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| Greed |
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| Fear |
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| My Stock Consultants |
GREED AND FEAR - THE TWO MARKET DRIVERS
Below is a post I made during the market melt-down of January 2008:
"The past month has been very painful for many along with a number of my positions, and Friday probably feels the worst out of it all. The market has dropped almost 20% since its highs last November, and we have seen a somewhat unprecedented 10 straight days of falls on the ASX.
Like every bull and bear market, stock price moves will move beyond logical levels driven by the opposite emotions of GREED and, what we are seeing now: FEAR. Seems logical that a US recession will have a global impact, but how much is not clear. Anyone would think that given the fear in our own market that we are in the midst of a recession.
Evidence of a global recession is scarce. Economies like Brazil, Russia, India and China don’t appear to be showing signs of a slowdown, and they (not the U.S.) have been the economies that have been driving our bull run here. While global & local growth still looks healthy, selling at the tail-end of what feels like a crash would purely be a response to FEAR rather than any logical conclusions being derived.
Market P.E.’s have fallen a fair amount to account for an expected earnings contraction. This seems justified in some areas of the market, but the market as a whole has been sold off which is JUST INSANE.
Now is the worst time to sell IMO. With the benefit of Mr. Harry Hindsight, it would have been wonderful to sell stock when signs of a correction were emerging, but picking a correction is an inexact science, and to sell cheap stocks because the market is falling is dangerous as no one knows when the market will recover.
Flogging stocks like BHP & RIO when the earnings outlook is still promising on historically low multiples does not make any sense to me, and this is the time to be a buyer rather than seller. Some companies will be affected and have rightfully been sold off, but I can’t fathom that companies like WES with its supermarket, hardware & coal businesses will be largely impacted by a US recession.
For those exposed to a margin loan perhaps you can reduce your loan margin and maintain exposure to these stocks, long term you will come out ahead IMO.
Keep the stocks with dividends you can trust that have solid cash flows, the banks come to mind, because if in two years the market has continued to fall before recovering and has still maintained its dividend payments, this correction will be a distant memory.
Pain will only be caused by selling for the sake of selling rather than selling stocks that have genuine earnings risk and buying or holding the ones that don’t.
The market will always boom and bust, and I find this bust is no different to the others. Stay true to your convictions and don’t follow the herd of lemmings. The market is cheap by historical levels and Australia is still very healthy and growing at strong levels. I don’t see a parallel between this major pullback and 1987 or 2001. Fundamentals appear to support solid investment returns over the long term. We just have to endure the volatility in the short term...."
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