It seems investors have forgotten what investing is all about.
They seem to think investing involves just buying something and then watching the price go up each day.
These investors like making money, as they should. But they get annoyed when things don’t go to plan…such as when stock prices fall.
It seems they want the reward without the risk. And that’s why stocks are doing some crazy things at the moment…
As we’ve noted before, there’s a trend right now where the mainstream turns every news item into a major event.
It’s a product of the 24-hour news cycle. When a broadcaster sets up a round-the-clock news service they’ve got to fill it with news.
They can’t have announcers saying, ‘Well, there’s nothing going on right now. Check back in an hour and we’ll let you know if anything has cropped up.’
No, there has to be news. And it has to be new news. It can’t just be a rehash of this morning’s news. If nothing else has happened then there has to be an update on the news, even though nothing has changed. Nowhere does this happen more than in the financial media.
The cable TV business channels like nothing more than wheeling in one faceless, pinstriped, bald headed finance guy after another. (Don’t take offence fellow baldies, your editor is one of the gang.)
And as you’d expect, they can’t just turn up to say things are looking just dandy. They’ve got to throw in a reference to the latest headline-making non-story that has just caused stocks to fall 5%.
And yet as we recently explained, despite the string of supposed disasters unleashed on the market over the past five years, the Aussie stock market has still made a pretty good fist of things. It’s up 71.2% since March 2009.
So just how bad can things be?
Well, if we’ve read the market right, the outlook may not be as bad as the mainstream makes out. In fact, as usual it looks as though the mainstream and most investors are doing what they always do – they’re trading yesterday’s news.
What’s the big subject on the lips of financial market watchers today? That’s right, the potential for slower Chinese growth.
But here’s a newsflash. That subject has been on their lips for the past five years. That’s why China’s CSI 300 index looks like this:
Since China’s market rebounded from the 2008 crash it has fallen more than 40%. And it’s down 62% since the 2007 peak. Why? Because of fears about slower growth.
Of course, that doesn’t mean the market can’t fall further, because it could. And as Jason Stevenson wrote in his latest research report published yesterday, quoting Wall Street investing legend Peter Lynch:
‘Trying to catch the bottom on a falling stock is like trying to catch a falling knife.
‘It’s normally a good idea to wait until the knife hits the ground and sticks, then vibrates for a while and settles down before you try to grab it.‘
That’s true. We can’t argue with an investing legend. You shouldn’t try to catch a falling knife. But by the same token, it’s fun trying (if you like that sort of thing). We love to speculate. And that’s why we say investors should buy this market now…while it’s still falling.
Many investors have forgotten one of the key principles to investing – that you have to take some risks if you want the chance to bag the rewards.
So when the market has a bit of a hiccup, as it has done many times over the past five years, investors run for the exits. The mainstream has trained them to believe that every new finance-related story has the potential to be a repeat of the 2008 crash.
It doesn’t matter what it is – an eastern European territorial dispute, Turkish interest rates, Argentinian debt, or Brazilian riots. Or just last weekend, the analyst at Bank of America-Merrill Lynch who said the bond default by a Chinese solar company was a ‘Bear Stearns moment‘. That was referring to the collapse of the US investment bank in 2008, at which point investors realised things looked bad.
Each of these recent events is apparently the straw that will break the camel’s back.
Except that it isn’t.
So when none of those things break the market, the mainstream reverts to a tried and trusted formula – call for a China market crash.
But look at the chart again. Isn’t it at least reasonable to argue that China has already crashed? Haven’t investors already priced that into the market?
That’s the bet we’re making today.
The stock market is a forward looking indicator. Stock prices reflect what the market believes will happen in the future. The fact that Chinese stocks have fallen so much proves that. Investors believe there will be slower growth.
If investors thought growth would be better then stocks would rise. It’s that simple. So when we see talk of the bursting of the China bubble we really can’t see what they’re talking about – not in terms of stock prices anyway.
To us this appears to be a classic case of capitulation by the last remaining China bulls. They’re looking at all the current news stories about slower Chinese growth, but forgetting that this is something the market already knew about.
What investors should really be doing is looking to take advantage of these low prices by adding China-related stock positions to their speculative portfolio.
Our view is that in the coming months, China’s growth rate will stabilise, exports will pick up, and so will imports. Sure, a bunch of Chinese companies may go bust and default on their debt – welcome to the world of capitalism. That stuff goes on all the time in western markets.
The key message we’ll give you today is that as an investor you should always look ahead. What’s happening in the market today is actually yesterday’s news. What you want to think about is what will be tomorrow’s news, and then invest accordingly.
We’ve no doubt that a return of a China-led bull market will be a big part of that news.
Cheers,
Kris+