Please examine the following summary of the market turbulence as it will offer some encouragement to our investors as well
As of September 15, 2008 we have seen volatile markets worldwide due to the sub-prime mortgage crisis in the USA with correlated contagion to all worldwide markets. This is due to an integrated globalization of the capital markets worldwide. Because every nation buys and sells credit instruments internationally, every nation is affected.
Looking across the border
We will look at the Dow Jones Industrial Average (DJIA) of the USA which influences other stock markets worldwide, especially in turbulent times.
Looking at the US Dow over a very volatile period just prior to Sept 29, 2008, it has moved down 29 points, up 196, up 121, down 778, up 486 down 23 - a total of 1631 points in five days or an amazing average of 326 points a day. Though the 778 drop was the biggest drop ever over 112 years, it was closer to the 20th largest drop (not the largest when examining percentiles) in percentage terms.
Since 1896 there has been 123 periods of volatility with the Dow, averaging at least once per year.
Investors respond to the media’s influence
On October 6, 2008 amidst the volatility, media poster-boy Jim Cramer went on the “Today” show on NBC and said, “Whatever money you may need for the next five years, please take it out of the stock market.” This was a media trumpet call for a downward spiral and a self-fulfilling prophecy. On the following trading day panic rocked the markets worldwide, indicated by a huge sell-off of stocks. He is now accused of creating market panic. At the same time there were about five other media people causing panic so we can’t blame only Jim!
On October 6, 08 the market also surrendered over 800 points in Canada during the trading day bringing us below 10,000. The US Dow dropped 18 percent in the week that followed. Then what happened? The following Monday the Dow zoomed up 936 points based on American good news! And on Tuesday the Canadian TSX rallied early. Volatility continued.
Volatility indicates the investors’ fear-factor
So how fearful are investors? On Friday, October 18, 2008, the VIX volatility index rose to 70.33, its highest close since its introduction in 1993. To some experts, that suggests that the ups and downs are not over. But what we are beginning to see, are prices settling into bargain basement pricing.
We are probably in for a long haul of average returns even though there will be rallies, coupled with value returned. Volatility will continue because we are facing a period of entangled finance among markets where over $2 trillion worth of foreign trade transactions occur per day globally, most involving the US dollar, and the euro accounting for a third, the British pound 17 percent.
Those that buy right now when prices are low will have the potential to gain tremendously in the next bull run and for the long term. Many of our best stocks are down in value, many at prices seen 1 to 2 years ago!
Wealth creation will rely on speedily investing to take advantage of the “sale” pricing
Over the last ten years the market has been less volatile, and we have enjoyed incredible wealth creation without a lot of fuss. Therefore the current market seems historically unique to many and some are fearful and may want to jump ship.
The fiscal tragedy is that once an investor sells his or her holdings, when sustained rallies occur there is nothing left to regain.
To a great degree many fear-struck people have panicked and sold their investments. The wise investor knows that this selling activity cuts billions from our capital markets and re-prices stocks (and funds investing in stocks), taking even blue chip companies’ stock prices far below their actual value. It is precisely at these times when buying opportunities reveal themselves in the market. And bargain hunters begin buying at a vigorous pace, eventually creating new wealth as prices rise again.
What the experts are saying now
Many of the gurus of investment, are currently saying now is the time to buy when the stock market prices are cheap. This also reflects excellent lower pricing and value among investment funds as well (both in segregated and mutual funds).
Just weeks ago Warren Buffet prior to the American bailout vote, used the term “economic Pearl Harbour” to define the financial markets. But if you watch Buffet now, he is buying up value everywhere he can and bragging about it. He is an opportunist that admits that he gets greedy when everyone else sells out of fear. He is an experienced wise investor—investing using the psychology of the masses to make millions. Little wonder he is one of the wealthiest billionaires in the world and his firm invests Bill Gates philanthropic money (he was worth $125 thousand at the age of twenty six using the very same approach as a young investor).
“Now’s the time to be greedy when others are fearful…If you wait for the robins, spring will be over." Warren Buffet, October 2008
Fear frenzy makes the wise richer
Jim Cramer now has said, “Opportunities abound even in a volatile market” and he is now buying stocks and advising to buy due to bargain prices. Guys like Jim and Warren make lots of money on everyone else’s fear!
The free market has experienced a hundred financial crises in the last quarter of the 19th century. More recently we have experienced: the Long -Term Capital Management/Asian contagion meltdown in 1998; the war; recession layoffs; the Savings and Loan crisis of 1989-90; and the greatest one-day stock market meltdown crash of 1987. Every time a financial crisis occurs what else happens? The best investors begin to buy, buy, buy right when prices are low.
Defence strategies for these markets
- Invest right now using the dollar-cost-averaging (DCA) method.
This works well with investment funds. Every week, or month, purchase the same amount of value in a fund. If the share value happens to go lower, you’ll win because the averaged purchase price gets lower. In this case the gains will excel all the more once the markets move into a bullish stage, beginning to rise.
However we cannot throw caution to the wind. Due to talk of recession, there is a chance markets could remain volatile and perhaps move to somewhat lower values if the media begins to offer up more bad news about unemployment, banking liabilities, bankruptcies, etc. (even when this is American news the contagion affects all). For the investors who are bargain hunters, this is viewed as positive because it allows them yet to be able to buy at lower prices.
- Consider specialized Segregated Funds designed for volatile markets.
An excellent new product has been designed by some leading insurers to protect your capital against markets decreasing in value. Though this vehicle is indexed to market performance it has some very attractive life-time guarantees.
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