By MoneyMorning.com.au
“This has potential to be significantly worse than the Lehman Brothers collapse and the subprime crisis because now we are talking about nation states. If you have a situation like you had today, where markets had effectively frozen, then it doesn’t matter how good your name is, you are not going to be able to access markets. As of today, no banks could access these markets.” – Sir Ralph Norris, CEO, Commonwealth Bank of Australia
It would have been nice if Sir Ralph had warned us about this three years ago with a more timely stock market prediction.
It’s not as though no-one saw this coming.
In 2008 we warned you nothing good would come of government and central bank intervention. But the establishment and mainstream thought they knew better. They insisted everything governments and central banks were doing was necessary.
We got the stock market prediction right. The mainstream got it wrong.
Tonight your editor is speaking at the Daily Reckoning Doomers’ Ball in Melbourne.
The theme of our speech is about making market predictions and having an investment back-up plan (something most mainstream investors don’t have).
We argue that making stock market predictions on the future is a crucial part of being an active – and successful – investor. But the most important part of market predictions is you don’t have to be 100% right.
In fact, as I’ll show tonight, you can be right and wrong… and still come out way ahead.
Let’s give you an example…
We advised our Australian Small-Cap Investigator subscribers to play along… buy into the rally. But when the boom started to peter out in late 2009 we advised readers to start cutting back.
As the chart below shows, it was good advice:
Today the stock market is back to mid-2009 levels. Most investors have made no gains in over two years!
Since mid-2009 most investors will have been better off holding cash than owning shares.
However, that doesn’t mean you should sell everything. Because as the six-month period from mid-2010 shows, even in a bear market you’ll still get bull market rallies.
That’s why it makes sense to have some exposure to the stock market. The key to good stock market predictions is to pick stocks that will give you the best bang for your buck if the market goes higher.
Put it this way. If you’ve only got 10-15% of your portfolio in blue-chip growth stocks, you won’t get much of a bang. The stocks will need to rise significantly to make it worth your while.
But, if you use small-cap stocks you can afford to invest less of your cash in stocks and keep more in safe assets (cash, term deposits, etc.). And because small-cap stocks tend to move higher quicker during a market recovery you’ll get plenty of bang for your buck.
We know that for a fact because our stock market predictions helped us play along during 2008-2009 and again from mid-2010.
But that’s in the past. What about today?
Well, we’ll be honest. We’re glad Sir Ralph Norris belatedly agrees with our view that the world economy is in a bunch of trouble. But unlike 2008, 2009 and 2010 it’s much harder to see where the positive news will come from.
After all, what more can governments and central banks do to fool the market into thinking they’ve got a magic bullet? They’ve tried everything – stimulus, money printing, bond buying, bailouts… none of it has worked… exactly as our stock market predictions said it wouldn’t.
However, as we say, even though we’re bearish we haven’t completely given up on the stock market. We’ve seen the extent to which governments and central bankers will go to manipulate the economy.
…Just like our own government tried to do with the Australian property market. You’ll find our housing market predictions weren’t that far off either.
But right now we can’t see that they’ve got anything left in their arsenal to artificially boost the market. Of course, that doesn’t mean they won’t try.
That’s why holding a small exposure to volatile (and high risk) stocks is a great way to potentially magnify your returns. Because with the stock market as it is, you should only have a small amount of your capital at risk.
Cheers.
Kris.
P.S. To find out where you can find the kind of small-cap stocks that could magnify your gains even in this market, click here now…
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From the Archives…
The Onward March of the State
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2011-11-10 – Kris Sayce
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2011-11-08 – Kris Sayce
Lighting a Match to Inflation
2011-11-07 – Kris Sayce
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