Is the US share market going to crash?
That’s the question everyone is asking of late.
Some positive days calm the nerves, but the nagging possibility is there…under the surface.
No one really wants to tear up money if they can avoid it.
The reason people want to know whether a crash is imminent or not, is simple…they want to squeeze every last drop out of the market (or at least try to), and then sell at the very top of the market.
Good old-fashioned greed keeps them in, when, with that attitude, they should be well and truly out the exit.
The temptation of those prospective higher returns is just too hard to resist…especially when the alternative is going to cash.
Will markets crash?
The answer to the ‘crash’ question is unequivocal.
‘Yes. Absolutely. There is no doubt that’s going to happen.’
Because booms are always, always, always followed by busts.
It really is that simple.
If we use the busting of the two previous Fed-blown market bubbles as a guide, then you should expect that all the gains made during the boom will be surrendered in the bust.
In fact, this coming bust could take back even more than what’s been made since 2009.
Given the historic nature of the boom, it’s only reasonable to expect an equally momentous bust.
Staying around for an extra few percent makes no sense when you’re at risk of seeing 70% or more of your capital being sent to the ether.
That’s a reward versus risk equation that just doesn’t add up to long term wealth creation.
Far too many investors over-complicate the investing process.
Chasing ‘what has been’, rather than looking at ‘what is likely to be’.
Booms always bust.
Take cryptos…this time last year the ‘crypto-craze’ was in full swing.
Bitcoin was headed to US$1 million and beyond.
Those with ‘more money than sense’ gave these valueless tokens a (temporary) value they did not deserve. That boom busted…and there is more pain ahead for those who still believe in this stuff. There’s no doubt that from the crypto ashes we’ll see a Phoenix or two, but good luck picking that in advance.
Pot stocks are another ‘boom to bust’ story.
As reported by Market Watch on 29 October 2018…
‘There’s still no reprieve for weed investors. Shares of cannabis companies took another big hit Monday, adding to the worst week for the sector in nearly nine months, led by a big and active selloff in Aurora Cannabis Inc.’
All the punchlines have been used on pot stocks…gone up in smoke; a high followed by a low.
But losing money is no laughing matter.
Again, like cryptos, some of the pot stocks will have some value at some stage.
Identifying which ones will survive is something I have neither the time, inclination or ability to do.
My approach to wealth creation is ‘more tortoise and less hare’.
Perhaps it’s my age, or the results of lessons learned the hard way, that I no longer find the next ‘hot’ thing alluring whatsoever.
The key to long term financial success is to invest in quality assets that are valued well below their historical average. Buy good stuff cheaply.
And, do not invest in assets that you do not understand or are being priced at levels well above their historical average…and most definitely do not be tempted by momentum pricing…‘it keeps going up, I better get in’ mentality.
Also, never, ever be afraid to take a profit. The tax man will want his share, but that’s ok. The price you pay for being successful.
It’s a simple (some would say boring) formula.
In the short term you have to accept you’ll fall behind the ‘hare’.
But, in the longer term ‘slow and steady’ wins the wealth creation race.
Having been in the investment business for more than 30 years, I’ve seen my fair share of hares…most end up as road kill.
When you consider that a person aged in their 60s today could live another 30, 40 or even 50 years…you have to think long term. Thinking short term could get your capital ‘killed’.
Suffering significant losses in the next one or two years is going to have serious ramifications for decades to come. Visions of comfortable retirements will be replaced by a much starker reality…self-imposed austerity measures.
‘Keeping it simple’ approach to investing
My ‘keeping it simple’ approach is not a recent conversion.
Having been through the market collapses of 1987, 2000/01 and 2008/09, I saw first-hand how people who believed the industry spin had their lives turned upside down.
In 2011, I wrote a book titled A Parent’s Gift of Knowledge.
The book was a very limited edition…meant for a readership of three…our daughters.
The purpose of the book was to put in writing what I’ve learned from my time in the business.
A reference guide for them to use when circumstances warranted an unbiased opinion.
The book was written well before I joined the Port Phillip Publishing editorial team.
It was a labour of love, written with the intent of demystifying the investment process.
Keeping it simple, keeps you safe.
In my experience, complex investments tend to be a win/lose proposition.
The promoter wins, and the investor loses.
This is an extract from Chapter Eight — A navigation guide to the world of investing.
‘Investing is a bit like swimming in the ocean. It can be exhilarating, refreshing and fun. However, the ocean you swam in yesterday; the one that provided you with an uplifting experience may not be the same as the one you swim in today.
‘The conditions may have changed and there could be a strong undertow, dumping waves or even sharks in the water.
‘The world of investing must be treated with the same respect you give the ocean.
’Investment markets are powerful forces and they can create and destroy personal fortunes. Investment conditions are constantly changing: markets (property and shares) boom and bust and economic conditions are continually evolving.
‘The business cycle goes through a regular process of expansion (boom) and contraction (recession) just like the tides of an ocean. This is a normal course of events.
‘The thing to be aware of is where you are in the cycle. Is the economic wave about to rise or are you on the crest, about to be dumped?
‘When you decide to enter the investment world, it is wise to adopt the same caution as you would when deciding to swim in an unknown body of water. Gradually feel your way in.
‘Not to put too negative a point on it, but so many people have faced financial ruin by being naïve. Investment markets can be very rewarding, but it is important to remember some of the golden rules.’
And, one of the rules I alerted my daughters too is…
‘Booms always, always, always BUST. There is absolutely no exception to this rule. The longer a boom goes on the greater its gravitational pull to draw in as many suckers as it can before it busts. The US property boom (propelled by sub-prime lending) carried on for nearly five years before it finally collapsed. The 2003–2007 share market boom was the lure that Storm Financial used to attract many unsuspecting investors. The boom times felt like they were never going to end. For four years in a row the market returned a hugely impressive 20 percent per annum.
‘Because this incredible run went on year after year, people began to think that these results were normal…
‘The only difference with each boom is the duration. Some are short and others are long. The best tell-tale sign of a boom is when everyone is talking about it (whatever the “it” is) and they know someone who has made a small or even large fortune or they personally are about to make a small fortune. Resist the temptation to follow the herd (in fact they are lemmings headed for a fall from a very high cliff).
‘As you know, it can be rather uncomfortable going against the popular trend, but when the trend has exhausted itself you will be the smart one. As Charles Mackay once said, “Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”’
The US market is going to fall…and fall much harder than people expect.
When it does, it’ll take everything down with it.
If you were worried (even a little bit) by the uncertainty last week, then you need to consider reducing your exposure to ‘growth’ assets.
The following chart shows the gain required to recover from the loss incurred.
A 70% loss requires a 233% gain just to get make a dollar whole again.
Gains of that magnitude takes decades to happen.
Which is why anyone within range of or in retirement can ill afford to be swimming in the sea of uncertainty we find ourselves in today.
Editor, The Gowdie Letter