From Business Day
October 29 2007
By Bryan Hirsch
WHAT lessons have we learnt from the panic that took place when world markets, and particularly the JSE, corrected in August? The JSE all-share index peaked in July, moving through the magical 30000 level. By the end of July it had slipped back to 29000. Sixteen days later the index was below 25000 -- down 16,6%.
Was anyone surprised? Yes and no. For the past year investors have been talking the market down and waiting for a market crash. This is no different to what has happened in the previous four years when markets have risen enormously.
Although in this period there were a few occasions when markets did fall, within a short space of time they recovered to set new highs. Many new listings came to the market, as did many new investors.
The expected drop in August affected many investors and that is why I asked if investors were really surprised.
The expectation was that markets would come back from the high levels, so why was there a panic and so much selling?
True, foreign selling was blamed, but statistics dispel that theory and reflect that they were in fact buyers. With markets now well above the highs of mid-July it supports the popular theory that the market turmoil was indeed a buying opportunity.
Not every share that came off during that period has recovered. Fashion, furniture and motor retailers are substantially down. and at the time of writing some bank shares are a lot lower than they were in July.
Every time a market corrects we should learn something. So what can we learn from this experience?
Too often we are so preoccupied with the future and spend time worrying about what is going to happen next that we miss some obvious lessons from the past.
I can't remember where I first heard it, but to quote a famous philosopher: "Those who cannot remember the past are condemned to repeat it."
A few points for the future:
* Never sell in a panic -- no one has stepped forward to admit to selling at the bottom. If you are one, vow never to do it again.
* Leveraging is dangerous. Borrowing money to buy shares and using single-stock futures to try to enhance your return could be disastrous. Why are investors not satisfied with the market returns of the past few years?
* There will always be volatility in the market -- if you missed out, don't worry because the fact is that you will get another chance.
* The old adage of "buy and hold". During the recent drop (and even as far back as 1987) if you had gone to sleep like Rip van Winkle, you would have come out ahead -- without paying brokerage or capital gains tax. You would also have received growing dividends.
Just over 20 years ago the markets suffered their worst one-day loss in history.
Most of our traders and stockbrokers are too young to remember the panic that set in.
In my opinion, there were a few differences:
* In 1987, the US Fed Reserve had just finished a round of rate increases (7,5%) whereas the Reserve Bank has lowered rates recently to 4,75%. Don't think for a moment investors and speculators were saved by the Fed's cut. The Fed's job is neither to punish nor reward individuals. Its job is to protect the economy by creating price stability, economic growth and the functioning of capital markets; and
* 1987 trading systems, faulty communications and a lack of circuit breakers (meaning US markets will close for a period during the day if the fall is too severe) were not nearly as sophisticated as they are today.
Yes, markets will fall and, on some occasions, as we have seen over the past few years, quite quickly. On each occasion this has led to better buying opportunities, although there can be no guarantee in the short term.
There are a few dark clouds on the horizon, including the weak dollar, higher oil prices, deficits in SA and the US, the low y en, inflation, and concerns about world growth.
But do remember the famous cliches, "buy low, sell high" and "don't try to catch a falling knife". Sit tight -- even if it has to be for the next 18 months.