Back to the Future… here’s what I know.

Back to the Future… here’s what I know.

At this point in the current Corona Virus – we know that many people are worried about their Super and Investments. I hear people say, “I’ve lost x amount” and it’s understandable that there is a certain element of fear. I want to explain why panic isn’t going to help and how fear comes from a lack of understanding.

From the outset – THIS IS NOT ADVICE – this is general information only. If you are specifically worried about your situation and want help to understand the real impact for you – (even if you’re not a current client of mine) – feel free to reach out. 0415 224 586 or james@lifesumo.com.au. I’m happy to have a conversation about your situation at no-cost. We’re happy to do anything to help get you through.

On the 20th of February our Australian market (All Ords) was at 7230 points. Today, the 19th of March the market will open at 4998 points. This represents a 30.8% drop in the market in just under 1 month.

The reasons for this drop are very clear. Panic relating to the global impact of the Corona Virus has caused many shareholders and institutions to sell assets in a short-sighted speculative reaction to the uncertainty around the virus. Uncertainty is the number one factor for the drop and the fear induced from that uncertainty is driving speculator behaviour. It is the belief of many speculators that they are ‘preserving capital’ in selling out in the decline with a hope to ‘buy back in’ when ‘everything settles down’.

You’ll notice I used a lot parenthesis in the last sentence. The reason for that is that these notions like ‘preserving capital’, ‘buy back in’ and ‘everything settles down’ are not concepts that long-term investors will endorse. These are the actions of speculators and the lessons of history are clear – endorsing or carrying out these activities is the absolute best way to torch or lose your capital. This has been definitively proven through all of the major periods of instability in history. The herd reaction during the ’87 Stock market correct, the OPEC Oil Crisis, 9/11, the GFC, SARS was all based on fear of the unknown and that reflexive response, designed to create safety – had the actual opposite effect.

This all comes from a misunderstanding as to how someone creates long term wealth. There is a perception that we are supposed to trade our way to asset ownership and that we can sell and buy our way to an ultimate outcome. This works under one absolute condition – your crystal ball has been serviced and working to ultimate efficiency.

Many people can look at the market history and say, “if I had sold here… and bought there…I’d be better off”. What is it they say about hindsight? Oh, that’s right…you know the saying… Hindsight is completely ineffective in helping speculators to time markets. What hindsight proves is 2 things… 1. Most volatility (particularly large downward market movements) is amplified largely by speculative fear and 2. Market always recover to their previous highpoint over time.

What hindsight doesn’t account for is the fear inherent in the moment. People have short memories and I think, as part of our DNA, we find ways to suppress and bury the magnitude of the fear we previously felt. The evidence for that is in the language that we choose and use. Now that world markets recovered from the GFC – I hear people saying things like “The GFC wasn’t that bad” and “it didn’t really affect me”. The experience at the time was very different. I lived that period through the eyes of over 300 clients that I was responsible for.

You might have forgotten but at that time, the entire backbone of the global economy was broken. The financial system was endemically corrupted by putrid collateralised debts, bad debts/sub-par lending was off the charts, inter-bank lending was stopped, property values were decimated, ENTIRE economies were brought to their knees including Spain, Ireland and Greece. It was my experience having advised through both the GFC and now, that the fear felt and communicated was identical. Absolutely identical.

It doesn’t feel that way because we have suppressed it, but I can assure you, I have not forgotten. Every statement I hear today about fear regarding the current situation is identical. The dark cloud that hovers is similar and sadly, the response by speculators is turning out to be the same. If there is one thing we’re amazingly good at as a species, it’s repeating the mistakes of the past.

This is the definitive bottom line. UNLESS the assets your investments or Super have invested in have defaulted (gone broke) or become illiquid – you haven’t lost anything. What you will be experiencing is a change in the value. By way of example:

You had $100,000 in Super. Your super is invested somewhere and that somewhere is most likely a managed fund. (Most people might have an industry fund and have their super in a ‘Balanced’ Allocation – this is often the default). Let’s say the assets purchased with your $100,000 were $1 each when you purchased them.

100,000 shares @ $1 = $100,000.

Now we go through the market fall we’ve just had, and the market has fallen by 30% – so when you login to check your super, in the space of 1 month, the value of your super is now $70,000.

This is the first moment that people instinctively panic. They believe they have lost $30,000.00. But what actually happens? The value of the shares was $1. The market falls 30% so the value of the shares is now $0.70. How many shares do you have?

A lot of people think that they no longer have 100,000 shares – and they will often say that they have 70,000 shares. That is incorrect. You still have every asset you purchased.

100,000 shares @ $0.70 = $70,000.00

THE ONLY TIME YOU WOULD ‘LOSE MONEY’ IN THIS SCENARIO IS WHEN YOU SELL THE ASSET.

If you were to panic and sell the super into cash because you are fearful – you will absolutely have crystallised that loss. This is what the speculators and the herd do… they think they’re mitigating their losses by converting the asset to cash, and they do so believe that they will ‘buy back in when everything settles down’. They never do. Here’s what happens.

The market has already fallen 30% – the speculator sells out to ‘stop losing’ and then watches the market fall further. This gives them a feeling of vindication. ‘See, the market fell further – thank god I took that action when I did’. This false endorsement gives a sense of superior capacity.

At some point – the market stops falling… because that’s what markets do. They correct, they reprice, and they start to grow. Unfortunately – no one rings a bell at the bottom of the market. Without the benefit of a crystal ball, this day will come and go, and you will NEVER know it happened…until long after it has. All that will happen – if you’re watching things daily… is that suddenly, the market will gently climb back to the point where you sold the asset. You will convince yourself that this is a short-term rise, and that it will fall again… it must… because now you’re watching everything and all of the ‘kinks’, ‘aftershocks’ or world events haven’t completely corrected. You’re now so much smarter than you were before – confirmed by the fact that you cut your losses and the market fell further.

You’ll repeat this pattern continuously and will invariably second guess yourself – until one day… many days later, the assets/super/investments have climbed higher in value than your sell out point. At some stage, you’ll re-enter the market, but you will do so with a lesser capital base because you crystallised the loss – and you’ll now be blaming the markets for being unpredictable.

But here’s the thing… markets are not unpredictable. Markets move according to stimulus, exacerbated by fear and/or greed. Because it is the purpose or nature of companies to be profitable – markets will fundamentally return to their previous highpoint and beyond over time. The speed at which this occurs is driven largely by speculator sentiment. It is the nature of people to be attracted to the bright shiny thing – and so money flows into markets that are rising quickly… and just as commonly, people are scared by the dark steep falling thing… and so money tends to flow out of markets in adverse volatility.

Every single period of market volatility that occurs plays out EXACTLY the same way. All that ever changes is the speed and intensity based on the overall level of panic or elation.

The only way I know to avoid hurting yourself in that process is to not get caught in the herd mentality and to be patient.

If your assets are properly diversified, and IF you have had the right education regarding the risks of the particular assets you own – waiting out the negative times will always be offset by the benefits of the positive times. Why am I so certain of that? I have had ZERO evidence to the contrary. Markets recover because they are fundamentally driven by capitalism. That is our underlying system and until that changes – it’s not a matter of IF things will get better but ‘WHEN’.

This time is different.

I hear this EVERY time. When 2 planes hit the World Trade Centre – (housing a significant number of headquarters for the worlds largest companies), it was the first time ever and the panic was real. When the GFC was triggered by globally de-stabilising banking and financial practices that were going to bankrupt the world – it was the first time ever. The 1979 Oil crisis was different… the ’87 stock market correction was different… do I have to go on? The one absolute consistency is the difference of these events. They are all substantial – they should all be taken seriously but one thing is abundantly clear… if you had invested at the top of the market in 1987 (deemed to be the WORST time to invest) or the top of the market in 2007… and just left it alone, you’d be significantly better off today. If you had been regularly investing through the volatility and in fact buying more assets during the downturn, you would have increased the number of assets/shares etc you owned and been in a significantly better position long term.

What about timeframe?

Time frame matters – of course it does. Yes, if you have 30-40 years ahead of you, todays volatility will have less of an impact. If you’re in retirement phase or approaching retirement, you’ll certainly be feeling the downturn in a greater sense.

What is important to remember though is that it is the quality and diversification of the assets that matters. For everyone who is experiencing the brunt of this 30% downturn, you also must acknowledge that in the year preceding, the market was powering along at 18-20%. The market fall will affect the value of your investments but the companies that make up our stock market are still making profits – even though their values are down.

That means that most of them will still be posting profits and thus dividends to their shareholders (you) in that timeframe. The value of these may be affected during this period – but for some contrast – during the GFC, many companies’ dividends increased as consumers continued to buy groceries, fuel their cars, deposit money into banks and pay their loans.

This is a health issue with severe financial impact.

As opposed to the GFC which was a financial crisis, and one in which we had no way of quantifying how bad the underlying financial corruptibility was – this is a severe health issue which due to its viral nature is impacting business and fear is driving the speculators. There is absolutely no doubt that share prices have to be affected but there is a finite period that this will last – and with infection rates decelerating in the most populous parts of the world and the race on to find a vaccine/cure with human trials already underway, again this issue has a finite life.

Already, production and manufacturing in the affected Asian countries is resuming. Slowly…but resuming. Demand hasn’t decreased…. supply has and as the world works through this situation, a sense of normality will resume.


Shouldn’t we just put our money in cash and wait it out?

Please re-read all of the above.

Aren’t you being too complacent?

We aren’t being complacent at all – it is our job to be the moderator between fear and greed and we’re not ‘guessing’ here. These are experiences we have had before and we’re not fair-weather friends.

Our job is to keep you focussed on the longer term picture and to stop you making the mistakes that the rest of the herd make. We’re not speculating, we’re investing and investing means we’re in it for the long haul.

We will never have more value to you than we do right now because of the importance of helping you keep your head – when all about you are losing theirs. This is why we do what we do.

Your mental health is important. With the constant bombardment of fear and information (much of it unverified and factually incorrect) – it can all be overwhelming. We’re not medical professionals and we’re taking the virus itself very seriously. It isn’t our place to tell people how to respond or feel – but we advocate all measures put forward by the WHO and follow the directions of both our Federal and State governments. We are however focussed on you and your mental well-being.
Self-isolating shouldn’t mean mental isolation. If you are concerned about financial issues and it is weighing you down, please reach out. We’re here to provide support, education and understanding in that area.

We urge you all to be safe, be respectful and kind to each other – don’t hoard and as best you can, don’t panic. By all means be diligent – but don’t panic. It really won’t help.

I can assure you that you and the economy are going to get through this.

Yours kindly,

James Mousa