George has written a series of blogs which explain how we think about investing and use the best practices of the most successful long-term investors, in the construction of the portfolios.
An important lesson common to all the best is ‘don’t panic’ when markets take lurches down in valuations.
Additionally, the learning from many decades of data is that these swoons in value are actually quite common and in the vast majority of cases don’t mean anything long term serious is occurring.
The past week has been nasty for markets but there are understandable and transitory reasons for the sharp declines and as we are beginning to see already, they usually stabilise and unwind.
- The markets today are hugely influenced in price movements over short intense periods by computers/algorithmic trading and the ability since the abolition of the uptick rule in 2007, to indiscriminately sell markets short, which massively amplifies short term movements downwards. Markets undershoot fair value making outside gains for short sellers who will then go long the market as it normalises. The cumulative result is they reap big profits for a market that ultimately goes nowhere.
- There will be a reason which precipitates a short sale avalanche such as, (now) Coronavirus (they are most effective when there is great fear and little hard fact) and it will feel for a time that all is disintegrating, but it isn’t.
- The key points to remember are these: – The sell-off will usually be indiscriminate so great company valuations fall as much as the not so good and this allows precious opportunities for bargains. The losers in the process are those that find the emotional toll of price volatility too arduous and get shaken out at the bottom. So, the best thing to do when these events occur is to be carefully and contra-intuitively acquisitive, next best is to practice artful inactivity and absolutely the worst is to panic and sell.
- All the above does not mean that Coronavirus is not an issue, it assuredly is, but to remember that buying a share is buying a share in a business and although profits may be negatively impacted for a time, an Apple, Microsoft, Intuitive Surgical, Google or Disney will be making far greater profits in 5 and 10 years than they are this year or last.
- The final point is that there is a fundamental difference between transitory shocks such as the one we are experiencing and a systemically significant event such as the Financial meltdown of 2008/9. Those when they come, and they are very rare, require far more radical actions.
Please don’t hesitate to contact us to discuss any matters at any time, we are here to support and help.
Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.