I think the only time I’ve genuinely felt panic was in the dying seconds of the 2005 AFL Grand Final, moments before Leo Barry took his now legendary mark in front of the pack to repel the West Coast Eagles as they pressed forward one last, desperate time.
Panic can be a stupid and ultimately futile emotion. (The magnificent Swannies won, after all.) Unless you’re actually being pursued by something or someone committed to injuring/devouring you, panic can cloud your thinking and lead to rash, irrational decisions.
It might give you the idea to evade a grizzly bear by climbing a tree (and the burst of energy you need to achieve that); but the next issue you’ll have to deal with is how to fight a bear in a tree.
Movements in markets, at the end of the day, reflect the sum of all the actions of every investor in those markets. Most investors I know are reasonably sensible people; but the point is, they’re people. That explains almost everything about how and why markets move. And specifically, how markets react to today’s “news”.
On Monday, August 8, the Australian sharemarket slumped. There’s no way that everyone who traded shares that day spent the weekend undertaking a careful, considered analysis of the economic condition of the US and then all at the same time decided to sell.
Later the same day, the market not only regained all of its lost ground, it closed 1 per cent higher. Did every investor come to the carefully considered conclusion at about 2.30pm in the afternoon that the market was undervalued and decide to buy?
Of course not. This was the herd running at full tilt – first driven by fear, and then by greed.
There had to be a catalyst for the market’s initial dive, of course, and there was. But why did an announcement from Standard & Poor’s carry any greater weight than symbolism?
Nothing changed in the US economy from the day before S&P issued its downgrade, to the day it was issued. The only “news” was S&P’s actually announcing its downgrade – if you can call something “news” that was based on stuff we all already knew about.
All S&P did was put in writing what investors already knew: the US economy is a basket case, and its political system is the equivalent of a Marx Brothers movie.
So why didn’t the market tank the day before the downgrade, or some time earlier?
It’s because the S&P downgrade was the equivalent of stumbling across a grizzly bear on the hiking trail, and a big bunch of investors – I use that term loosely – were panicked into climbing a tree.
I’m reminded of the joke about the two hikers confronted by a large and aggressive bear. One panics; the other takes off his shoes and puts on a pair of sneakers.
“What are you doing?” cries the first hiker. “You can’t outrun a bear!”
“I don’t have to outrun a bear,” the second hiker replies. “I only have to outrun you.”
I read in the esteemed publication I&T News (www.iandtnews.com.au) the other day (“Esteemed” is not how you described it the other day – Ed) that some- thing like 60 per cent of trading volumes on the US sharemarket are “short-term” trades – speculators, in other words. These are the knuckleheads and morons who find themselves fighting bears in trees. If it’s only their own money they’re burning, then that’s OK with me.
But if any of them have burned other people’s money, they should be shot – particularly when you think of the amount of money that’s been tipped down the drain in completely unnecessary transaction costs. I foresee some awkward conversations between planners and clients, and between asset managers and super fund trustees.
There’s been a lot written about the events that led to S&P issuing its down- grade, and its reasons for doing so.
The theory I like most is that after years of being looked upon as the sheltered workshops of Wall Street (read Michael Lewis’s “The Big Short” if you’re in any doubt about how ratings agencies were viewed), and being used as whipping boys in the post-GFC analysis, one of them is raising a symbolic middle finger to the US Government and Wall Street.
Now that’s an analysis I can relate to.
Dixon can run surprisingly fast for an old bloke and so if you’re ever out with him and the two of you meet a bear, you’re stuffed. You can contact him via the editor of this magazine, or on info@professionalplanner. com.au
