Independent Financial Adviser and Director of Practice Financial Management Ltd (PFM) Jon Drysdale considers Bears, Bulls and how Investment History has a habit of repeating itself.
The economic turmoil of 2008 was unprecedented- or so you might think. Readers might be interested to know that a rapid plunge in the value of global stocks or a ‘Bear Market’ has been a regular feature of Stockmarket history since the 19th Century. In recent times, even the most apathetic investor can remember the start of the last Bear Market in 2000, with a resounding pop to the Dot Com bubble. That downturn in global share values lasted until 2003, with the market reaching a floor to the backdrop of US bombers invading Iraq in March 2003.
Stock markets dislike uncertainty, whatever the cause. Blame for the present bear market is often laid at the door of ‘sub-prime’ lending to overstretched homeowners in the US. This may be true but what really drove the market downwards was uncertainty and a lack of trust in our once most trusted institutions and companies. In the UK few would have predicted that a bank such as HBOS would need to seek assistance from their arch rival Lloyds TSB or that UK Plc would become a major shareholder in Natwest RBS. Stateside, the miserable plight of the once mighty Automobile industry equally demonstrates the point.
When the fog clears and economic confidence returns a ‘Bull’ market generally ensues. This rapid rise in the value of share markets has been experienced on several occasions in the last 50 years not least in the mid 1970’s, after economic recession in the early 1990’s and in 2003. It is notable that the highest volumes of shares traded tend to be when shares reach their peak value. This is an understandable feature of human psychology and reflects our often herd mentality when it comes to financial decisions. Although a ‘buy low and sell high’ strategy makes sense, in practice this is very difficult to achieve and investors are naturally nervous of investing against the tide of common opinion. Perhaps we should look to successful investors for a lead on this. The legendary American Investor Warren Buffet wrote in October 2008
“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.”
Warren Buffet admits that the timing of the recovery can’t be predicted and most experts believe stock markets will continue to be volatile in 2009. However Buffet also makes the point that in the 20th Century stock-markets often recovered in advance of the general economic recovery. In other words, the opportunity to buy shares at an attractive price may well have passed if you wait for full economic recovery. A recent study by Thames River looks at ‘Bear’ Markets since 1987#. Their findings reveal that the average duration is 339 days and the average fall in the FTSE 100 is 30.9%; at the beginning of November we were 533 days into the current Bear Market and at its low for the year, the FTSE 100 had fallen by 45.5%. In a historical context then, it would appear that we may be through the worst in terms of duration and magnitude.
For Dentists with a long-term investment horizon (by this we mean 10 years or more) 2009 could represent a window of investment opportunity that may not be available again for many years. With the UK Treasury redoubling efforts to rescue our economy and the potentially positive ‘Obama effect’ in the US, the fog may indeed be clearing.
PFM recommend that you seek advice from a qualified independent financial adviser before making investment decisions. This article is intended as commentary only and in not intended as an investment recommendation.
# Black Monday (1987), First Gulf War (1990), LTCM/Russian Default (1998), September 11th (2001) and the Tech Wreck (2000-3