Think how you buy fruit and veg at the greengrocer – when it comes to shares, we behave in exactly the opposite way.
The above thought was one of several “lessons learned” that a major funds manager published to mark the 25th anniversary of the Crash of ’87. Investors are always learning, often the hard way, but this is one of the more important lessons that people just keep ignoring.
It’s really just another way of saying we should be wary of buying high and selling low, of going along with the herd instinct, but the fruit and veg analogy is a nice way of putting it. When cherries are cheap, we’re more likely to load up on them, when mangos are expensive, we’re more likely to pass or only buy one – we behave rationally in response to the price mechanism.
But when it comes to the stock market, rational behaviour goes out the window. When prices are racing higher, the herd dives in and buys more, pushing prices higher again – until they pop. When prices are falling, the herd sells furiously, ensuring prices fall further.
I’m sick of hearing people complain about the Australian stock market not rallying like Wall Street has over the past year – why would you want it to? It’s a bit like picking up an orange in the supermarket and saying: “I wish this was as expensive as the oranges in Japan.”
There’s a relativity argument in this example – does it mean oranges in Australia are too cheap or that oranges in Japan are too expensive? But that doesn’t matter as much as whether the orange you have the chance to buy represents good value.
With the Australian market remaining cautious, the chances of being able to buy well are dramatically increased. Our shares have picked up from their recent lows yet still offer good value with attractive, sustainable dividend yields. Why would you want them to become more expensive before buying?
The answer for many investors or would-be investors is fear that the price could fall. Trouble is, the only way they will have confirmation that prices are rising is after they have risen – and the bargain fruit and veg on offer are no longer bargains.
The fruit and veg lesson came from Tom Stevenson, investment director with Fidelity Worldwide, one of many to use the Crash of ’87 anniversary for a bit of reminiscing. With the benefit of hindsight, 87 now seems like a rather mild experience – a stock market bubble pricked while the developed economies remained fundamentally unchallenged – but I can assure you it was scary as all hell at the time to see so much nominal wealth wiped out in a day or two.
The GFC and sovereign debt crises are proving more long-lasting and challenging to deal with, but the fruit and veg lesson still applies. Now, what price are those delicious Bowen mangos as the weather warms…