China – the threat to investors

Investment Perspective – September 2015

“Neither the investing method nor the fundamentals of the business are right or wrong because the mood of the market is favourable or unfavourable toward the “stock”. That is because when you really think about it, “stocks” (shares) are all about the financials and the trading price, the share price… the cash up value. What matters more is the economics of the business” 

Peter Flannery

What you just read was a dramatic attention catching headline. 

China will slow and that will unsettle global markets.  That will at times make the cash up value of your investments, particularly if they are in the sharemarket, decline, sometimes sharply.

Those who are more defensive or academic sometimes take the view that they should “wait out” any nastiness in the economy and wait until things get better.  They tend to be highly academic and defensive individuals who will only invest in growth assets when conditions are ideal.  Ironically, actually when market conditions look ideal is not the time to be getting into the markets.  If anything it’s the time to be stepping back or stacking up cash.

When talking with most people, they understand that investing when prices are high may not be always the wisest of moves.  They have heard that old saying “Buy low, sell high”. 

In my experience, most people get that logic.  The problem begins though when market prices decline and emotions rise. 

So, whilst most people get the logic of “Buy low, sell high”, far fewer are at one with the underlying “psychology” of it.  What about you though?  Do you get rattled when prices decline?

China will offer long term Value Investors opportunity

Only though if we follow the logic of buying low and selling high (although frankly selling is not something we do a lot of at WISEplanning) especially when price movement (the cash up value of an investment or your portfolio) is sudden and significant, either up or down. 

Slower growth ahead for the world economy

Although there are always exceptions to everything, generally asset price growth will slow down over the next couple of years as the deflationary forces washing over the global economy begin to impact. 

You only have to look at interest rates that depositors can earn by parking their money up in the bank.  4% per annum is about as good as it gets and soon to decline further.

As Warren Buffett has been saying for a couple of years now, we need to become used to the idea that the returns we have achieved in recent times may not continue into the future. 

This is particularly so if we diversify significantly (e.g. managed funds, KiwiSaver schemes) as we try to manage risk.  Diversify widely enough and we become the market therefore getting whatever the market gives.  That’s okay for those who are highly defensive and who place their money defensively so that they do not lose it rather than conservatively invest for growth in order to improve their financial security in the future.

Investors tend to become brave as they invest watching their investments grow during that phase of the market cycle.  For them, it is very important that they remain brave and stick to their strategy when prices head in the other direction. 

Being fully invested as the markets rise does mean better returns but a bumpier ride along the way.  Having some cash available provides some flexibility to take advantage of better pricing when markets become uncertain and volatile.

How will you feel when your portfolio for 12 months from a pricing perspective makes little or no money?  If you are fully invested with minimal cash then at some point that will definitely happen.  It is neither a good nor a bad thing.  It is just the way things work.  Will you be okay with it though?

“The stock market is sometimes called a “No-called-strike game”.  You don’t have to swing at everything – you can wait for your pitch. The problem when you are a money manager is that your fans keep yelling “swing, you bum!”.“

Warren Buffett