Investors should follow the Munster family to profit from the credit crisis
Investors should be like the Munster family. Just as the latter only went to the beach when it was raining, the former can take perverse pleasure in more bad news about the economy – such as the official announcement that Britain has entered a second credit crisis.
Why? Because stock markets are in business to discount the future; not act as a means of recording the present or the past.
Obviously, the credit crunch is very bad news for thousands of people who will lose their jobs and homes before the economic cycle turns up again – as it will, unless this really is the end of the world. But, much less obviously, the current crisis also presents opportunities for people who remain in work and do not need to spend everything they earn.
If that sounds somewhat hypothetical, then bear in mind what has happened since I made similar points in an article that appeared in last Saturday’s newspaper under the headline: ‘Why not buy before share prices rise?’
That piece was written on Thursday last week as the FTSE 100 index closed at 5127. As I write this, it’s trading at 5541 or 414 points higher.That’s an increase of just over 8pc in one week.
You may very well say that paper gains are neither her nor there and, as a long-term investor, I would agree. But they are better than starting with a loss – and 8pc is more than most deposit accounts will pay in two years at current interest rates.
Here’s what that article said: “After the FTSE 100 index of Britain’s biggest shares suffered its longest losing streak in nearly nine years, it might be profitable to remember that the best time to invest is when you least feel like doing so.
That is the counter-intuitive message of the graph on this page, which shows how most investors do the exact opposite. They chase shares and equity-based funds when stock markets are expensive and shun them when they are cheap.
They buy with both hands at the top of the cycle and then sell out at the bottom. Needless to say, that is also the exact opposite of the way to make a profit; which is to buy low and sell high.
It ain’t rocket science but it isn’t easy to put into practice either. Humans are herd animals and it is difficult to buy when everyone else seems to be selling, even if you suspect that predictions of the end of the world will prove exaggerated, as they always have done in the past.
Or, as the multi-billionaire Warren Buffett puts it: “Investing is simple but not easy.” Tom Stevenson, a director of Fidelity Investments – and late of this parish – blames the media: “People seem to react to the overall market mood, particularly as expressed in the media. When the market is moving higher, the headlines are positive and this results in positive net sales.
And vice versa. During the 1999-2000 technology bubble, retail investors were sucked into the market in vast numbers when share price rises went exponential in the final throes of the mania.”
Many of today’s worldly-wise media bears were raging bulls back then. Now some of the shrewdest stock pickers in the world say the pessimists of today are as wrong as they were a decade or more ago when they were optimistic about the outlook. More specifically, Mr Buffett has become one of the biggest shareholders in IBM after a lifetime of avoiding technology shares.
At the risk of moving from the sublime to the ridiculous, this came as particularly good news to your humble correspondent because I had picked up some technology shares for my self invested personal pension (Sipp) in August. Back then, the FTSE 100 had fallen by 15pc in a fortnight and it seemed like a good opportunity to buy into an investment trust I had been following for more than a year.
So I bought some Polar Capital Technology shares at 301p and – even though the FTSE has fallen by more than 7pc in the last month – Polar Technology was trading around 325p this week. Of course, I have no idea where these shares or the FTSE will be next week or next year – but I have no intention of cashing in my Sipp next week or next year.”
Now, as then, that remains true. But, as mentioned earlier, it is better to start with a gain than a loss. Polar Capital Technology is currently trading at 329p, which is good news for my pension in a week of bad news for most people’s retirement plans.
Many may consider it in the worst possible taste to say such things and to refuse to join in the chorus of doom and gloom. But I think it’s more interesting to take an opposing view; even on something as serious as the credit crisis. And, as the facts above demonstrate, it can be more profitable too.
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