The World is Full of Turbulence Right Now- Creating Opportunities!
“Be fearful when others are greedy and greedy when others are fearful,” a quote from the great value investor, Warren Buffet, the owner of Berkshire Hathaway.
Even if you have not heard of Warren Buffet, even if you have heard of him and you don’t like his methods of investing, you must admit that he has built up some wisdom over the last 57 years since taking over Berkshire Hathaway and building it into the holding company that it is today.
Currently, at time of writing, the ASX 200 (the top 200 listed companies in Australia), is down 13% year to date [1], the S and P 500 (the top 500 companies in the US) is down 25% year to date [2], displaying the fear that we are seeing across the world.
The fear is well-founded, we have no idea what is going to happen next, just look at last week, whereby the British Pound crashed and the central bank had to step in to buy up bonds (bonds are like a loan, being handed out to the government) to save the UK from certain financial catastrophe. [3]Which would have reverberated around the world, even hitting us here in Australia.
Investors are uncertain about what the future entails, and when investors are uncertain, they become fearful, it is known that humans have “loss aversion,” whereby we experience more feelings and emotions from losses than we do from gaining something. [4]
Which generally speaking, losses compound on each other to the point where more people become fearful and will sell down on investments, so that they don’t lose more on their portfolios. Some investors are in need of the cash, therefore they are selling down, due to a myriad of reasons, however most would be selling due to fear of loss right now.
Moving cash from equities/shares to the safe haven of bonds and cash, especially as the cash rate increases.
But, and this is a big but, the companies that people are selling down are still performing, still running their business as usual. The companies are still making money, some are still profiting and handing out dividends, some companies are still pumping into research and development to improve products to become the next Tesla.
All this fear of losses and selling down of assets, it is finally creating opportunities for those willing to do the hard yards and research the companies that are doing well, to understand the companies that are going to do really well in an inflationary environment.
Now, this is not an article to tell you that you should start buying the S and P 500, because it is down 25% this year. No, it is an article just stating the facts, because no one knows just how bad things will get. Or whether the fear is founded on nothing at all and we will see the share market bounce back quickly, as it did in 2020 due to COVID-19 (the bounce back came due to the massive amounts of money that has been pumped into the system, called “quantitative easing”).
However, if you are interested in doing the hard work, and being greedy when others are fearful, you could find some absolutely great companies that are on a fire sale right now.
The worst may not yet have come, we could see further falls in the share markets, but depending on your circumstances and your risk tolerance, there is no reason why you should not be doing your due diligence right now and sifting through the wreckage to salvage some gold.
And just for your knowledge, across time, the share market has always done well, the great companies of the US, Australia, China, Europe, Africa have continued on and forged ahead. Even through wars, famine, droughts and other natural disasters, because nothing can stop human nature. As long as there are still humans on this Earth, there will always be a push for the advancement of the human race, HOPE is what keeps us moving forward.
Hope of course will not see a company or the share market do well, but history shows even after Black Monday, where the Dow Jones crashed by 22.6% in a day, that it will recover. And generally speaking, will do better over the long term, because human progression still keeps marching forward. In the case of Black Monday, half of the losses on that day were made up in just under two days, and it surpassed its previous highs two years later. [5]
Which is why understanding this one fact, that owning a stock is owning part of a company, will help you in these turbulent times. Owning a company or the S and P 500/ASX 200, it is not a gamble if you understand the company and history, if you do your research and hold for the long term, short-term fluctuations will not concern you.
Still, you need to do your due diligence, not just put down money on some company because it has been doing well over the last twelve months, that is when gambling really does come into play.
**If you are unsure of how to value a company and don’t know what to search for in a companies annual statement, that is when talking to a financial advisor could truly help you, or talking to an educated fund manager or investment broker.
I want to leave you on this note, on the 2nd of January, 1950, the S and P 500 opened at 16.660. [2]
Just 72 years later, the S and P 500 is sitting at 3,587, which means you would have $219,309.34 in terms of 1950 dollars if you invested $100. [6]
Not a bad return for just $100. Not to say that historical returns will replicate again, but still, we can learn from history and understand it better, to put ourselves in a position to make better decisions.
Until next time,
Take Back Control
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[1] - Yahoo Finance- search asx 200 (charts)
[2] - Yahoo Finance - search s and p 500 (Charts)
[3] - https://www.barrons.com/articles/bank-of-england-federal-reserve-rate-hikes-51664403126
[4] - https://www.apa.org/science/about/psa/2015/01/gains-losses
[5] - https://www.federalreservehistory.org/essays/stock-market-crash-of-1987
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Disclaimer:
The information on the Take Back Control Website is intended to be general in nature and is not personal financial product advice. It does not take into account your objectives, financial situation or needs. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation and needs. In particular, you should seek independent financial advice and read the relevant product disclosure statement (PDS) or other offer document prior to making an investment decision in relation to a financial product (including a decision about whether to acquire or continue to hold).
