You are driving home on a Friday and listening to the news on the radio, and it is all doom and gloom.
On Saturday, you read your weekly diet from a couple of investment websites you subscribe to and there is a surprisingly positive tone to the commentary. You watch the news on the TV and the financial wizard being interviewed tells you, convincingly, that the Euro is shagged and the equity markets are going to hell in a hand basket. You fret all weekend and are just about to sell a few shares or funds on Monday when, to your surprise, the markets open up, and you calm down.
So you go one step further over the following few weeks. You listen to several programmes on the troubling Eurozone sovereign debt crisis, look up interviews on YouTube, and read all you can on the issue. Having amassed both the positive and negative arguments, you feel better equipped to come to a conclusion – things are not quite as bad as those merchants with their ‘glass-half-empty’ attitude would have you believe. More relaxed, you stroll into your work on Monday morning and are gob-smacked to see that the markets are down 5%. What the hell did you miss, you might ask yourself?
I think this typifies the average, non-professional investor. Take it to the extreme – if you tried to obtain everyone’s view, positive and negative, think how long that would take and ask yourself – would it help anyway?
Concrete examples of markets doing the exact opposite to what the majority view is saying include March 2009 and, more recently, July/August 2011. In March 2009, much of the media and general investment commentary was universally apocalyptic but the markets started rising. And they kept rising for a very simple reason: the average investor was buying, not selling, as more and more fund managers believed the global economy would turn around, as it duly did.
Likewise, the sell-off in July/August 2011 was fast and furious and understandable alarm in the media added to the sense of fear. But the sell-off in the US and Eurozone markets had the tell-tale signs of Capitulation, a market bottoming signal and not a signal of the start of a new bear market. Of course, the sense of fear grew over the following months but most markets went no lower than their early August lows, or only did so temporarily. So things were either not actually getting worse since August last or the worst had already been discounted in prices. The markets look ahead.
For sure, I like to read good analysis and the internet is a blessing in that regard. But I have learned through bitter experience, eh 2008, that I can understand the balance of risk much better if I listen to what the markets are saying. Of course, the markets are not always right but they are the best leading indicator we have.
Being able to ‘listen to the markets’ does not impact much on my own approach to investing. For me, the two issues are completely separate. The markets could be telling me that they are heading down and I might still invest if the value on offer is right and the risks low.
At the end of 2011, the well-known Dow Theory technical indicator gave a ‘Buy’ signal on the US markets, signalling that the probability they would rise further in the months ahead was high. Is it possible that the bad news has been discounted? Or perhaps the markets are simple telling us that with bank deposits offering virtually zero income, in the supposedly safer regions of the US, UK & Northern Europe at least, the pressure on monies to flow to where returns are higher is exceptionally strong despite above average risks. If markets have turned and are in the process of pushing higher from here, a significant part of the reason is because there is no where else for the money to go.
Economies are not companies, and the Eurozone markets, which are as cheap as they have been since the early 1980s, look like an ideal place to invest despite the ongoing sovereign debt crisis. In the emerging markets, values are much improved, monetary policy looks to have turned and should now provide a tailwind instead of a headwind for these markets. Elsewhere, good quality companies and funds offering high and sustainable income will continue to be in demand. The markets are littered with them. If the US construction cycle has turned, as it may well have, CRH could be a surprise winner as it is deeply undervalued relative to the capital employed in its business.
For those seeking the security of non-risk assets, inflation-linked bonds were built for exactly these times – high debt levels should ensure interest rates are kept extremely low yet inflationary pressures from the emerging markets remain high – a win-win for inflation-linked bonds. Traditional government bonds in the developed world are grossly overvalued after a 30-year bull market in bond prices. Owners of balanced funds with a good dollop of bonds beware!