Stay with the winners - don't get shaken out

Let us learn about the size of some market moves and the lengths of time involved, using some very well-known examples. All of these were big moves over a number of years, and few people expected them.

DJIA: This had an almost uninterrupted run in the 1990s when it rose from under 3,000 to over 11,000 by the end of the decade.

Gold: This had a big fall from $400 in the mid 1990s to about $250 in 1999 before moving higher to $400 by end 2001.

Crude oil: This has had some big moves.

• Driven by OPEC and events in Iran and Iraq, the oil price rose from a few dollars per barrel in 1970 to over $35 by the early 1980s.
• It then collapsed to under $10 per barrel by December 1988.
• With the Iraqi invasion of Kuwait and the Gulf War, the price spike to over $38 in 1990.
• Improved drilling and production techniques in the 1990s saw the price fall to below $10 by 1999.
• With the troubles in Iraq it then rose close to $50 in 2004 and climbed to over $60 in 2005 with Hurricane Katrina.

A roller coaster ride by any standard.

Currencies: This too, have had some incredible shifts.

• In early 1984, 1 dollar bought about 250 yen.
• Now it buys less than 110 yen.
• After the euro started trading as a theoretical currency in January 1999, it sank from a first day high of nearly $1.20 to around $0.80 about two years later.
• It then recovered to over $1.30 in early 2005.

It is astounding that the world's most important exchange rates can have such big moves.

Housing: Housing prices are estimated to have more than doubled during 1997 to 2004 in UK and Australia, and nearly tripled in Ireland. In the US, the rise has been a more modest 60% or so. Who would have thought that these moves could happen? Not the economists, property experts or the press.

These are the types of opportunities that should appeal to you. If you can correctly identify the changes in the fundamentals, you may have plenty of time to take a position and enjoy a very favourable move in the price.

Over the years, by recognising that prices go further than expected, you can profit more by staying on winning ideas. Long after many others have sold out of winning positions, by persisting, you might be amazed by how far the market subsequently went.

Prices go further than expected

Price Behaviour Strategy: Prices go further than expected

Historically, all the different asset classes have a habit of surprising people by:

• how far they move, and
• by how long they keep moving.

While the market also has plenty of periods when it goes nowhere, the small moves do not come as a surprise. The amazing thing is the price reaction when the fundamentals change.

If you can develop the habit of sticking with winning positions, you can obtain a significant comparative advantage. You will find that long after many others have sold out prematurely, you can persist, even if you are amazed by the market's subsequent performance.

Stay invested to make great profits. The big moves provide fantastic opportunities to make money. It is necessary to avoid the temptation to jump on and off a good idea in just a week or a month, and to instead doggedly stay with the winners. Others had the right view on the fundamentals but did not make big profits, because all they did was grab an odd half a per cent here and there.

If you can correctly identify the changes in the fundamentals, you may have plenty of time to take a position and enjoy a favourable move in the price. Over the years, by recognising that prices go further than expected, you can become very good at staying on winning ideas. Long after many others have sold out of winning positions, you have persisted, even though you have been amazed by how far the market subsequently went.