World sharemarkets continue their long, sharp decline. Whilst we at The Motley Fool are an optimistic bunch, we're realistic enough to realise this bear market has claws.
And, coming so soon after the GFC, where the S&P/ASX 200 index fell over 50% from peak to trough, it's perhaps not surprising that many investors have simply thrown in the towel.
Those selling out now, when markets are tanking, are probably making a terrible investing decision, one that could adversely affect their wealth for the rest of their lives.
Firstly, let's look at some facts…
The S&P/ASX 200 is dancing to Wall Street's tune. You can forget what's happening in the local economy – share prices are being totally influenced by what's happening on global sharemarkets.
Cautious Fools
That said, we've long been cautious on the Aussie economy. Heck, we've even bearish on the Aussie dollar, saying back in July, when it was trading at $US1.07, that it was "living on borrowed time."
Today it trades at close to $US0.95, and like world sharemarkets, is in free-fall. Look out below if The Reserve Bank of Australia (RBA) cuts interest rates this afternoon. We wouldn't count it out.
Three lessons for forex traders
We're no currency traders here at The Motley Fool, so we can't claim to have profited from our seemingly prescient call. But we do hope readers can take away three important lessons…
1. When you see ads everywhere urging you to dump the day job, attend a 'free' seminar, and become a full-time currency trader, you know you're close to the top of the market.
2. Timing the market is virtually impossible. We thought the Aussie Dollar (AUD) was over-bought at parity, yet it went on to hit $US1.10. Now the sharemarket is in full-blown bear market mode, picking its bottom is equally as difficult.
But you don't have to pick the top, or the bottom, to be right. As Warren Buffett said, "It is better to be approximately right than precisely wrong."
3. Speculation, and over-leverage, is a one-way ticket to the poor farm.
The AUD at $US1.10 was pure and simple speculation. The fundamentals simply couldn't justify such an elevated level. Eventually, as it always does, sanity prevails. In the case of a highly-geared, highly speculative investment like the AUD, the rush for the exits is anything but orderly.
(As an aside, if any Motley Fool readers have been wiped out by forex trading, we'd like to hear from you. Of course, we'll keep your name and details confidential. Just reply to this email.)
Two things to know about this tanking sharemarket
Now, what about this sharemarket?
Overnight, U.S. shares sank further, falling another 2.9%, sending the S&P 500 Index to a one-year low, closing at 1,099.
Naturally, puppy-dog Australia has followed suit, although it has fallen less than feared, down just 1.4%. Still, investors in companies like David Jones (ASX: DJS), Resmed (ASX: RMD), Lynas Corporation (ASX: LYC) and Cochlear (ASX: COH) are feeling more pain, their shares all slumping 2% or more.
Apparently the problem remains Europe.
We beg to differ.
The problems are twofold…
1. On a day to day basis, high frequency traders, with their souped up computers, control the direction of the market.
This paragraph on Bloomberg sums things up well…
"Losses increased in the S&P 500 after the gauge fell below a series of levels considered significant by analysts and traders whose investment decisions are influenced by charts."
Have you ever heard such baloney? The charts are taking over the asylum.
What happened to good old fundamentals? Like, buying good quality companies at attractive prices, and holding onto them for the long-term?
2. We've just seen the biggest quarterly increase ever in the VIX, the volatility index, commonly referred to as the fear index.
Bloomberg reports it trades above 40, a threshold exceeded only 3% of the time in 20 years, and a level that has preceded stock rebounds.
"A very high VIX level suggests investors have given up, they're out of the way, and that's a great entry point," said James Paulsen on Bloomberg. "It's a contrary sentiment indicator, so when the VIX surges, it says bearish sentiment verging on panic is surging. And the market's a good buy."
One excited, Foolish analyst
Our own Investment Analyst Dean Morel agrees. Dean is generally a very cautious investor, parting with his own hard-earned cash very infrequently.
So when he said this morning it was time to get excited about shares, it certainly piqued our interest.
Over to Dean…
"With fundamentals up, why is the sharemarket down? The answer is fear and fear alone. The market has fallen as investors have become fearful of the near term future.
That would make sense if investors had a track record of accurately predicting the future. But alas, they don't.
The economy and sharemarkets are too complex for even the best economists to accurately predict.
What hope do individual investors have?
The good news is there is no need to predict the future to succeed in investing. In fact the more time you waste predicting the future the less time you have to focus on what's right in front of you.
What is in front of us now is a sharemarket on sale.
Yes the market could get cheaper, but so what? That merely means even better bargains. Falling markets are only a concern to those unfortunates who are leveraged or need the money in the next couple of years.
Hopefully that is not you.
Spread your investments over the months and years ahead. Spreading your investments reduces the psychological pressure of investing. Doing so during market sales increases your likely returns and reduces your real risk.
Holy grail of investing
Buying during market sales is the holy grail of investing. Higher potential returns for less risk.
As my crystal ball is as cloudy as everyone's, I can't tell you when this market will bottom. But I am confident that we're in a value phase of the market.
Buying during this part of sharemarket cycle is an excellent path to market outperformance."
Sage words, as ever, from Dean.
As for individual share-buying opportunities, you can always check out the action at Fool.com.au. Below we have listed a couple of recent articles packed full of ideas.
We've also today published an article titled 1 Stock To Buy In October.
It's a U.S. quoted company, but one you may have already heard of.
The Australian sharemarket offers investors plenty of opportunities, and that's where we'll focus most of our attention. But U.S. markets, home to companies like Google, Apple, Microsoft and Coca-Cola, also offer excellent investing opportunities.
And with low-cost brokers like OptionsXpress and Interactive Brokers offering cheap trades, you'd be a fool not to take a look.
1 Stock to Buy in October
There's a stock in the market that just seems too good to be true. This company has a 160 year track record and comes with growth opportunities and dividends. It's both boring and sexy at the same time and best of all it's cheap. More >>
More investing ideas:
The ultimate high yield dividend portfolio
3 growing ASX companies at value prices
Dividends: The great wealth creator
Another place to look is this free report by our top equity analysts that profiles two companies they think will be well insulated from any bursting of the dollar, gold and commodities bubble. Grab this report – 2 Safe Ways To Play The Commodities Boom – while it's free and still available.
Bruce Jackson has an interest in Google, Apple and Microsoft. Dean Morel has an interest in the sharemarket. The Motley Fool's disclosure policy is a must-know.
