Guiding consumers since 2009

What to learn from a market crash

By Staff Writer


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.

Recent Articles

Featured What’s the deal with underwriting?

When you apply for a long-term insurance policy, a financial adviser will ask some personal questions about your lifestyle, family history, health, and even ask you to take some medical tests. This process is called underwriting, but is it really necessary?

 

How are you taxed on your retrenchment package?

Unemployment is one of the biggest problems in South Africa. The emergence of the Covid-19 pandemic has exacerbated the situation with a lot of companies retrenching their employees.  When retrenched, you’ll receive a retrenchment package, but do you know how much tax you’re liable for?

Car repossessed – don’t be taken for a ride

When the country is facing an economic downturn, chances are your finances will feel the pinch. This can lead you to make bad financial decisions such as skipping your vehicle payments. But every decision has consequences and if you don’t pay your instalment, the bank will repossess your car. But what can you do when this happens?

 

Why you should consider gap cover

Your medical aid should protect you from incurring large medical bills when you’re sick. But what if your plan doesn’t cover the full cost of your medical expenses? We got in touch with insurance experts to find out whether gap cover is worth having.

Deals

Office furniture at discounted prices at BDK

Price: Available on request
When: Daily
Where: Johannesburg

Da Vincis Happy Hour Special

Price: Available on request
When: Daily
Where: Cape Town

Use your Absa card and get 30% cashback at Dis-chem

Price: Available on request
When: Daily
Where: Nationwide


Latest Guide

Guide to debt rehabilitation solutions