... I thought was an appropriate title for this piece as we saw the
launch this week of a new film version of Dad's Army in which no doubt
the latest incarnation of Corporal Jones will utter his famous catch
phrase. So what's that got to do with investing I can hear you thinking.
Well the don't panic phrase is a good one to try and remember when we
are experiencing volatile markets such as those seen this January and
since equity markets, with the benefit of hindsight, topped out last
spring / summer.
Now some readers may be younger than me and
indeed you may have only got interested in the stock market in recent
years when it seemed like it only ever went up. While some will be older
than me and have seen it all before no doubt. But it is worth
remembering that equity markets only go up about 60% of the time and in a
bear market which is defined as a 20% drop from a top,
they can and do go down by 30% to 50% or more as we saw as recently as
2008/9. In extreme cases when certain markets are unwinding from bubble
conditions they can and do usually fall by around 80% or more from the
peak - think .com stocks back in the early 2000's for a recent example
of that.
Having said all that investing in equities for the long term (10 to 20 years) has in the past delivered decent real (after
inflation) returns in the region of 5 to 6% per annum which is always
worth remembering, but whether you achieve these returns is largely
dictated by the price or rating you pay at the outset. Swings in
ratings both up and down help to drive secular bull and bear periods in
markets which seem to have lasted on average around 17 to 18 years. It
seems to me that having had a 17 year or so re-rating which peaked out
in 2000 with the .com bubble, we have remained since then in a secular
bear market as the FTSE has failed to make a decisive break into new
high ground. This has not however precluded big swings a profitable
period within that along the way, which is also in common with history.
Any way if you want to read more about…
The thing I always think is this. The dividends relate to the business in reality. Is the business one that will make money in all seasons because life goes on, whatever happens on Wall Street? The share price bears little relationship to that reality but is in the hands of billions of individuals, some of whom are thick as custard, many of whom are greedy and most of whom are inherently fearful. This mismatch and the fact that all life is uncertain, is what makes this such an absorbing hobby.
