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 EXPERT PANEL |
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Ask the Expert – Share Trading
Looking at the glass half full
Julia Lee, equities analyst, Bell Direct
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Today's expert:
Julia Lee, Bell Direct | How much further can the market fall?
The market is down almost 50% from the all time high of 6851.5 reached on 1st November 2007. Looking at it another way and with the market now at 3640, by the time the market has moved back to the all time high of last year, the Australian sharemarket would have gained about 100%.
That means that had you bought the market today, then by the time the market has climbed back up to last year’s November levels, you would have doubled your money.
Now the sceptics would probably ask how long would that take? After all a 100% return is no good if it’s going to take 100 years. Let’s look back into history to find out how long it took the market to recover from past collapses. If we look at the last 40 years, the most dramatic one was probably the crash in 1987. If you take the highest point in 1987 then it took bout 10 years before that point was seen again. 1974’s crash took 4 years before the high of that year was seen again. And the 1980/81 crash took just 3 years before new highs were once again being made.
And what about the 1997 currency crisis? Well that one took just one year before new highs were once again being made on the Australian sharemarket. So let’s assume that the market takes 10 years to recover. A 100% return in 10 years doesn’t sound too shabby. You can see why many value investors are calling the current market conditions, the opportunity of a lifetime.
Warren Buffett is probably the most successful investor of all time and he says: “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful” How would today’s market be characterised? I would say that now is a time of fear. You only have to look at the rush into treasuries to see this. US treasuries are widely considered the world’s safest securities. Overnight we saw the US Treasury Department selling US$30 billion of 4 week bills at 0%. That means that investors were willing to receive no return in exchange for having their capital safe.
The problem is that most investors buy high and sell low. They buy when the media is reporting the market reaching new record highs and when every man and his dog seems to be buying stock. And then when the floor falls out of the market, they get fearful and sell probably near the lows. This is not a strategy for making money. The point of investing is to do the opposite and buy low and sell high.
The truth is that markets go up and markets go down. It’s normal and for anyone that understands this cycle, it represents enormous opportunity to profit from the cycles in the market.
It’s hard to be brave in a market that is fearful but it is the brave that will be looking back in ten years time and will be smiling from the ability to see opportunity when the rest of the world sees gloom.
Julia Lee
Equities Analyst
Bell Direct
Our panel of experts are available to answer any questions you have on products and strategies, or simply to explain a particular term. The team consists of experts on CFDs, forex, shares, options, warrants, futures and ETFs. If you've got a question, you can post it at: Your 2 Cents, in the 'Ask the Expert' section.
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Expert Panel: Looking at the glass half full
Madoff: The World’s Biggest Ponzi Scheme?
Stocks: Stock in Focus – IMF Australia
Global Crisis: IMF issues warning over global recession
Companies: Rio Tinto drops equity stake in Saudi Arabia
US/China: China won't prop up US economy forever
Companies: CBA shares slump to six-year low
Commodities: Oil price hits four-and-a-half year low
Companies: Ten's first quarter earnings fall 25.2%
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