Avoiding the lemmings

I’ve been watching the tumultuous gyrations of the market very closely for the last month. In that time I’ve seen the Australian market decline by about 18% as of this morning. A month ago BHP was trading just on $45 a share. Today it’s in the $36 dollar range and likely to go lower.

I speak to my broker every day, and sometimes several times a day. When I got a missed call from him at about 9.15 this morning I knew it wouldn’t be good. “How you going,” I asked him when I got him on the line. I met with him a couple of months ago and speaking to him daily we’ve found a lot in common outside of the market. He’s a straight shooter and a good bloke. “Been better” he admitted. “Was up most of the night watching the US markets fall.”

He went on to suggest that I get out of the market. Too volatile, too irrational to make money safely. Generally, volatility is a good thing: it’s when you make money by buying low and selling high and riding the cycle.  You can do that when you’re confident that the market is driven by fundamentals. That’s not the case now. Fear and panic-stricken over-reaction is the order of the day. Unfortunately the more rational of us get caught in the stampede. There comes a point with the lemmings’ barrel towards you when you have to decide: stand and get trampled or turn and run. Today we turned and joined the exodus.

I must say it goes against the grain. In fact, it pisses me off. I’m disdainful of those pussies who are so easily spooked. Some people shouldn’t be allowed to trade. The nature of the market is to fluctuate. For the most part, it is driven by economic fundamentals – business opportunities, company profits, and the wider economic outlook. There’s always some element of sentiment, but generally, it makes it interesting and allows those of us with a steelier nerve to profit off the softcocks. It works well, but not now.

It’s tempting to suggest that the softcocks are ruling the market right now, but that’s not entirely true. Sure, there are plenty of mums and dads out there who are terrified of seeing their investment in the NAB go up in a puff of smoke, but they’re small-time really. It’s the hedge and superannuation funds going all defensive who are really doing the damage. And it’s not necessarily because they’re getting spooked – they know the fundamentals better than anyone. They also know the fundamentals count for nothing right now. And so the slightest whiff of negative news – such as there has been recently – is enough for them to act in anticipation of an irrational response.  Unfortunately, it only adds to the downward momentum and general hysteria.

Right now everyone’s getting into cash. You know things are bad when stalwarts like me are getting out of the market. I gave my broker the nod this morning, do it I said. Then I went and liquidated all my privately-held stocks. I’ve taken a hit. At its peak, I had doubled my stake in the market, but I’ve given 20% of that back since. Still well in front.

While the lemmings around me plunge blindly over the cliff I’ll have a smoko. The good news is that there’s a lot of money to made on the upside. I’ve got to hope that the market continues to fall, and I think it will. Then I’ve got to pick the time to go back in.

It’s precarious right now. Europe is yet to be resolved, and while the recovery is ongoing in the US it’s fragile. Worst-case scenario and all this irrational behaviour may precipitate another crisis. I don’t think it will. I think it must steady. China is still going great guns; Oz is healthy notwithstanding the plunge in the dollar. Europe will cease to be news. At some point, rationality will return to the market.

Then we go. It might be a couple of weeks, it might be a month. When it goes I think it might surge. I aim to ride it for all it’s worth. I think within 6 months all that’s been lost will have been recovered and, notwithstanding any further unforeseen disasters, it will be a stronger market. I hope to double up again.

That’s the thing, for all the doom and gloom there are a lot of glittering opportunities waiting to be unearthed.

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