With recent share Market volatility, I thought it presented an opportunity to share some of my observations and thoughts. The Share Market has truly demonstrated its ability to reflect the psychological circumstance of its participants, these participants who are so often referred to as investors on the evening news, are often no more than speculators. For speculators, business is good! A tell sign of speculation reaching new dizzying heights is evident through the daily share market falls of 3-4%, to the daily gains of 3-4%. The madness in this though, is that the Market should reflect on any given day the value of the underlying Business that make up the Market, and I’m sorry to say, true Business valuations do not typically move that quickly or irrationally on a daily basis.
For a dose of perspective, over the last 12 months, the Australian Share Market has returned Circa Negative 9% including Dividends, with the negative impairment due to the economic impact of COVID-19. It is interesting to watch as people attempt to pile into and out of the market, in the hope of making a quick dollar return on a Share Price doubling, or even quadrupling. Do not get me wrong, some Companies have experienced exceptional Share Price growth, more recently however these are unmistakably the exception, not the rule.
When I see such astounding daily Share Market swings, I always attempt to ground my perspective into long term Market Averages and Business fundamentals (I’m sorry it is the Financial Planner in me). For example, average long term returns from the Share Market approximate 10-11% per annum. (So we are on the same page, I define the long term to be 30+ Years). The return figure of 10-11% per annum is primarily a function of Australian Business’s ability to grow its earnings by that same rate, which in turn translates into Share Price increases.
So, with all the ‘quick money’ being made by investors (i.e. speculators) I’ve become Very, Very cautious when Share Prices double but have No Earnings to justify an unrealistic Share Price increase. You must ask yourself, will the rise of the Share in question remain that high (unlikely) or will prices eventually reflect rational Market sentiment once the speculators do their dough and exit the Share Market with a tail between their legs (likely). And if you are attempting to ‘time the sale’ at this point, you must decide consciously when the opportune sell is, a job few consistently pull off and a position I’d rather not be in.
I’m not writing to criticize those beginning their investment journey, as I think it’s excellent that some have taken the opportunity to understand the Share Market. Although I caution, if you treat Shares like a Slot Machine you will get chewed up and spat out. It may not be today, tomorrow, or even next year, but it will happen! Remember, if you instead invest for the long run and forgo the speculative Endorphin hit that Share Price speculation provides, I’m confident you are destined for investment success. It is that easy!
If you would like discuss share market investments, give the team at Steve May a call and start a conversation today.
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