Deng Xiaoping was probably right when he said “To get rich is glorious.” To go broke is not so glorious, however. And we have a feeling quite a few Chinese investors-like every other group of manic, euphoric, slightly mad speculators before them-are going to go broke this year. What they do then is anyone’s guess…and a communist bureaucrat’s nightmare.
This brings up an important point about investing. It’s an embarrassingly simple point, and one that makes all of our daily reckonings a little redundant, to be honest. The most important single factor to making money in the markets is being in the right asset class at the right time. Studies show being in the right asset class accounts for over 90% of your total return in any given investment.
This happens to be why we are still bullish on Aussie resource stocks despite the China melt-up. Resource stocks are the right asset class to be in right now, and probably for the next 15 years. There will be dips and potholes. But if the asset class is right (and resource stocks made a 200- year low in 2000, so they are still very cheap in historic terms), then the investment maths is really simple.
That’s it. You don’t have to be Warren Buffett, George Soros, John Templeton, or any other famous guru. You just have to buy the things that are going up when they start to go up, and then hold on for the ride.
It really is that simple. For example, if you bought stocks when they were historically cheap (relative to earnings) in 1982, it was a very good time to buy stocks. The asset class went up for nearly 20 years. The simplest strategy was to buy an index fund that mimicked the performance of stocks and then quit reading the business section every day.
This is why passively managed mutual funds like the Vanguard 500 fund became so popular. You owned “the market” and that was good enough for a good total return. Simply being in the right asset class at the right time would have done all the hard work for you.
The basic logic of bull markets didn’t change in the first two years of the millennium. But it did get a little more complicated. Now, you have to be a better sector selector. You also have to be a good stock selector. And it doesn’t hurt to be handy with geography and strategic thinking, knowing which foreign markets are expensive, and which have relative value.
Markets and Money