Read This Before The Market Crashes
Dear Fellow Stock Market Investor,On March 16, 2011, in The Australian Financial Review, Matthew Kidman of Wilson Asset Management said…
“The world has got problems and we are in unchartered waters, in that we have not had a secular bear market since 1987 to 1992, but that’s what we have now.”
That comment was made at the height of the Japanese nuclear crisis.
It was a scary time for investors. Japan’s Nikkei index had just suffered its third worst fall EVER, plunging over 10.5% IN A SINGLE trading day.
The headlines in the Australian Financial Review highlighted the fears…
“Nuclear crisis smashes markets”
“Shares fall to a seven-month low”
“$A hurt by wider economic jitters”
“Slowdown fears hit oil and gold”
“Japan disaster adds to global woes”
You get the picture.
But here’s the really weird thing…from the low point of the Japanese disaster, the S&P/ASX 200 index soared 11% over the next month.
Although the people of Japan won’t ever forget the massive earthquake, investors both here in Australia, and abroad, seemingly shrugged off the devastating and ongoing natural disaster.
They did so at their absolute peril.
Here at The Motley Fool, we’re generally not ones to preach doom and gloom. But we have to admit…we were more than a little concerned.
“Optimism is returning to the Australian share market, with eight out of 10 direct shareholders saying it is a good time to hold or buy shares…” said The Age and Sydney Morning Herald on May 4th 2011.
You’d reckon that was good sign, right?
Think again.
Mum and Dad shareholders seem to have a happy knack of buying shares when they are trading high, and selling them at the low point. And on May 4th 2011, the S&P/ASX 200 index was still riding relatively high.
Things are a lot different now…
The S&P/ASX 200 index has taken another battering in 2011.
In August 2011, the headlines and warnings were similarly dire…
World markets plunge on debt fears – The Age
Wall St in biggest plunge since GFC – The Australian
Markets tumble as investors run for cover – The Australian Financial Review
Shares on slippery slope as fears mount – The Australian Financial Review
Market massacre – Business Spectator
And then the coup do grace from the Australian Financial Review…
IS THE MARKET JUST TOO DANGEROUS FOR AVERAGE INVESTORS
Hold that thought…
You may have heard of the much promoted Myer (ASX: MYR) float?
About 60,000 investors bought shares, perhaps lured by a prospectus featuring no less than a reported SEVEN PICTURES of former Miss Universe, Jennifer Hawkins.
Floated at $4.10 per share, the gloss has surely worn off the Myer story. In the relatively short period of time since Myer was floated, the shares have plunged by close to 50%.
And, Myer’s future prospects don’t look too bright either. In September 2011, it expects its fiscal 2012 profit to drop as much as 10% on flat sales as the retail environment remains challenging.
It’s safe to assume the shares probably won’t be challenging $4.10 in the near future!
Can you see why we were concerned when we saw direct shareholders (i.e. Mum and Dad investors, just like you and us) returning to the share market?
Just like the Myer float, it just might have been the sign of a market top.
In the Australian Financial Review, Northcape Capital portfolio manager Steve Gliddon seemed to agree, saying…
“There is scope for significant downgrades, and I think there are a lot of them to come…especially next year, when earnings growth is expected at 20 per cent, which is unrealistic…there are very few areas of the economy that are strong at the moment.”
Also in May 2011, Charlie Aitken of Southern Cross Equities said…
“I believe the equity correction we fear is coming closer than we think.”
But for all the dire warnings, nobody’s telling you about the REAL THREAT facing investors like us right now.
Dollar for dollar, it could be 10 times deadlier than the worst “market crash” any forecaster can predict.
You probably know what it is…
That’s why…
We MUST keep this threat front and centre and make 100% certain we have the facts. Especially when it means turning the coming market “madness” into years of wealth-building gains.
There is ONE nagging question on every concerned investor’s mind… and that brings us one step closer to the REAL THREAT investors like us face today.
“Are we headed for an epic bear market?”
That shrill question is also ripped from the headlines. Our honest answer is “we don’t know.”
But even if the market slumps, as it did in August 2011, our view is it’s better to be buying shares when prices are low than to be piling in at the top of the market. Just ask Myer shareholders about how wealth destroying that strategy can be.
Taking it one step further, the warnings about the market being just too dangerous for average investors should have come when the market was riding high, not after it has already been battered down to what might prove to be bargain basement levels.
You see, unlike many other “fly-by-night” operators, the types who may promise the world but deliver hot air, The Motley Fool believes share market investing should be a lifelong endeavour.
So, for investors like you and us saving for retirement, we’d be better off ignoring all the hype, the predictions of a market crash, and instead stick to buying great companies at reasonable prices.
To sum up, The Motley Fool generally and genuinely thinks “the best time to invest in the world’s top companies is always RIGHT NOW.”
It’s such an attitude, and belief, that can help individual investors recover from a painful bear market.
I’m sure you can remember what the market has been like over the past 10 years — all over the shop.
The REAL threat facing us right now
It’s been a roller-coaster ride, that’s for sure. From 2003 to 2007, the S&P/ASX 200 had a truly magnificent and meteoric rise, soaring from 2,750 in March 2003 all the way up to 6,750 in October 2007.
In that glorious period, the local share market rose by a compound annual growth rate of 22%.
22% per annum!
To put that growth rate into some perspective, $50,000 growing at 22% per annum would turn into $1 million just 16 years later.
So what went wrong?
The Global Financial Crisis (GFC) is the obvious answer.
Without getting into the gory details of sub-prime mortgages, collateralised debt obligations (CDOs), mortgage backed securities and the mother of all bail-outs, there’s no doubt it was a devastating period for share market investors.
We’ve lost count of the number of people who’ve told us the big crash has sworn them off the share market for life.
Most times, the theme is the same – they lost BIG money after buying some high-risk mining penny stock right at the top of the market.
Even worse, some people even borrowed money to invest in such speculative stocks, in the process making the mostly costly decision of their life. Even today, they are probably still paying off margin loans, with absolutely nothing to show for it.
From October 2007 to March 2009, the S&P/ASX 200 plunged over 50%.
It was a painful period. Very painful. And scary. We’ve never seen anything like it in our 20 plus years of active investing.
But, we had seen market corrections before. We’d seen first hand the investor fear and panic as people saw the value of their portfolios disappearing before their very eyes.
So what did some people do?
They sold.
They sold because their margin loan providers forced them to sell.
They sold to recoup just some of their money, before it was too late.
They sold because some so-called ‘experts’ told them the market was headed even lower, and the world economy was going to the dogs.
They sold simply to end the pain.
In hindsight, we believe it was a mistake of monumental proportions.
By selling at the bottom of the market, thousands of hardworking Australians… many with only 10 or 15 years left until retirement… could have missed out on one of the great periods of wealth creation seen in years.
Just over a year after the market bottomed, the S&P/ASX 200 had soared close to 60% higher.
We can’t bite our tongues any longer…
Listening to these so-called ‘experts’ cost you money…
Rather than advising we buy shares when markets were bottoming, some doomsayers were telling us markets were headed even lower.
Or, almost as bad, some people may have tried jumping in and out of the market, and in so doing, they missed out on one of the greatest bull markets in history – and potentially millions in lost profits.
But you don’t have to take our word for it. Perhaps you’ve seen this remarkable chart from the USA, created with data from Fidelity Investments…
Source: Data from Fidelity Investments
The chart clearly shows how sitting out just the market’s 10 best days can cut your portfolio in half.
See how costly it can be to listen to these so-called experts, who claim they can help you time the market? Because the fact is they can’t.
We’ve learned that over 20 years in the business but, again, don’t take it from us.
Take it from John Bogle, legendary founder of Vanguard, widely acknowledged as the most respected mutual fund company in the world. Here’s what he has to say about market timing…
“After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has done it successfully and consistently.”
You may have heard about The Motley Fool co-founders David and Tom Gardner.
David Gardner is a dedicated growth investor with a legendary track record. He has a rare knack for identifying those rare companies with a paradigm-shifting product or service. Companies like AOL in 1994 and Amazon in 1997.
Tom Gardner — who also has a documented track record of success — prefers to dig into a company’s financials a little more. He fully examines the company’s books. He burrows deep into the numbers… digging out hidden liabilities… and sometimes, finding hidden assets the companies and Wall Street never seemed to know about.
And you know what?
Both approaches work, and both approaches have a place in your portfolio.
We’re proud to bring The Motley Fool’s investing strategies and philosophies to an Australian audience.
What you see with The Motley Fool is what you get. No dire warnings. No predictions of a market crash. No wild promises.
Just simply investing advice written in plain, understandable English.
Like the Gardner brothers, we truly believe investing to be a lifelong pursuit. There WILL be ups and downs, but we firmly believe the best way to create lasting wealth is to stay invested in the share market for the long-term.
In simple terms, it means you won’t be missing out on the best shares and the market’s best performing days…
We’ve subscribed to dozens of investment newsletters over the years. You may have too.
You’ve seen how they come at you with laundry lists of model portfolios, sector calls, and rapid-fire hot share tips. Or worse, macro predictions of $200 oil, skyrocketing interest rates, the sub-prime collapse, the housing bubble…or the imminent market crash.
And in so doing they could be methodically ROBBING US of millions in profits!
If you’re like us, looking for honest, independent advice to help you become a better investor, you’re in the right place. We think it’s advice that could help you safely and steadily accumulate real wealth over time, whatever the market is doing.
A market crash may not cost individual investors like us millions… but sitting out the next bull market will be a huge mistake, just like it was in March 2009…
Take Stock
If this is your first encounter with The Motley Fool, let us introduce ourselves.
My name is Bruce Jackson, and I’m the General Manager of Motley Fool Australia.
Way back in 1997 I co-founded The Motley Fool UK. From modest beginnings, I built up the business into one of the most successful and recognised brand names in the UK financial sector.
In my 14 years at The Motley Fool, I’ve has written thousands of articles for the UK, US and Australian websites, and in 1999 also co-authored the best selling The Motley Fool UK Investment Workbook.
Now living back in my native Australia, I bring over two-decades of hands-on investing experience to the Australian public.
Investing Advice You Really Can Understand
The Motley Fool website hosts a range of educational content, written in plain English that even your six year old could understand, with the sole intention of helping you take control of your own money and make better financial decisions.
In the next few days, you’ll start receiving our free email, Take Stock.
As we all found out during the global financial crisis (GFC), the world of money can move very quickly, sometimes in ways we least expect it, or want it.
Take Stock breaks through the noise and the jargon to tell you exactly what is happening in the world of money, and global share markets, and how it might affect your wealth today.
As you would expect from The Motley Fool, the opinion and advice is down-to-earth, easy to read, incisive and humorous. We aim to tell you when it might be the right time to buy, the right time to sell, and which shares to buy or sell.
We hope you’ll quickly come to realise Take Stock and The Motley Fool are essential daily reading.
It’s our passion at The Motley Fool to help individual investors like you build lasting wealth with the very best investments.
Once again, we trust you enjoyed and learnt from this special free report, and we’re thrilled to have you join us on this long and hopefully prosperous investing journey.
Yours Foolishly,
Bruce Jackson
General Manager, Motley Fool Australia
Employees and contractors of The Motley Fool, including Bruce Jackson, may have an interest in shares mentioned in this free report. These interests can change at any time. The Motley Fool has a clear and concise disclosure policy.
Last updated: 15th September 2011
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