Post Crisis Advice
01 February 2010
Posted by: Author: Marize Pieters
Post Crisis Advice
If i may have one small piece of advice to investors, it would be to learn from history.
As recently as May 2008, we witnessed another stock market crash,the second one in a single decade and one of the most severe ever. Markets were once again characterised by exuberant buying, irrespective of what the fundamentals said,which led to prices reaching exceptionally high levels. When this happens, markets often overshoot their intrinsic fair value as market participants are afraid that they will be left behind. Instead they choose to rather go along with the herd, driven by fear and greed. History has often taught us that at these unprecedented high levels, stock markets will eventually lose steam resulting in a total collapse in stock prices. As investors lose complete faith, their irrationality causes the market to undershoot its fair value.However,post-crisis lessons have taught us that markets tend to recover quite quickly from these depressed levels.
The table below is an example specific to South Africa, but the same phenomenon is evident all over the world. Once markets bottom-out, investors are rewarded quite quickly with extremely good returns on their investments in the months that follow. However,the major challenge is that it is not always possible to know with certainty when markets have bottomed-out.
|Period ||Peak to|
|Peak to Trough|
months post bear
bear market [%]
months post bear
| Feb 1960 - Apr 1961|| 14|| -32.22||21.31 || 31.15|| 39.35|
| May 1969 - Oct 1971|| 29|| -61.61|| 32.56|| 54.26|| 86.05|
| July 1973 - Nov 1973|| 4||-22.02|| 41.67|| 35.65|| 29.63|
| Apr 1974 - Sep 1976|| 29||-42.42|| 5.79|| 3.16|| 16.32|
| Oct 1980 - Jun 1982|| 20|| -46.70|| 52.21|| 94.47|| 111.28|
| Aug 1987 - Apr 1988|| 8||-40.64|| 12.90|| 22.62|| 61.62|
| Apr 1998 - Aug 1998|| 4||-32.95|| 16.08|| 23.74|| 48.96|
| May 2002 - Apr 2003|| 11|| -39.40|| 17.30|| 30.02|| 38.29|
| May 2008 – Nov 2008|| 6||-46.40|| 8.92|| 27.28|| 51.17|
| Average|| 14|| -40.48|| 22.61|| 8.92|| 53.63|
Source: I-Net, Glacier Research, Based on FTSE/JSE All Share Adjusted 1 January 1960 – 20 November 2009, in ZAR
So how did our investors react to the latest crisis?
According to the latest ASISA statistics, a small portion of investors (in the retail market) have recently moved out of cash and back into the equity market. In essence, it took them close to a year to regain confidence in the market and there is still a large group waiting on the sidelines for more clarity as to its direction. This means that the bulk of investors have unfortunately missed out on the recent recovery in the South African stock market.
A contributing factor to this common phenomenon is that human emotions play a very prominent role when it comes to investing and investors are often unaware of this. It so often causes investors to go against good investment practice.
In times of market uncertainty, investors often act irrationally losing sight of their long-term financial goals. They allow the most recent historic events to dictate their behaviour. In turn, they buy when prices are high out of fear of missing the boom market and sell low out of fear of losing money in a bear market, instead of the converse of selling high and buying low. To make matters worse, once their money is out of the market and back in the bank they, more often than not, wait too long to get back into the market. This emotive short term investment focus is a sure way to destroy value.
Investing is not a short-term game nor is it one of timing the market perfectly. It involves having a solid financial plan with set goals that are focused on the medium to long term. This is exactly where a credible financial intermediary plays a critical role. Select an intermediary who can successfully advise you and structure an investment plan that you are comfortable with.More importantly, select an intermediary that will protect you against your own investment imperfections.It is therefore essential that you select an intermediary not only with skill, but someone you can associate with.
A relationship between intermediary and investor should be a long-term partnership and one of mutual trust.Once you become more aware of the reasons for and consequences of irrational investment behaviour,you will be in a position to make wiser investment decisions and be one step closer to becoming a more successful investor."Be fearful when others are greedy and greedy only when others are fearful.” - Warren Buffett
Source: By Marize Pieters (TaxTalk)