watching too many seasons of The Walking Dead. One month only? Is there some sort of miraculous recovery after one month? Life goes back to normal after one month? All you'll end up doing is sitting on your boring old cash on the sidelines and when the market bounces up again eventually, you'll end up missing the entry points and back to where you started, over paying for stocks just to enter the market again. 

There is substantial difference between the market volatility during the GFC and the market volatility right now triggered by the Chinese stock market and their trading conditions. In the US, the GFC sub prime crisis was triggered by many shifty and dodgy practices such as junk bonds being rated AAA, collapse of investment banks holding these sub prime, poorly rated AAA bonds, pension funds collapsing due to investing in sup prime loans, the ability of US mortgage home owners able to walk away from their mortgages without future repercussions like how the banks in Australia can pursue mortgage debts. 

Approximately 1% of Chinese stocks are being held by foreigners. The global economy is affected if the Chinese economy is depressed due to the negative wealth effect on the Chinese population(if people have lost money in the stock market, this will negatively affect consumption which will affect economic growth which will affect the stock prices). If China reduces their demand for raw, mined resources, this will affect the world. However, this will be a gradual process and not instantaneously like investment banks in the US having their portfolio revalued during the sub prime.

Having illustrated all that, does McBride expect banks around the world to collapse simply because Chinese shareholders have lost money? Or that Chinese consumers will spend less? China is a net exporter (unless things have changed since I have been out for these last two years) and thus, their economic growth and GDP is still hugely influenced by worldwide consumption of nations such as the US. 

There are so many rich and wealthy investors out there. Can you really see them parking their stash of millions and billions in term deposits and cash for the next decade? They have so much money that ultimately it will find its way back into property and shares. 

That's SMG's take on this Chinese stock market crisis. The outlook isn't exactly rosy but it's not at McBride's doom and gloom level either where anyone should be liquidating their stake in everything and pulling their funds out of the bank. His sort of 'advice' is what compounds problems and create liquidity crises and the collapse of banks by creating run on deposits.

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