Every investor makes this mistake when investing.
It’s almost impossible not to make the mistake.
We’ve made it many times in the past.
We’re sure you have too…as has every analyst you care to mention.
And even though we like to think we’d never make the mistake again, we can’t promise that.
The good news is that even if you consistently make this mistake, you can still make big investing returns.
So, what is this common investing mistake?
It’s the idea that an outcome in one market will exactly mirror the outcome in another market.
To give you an example, from 2008 to 2010 we saw the aftermath of the US and UK housing bubble and concluded that the Australia market would suffer a similar fate.
We suggested Aussie housing could fall across the board by 40%. That didn’t happen. In fact Aussie house prices didn’t fall by anywhere near that amount.
But we didn’t get it 100% wrong. Some markets in Queensland and Western Australia did fall by this amount, and many individual house prices fell even further.
And now, the same mistake we made in the housing market is the mistake most of the mainstream is making with the Australian stock market.
Our dire warning never came to pass
It doesn’t matter where you look or what you read, the message is the same — the Aussie economy and stock market are on the ropes. And the advice behind those messages is that investors should ditch stocks before a major market crash.
To prove it they’ll point towards the US and Japanese markets. They’ll say the big rally in those markets in 2013 means those markets are set to crash. And by crash, we mean more than the 2.5% drop overnight.
They then argue that when those markets crash, the Aussie market will crumble, wiping billions of dollars of value from retirement accounts.
And they may be right. On the other hand, they may not be right.
We’ve learned the lesson from our dire (in more ways than one) house price prediction. The performance of one market doesn’t guarantee a carbon copy performance in another market.
We’ve also learned that lesson from the performance of the Aussie market in 2013. While small-cap growth and income stocks did well, we thought they could have done a lot better. Why? You guessed it, because US and European markets had done so well.
But we won’t be picky. If you backed individual stocks in 2013 rather than following an index-tracking strategy you should have come out of the year well ahead. In fact, stocks in pretty much every sector apart from the resource sector had a good year — tech related stocks especially.
Even so, compared to global markets, the Aussie market lagged. The Aussie market gained 15%, while some US and European markets gained more than double that.
Japan’s index gained 62%. So it’s perhaps not surprising that the Nikkei 225 index is now officially in ‘correction’ territory since the start of this year. That means it has fallen by more than 10%.
So, should you really be fearful about an Aussie market crash? Not in our view…
This isn’t a mirage
Any way you measure the market, Aussie stocks have done much worse compared to other Western markets.
The simple reason for that is foreign investors still see the Aussie market through a single lens — that is, as a commodities-based market.
That was great when the market took off between 2003 and 2007. It was equally great when the market rebounded between 2009 and 2011. But it wasn’t so great when commodities and resource stocks fell in a heap between 2011 and 2013.
But what about now? Well, we’re not sure that even the grumpiest bear could claim that Aussie resource stocks are overvalued.
Those who do must think it’s an illusion that Newcrest [ASX:NCM] has fallen 75.9% in just under three years. Maybe they think it’s a mirage that the S&P/ASX 300 Metals & Mining index is down 39.5% over the same timeframe.
The reason the bears think the Aussie market is primed to fall is because they’re looking at the US, European and Japanese markets, which have soared over the past year or so.
The same isn’t true for the Aussie market. In fact, as analysis from analyst Jason Stevenson points out, there are a whole bunch of stocks ready to bounce back after hitting multi-year lows.
We’re not saying these stocks are about to head up in a straight line. And we’re not saying the stock market won’t have days when prices fall. But we are saying that anyone who claims these stocks haven’t already crashed clearly hasn’t paid attention.
If you’re a genuine investor and you’re looking for genuine opportunities to buy low and sell high, we can’t think of another sector right now that gives you a better opportunity to do that than this beaten down sector.
Cheers,
Kris
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