Waiting for the fruit
For investors there has been nothing happy about the start of this year as the Bears, following their six year hibernation, are out in force and they are hungry! Now anyone expecting a prediction of what will happen in the next few months may as well stop reading now as truthfully no-one knows. Markets are moved by human emotion and at present, like the weather, gloom is pervading. However I will try and bring a bit of perspective.
Yes, there are reasons why investors are concerned. The fall in the oil price has certainly hurt companies involved in that area, but overall, cheaper oil has greater benefits to the economy as a whole and is in effect a tax cut for consumers, both individual and corporate. I am not sure this positivity has been priced into shares yet.
The slowdown in China is another area that is causing the market concern but although they are novices to capitalism and certainly do not know how investing works they will sort it out as they still have the least debt and greatest reserves in the developed world. However the key is that neither of these situations will last forever and that is what you have to remember.
I am one of those people that suffers to an extent from Seasonally Affected Disorder. Thankfully this can be alleviated by heading off for a bit of sun for a while or switching on the Lumie lamp that I have on my desk for an hour or two. Apparently the light emitted by the lamp triggers hormones in the brain which counters the feeling of lethargy and gloom that SAD creates.
As an investor the way I counter the market gloom is to understand the underlying causes but ignore the headlines. Reading the headlines that are created in times like these will not alter the markets one bit but it can alter your mood and that can lead to bad decisions. The journalists have their thesaurus out in force looking for new ways to describe the markets as if the words "plummet" and "crash" were not adequate to describe events.
As we have said previously markets such as these are not unusual and are to be expected when we have had such a positive run over the last six years. In fact for the long term investor they are welcome as they cull any over exuberance. How can that be?
I am not a gardener but thankfully I know a man that is. Every year he takes his loppers to an apple tree in my garden. The first few times he did it I looked at the few twigs remaining and thought "oh no, he's gone too far - that will never recover". However as the size of my stomach can attest I have yet to run out of apples to make crumble.
Gardeners will know that although the tree would survive without pruning over time it would become less productive and congested with dead wood. This is the best way to think of periods such as this - a necessary adjustment to ensure that future growth is more sustainable.
My reaction the first time I witnessed my apple tree was the difference between an experienced gardener and a novice and it is no different when it comes to investing. Experienced investors do not worry over times like these and indeed welcome them as they present opportunities to get into the market at good value. They know profits will return and when they do they will be stronger. For the inexperienced investor it can create discomfort and getting a valuation of an investment that is lower than it was before is never pleasant. However like me looking at the bare apple tree they should remember that although it may not be bearing fruit just now it will in the future.
The one difference is that a gardener can predict almost to the week when the fruit will return. As investors we do not have that luxury but, until it does, do yourself a favour and ignore the nonsense.