The stock market roared back to life, recording its biggest ever 5-day gain. There are bargains out there, but plenty of challenges too.
Last week was a week of stock market records.
Monday saw the FTSE 100 soar 9.8% higher, its biggest ever one day percentage gain. For the week, the FTSE 100 jumped an astonishing 13.4%, its biggest ever 5-day gain.
Most investors however were not rejoicing uncontrollably. The FTSE 100 index is still down a portfolio-busting 33% in calendar 2008.
Even worse, the FTSE 100 index is down 38% from its all time peak of 6930 on December 31st 1999. Unlike many other markets, including the US, the UK market never did regain its post dot com bubble high. With the FTSE 100 index now at 4288, I’d suggest it could be another 6 to 10 years before it breaches its December 1999 peak.
15-20 Years Of Nothing
When we look back at this period, a time in which we’ve endured the dot com bust, the credit bubble, a banking crisis which threatened to bring down the global banking system and the ensuing deep recession, we’ll likely see a period of some 15 to 20 years of zero stock market returns.
On the bright side, at least you’ll be able to tell your kids and grandkids how you lived through this period, and impart on them some of the many lessons you’ve learnt during these painful times. Check out these Five Painful Stock Market Lessons for starters.
And you know what? Not only will you have lived through one of the worst periods of stock market returns, you’ll have survived, and with a bit of luck and a fair degree of skill, you’ll have prospered.
The period from March 2003 to the end of 2007 was a very profitable time for many stock market investors. Oil companies like Cairn Energy (LSE: CNE), Tullow Oil (LSE: TLW) and Dana Petroleum (LSE: DNX) soared on the back of a rising oil price, investor enthusiasm and excellent discoveries. Smaller companies like Aveva Group (LSE: AVV) and Connaught (LSE: CNT) saw their share prices rise by several hundred percent. They had plenty of mates.
Making Money In Bear Markets
You can make money in bear markets, although not in the version we’ve had in the past few weeks. Those types of bear markets, where all stocks from all sectors, regardless of valuation and regardless of quality, are hammered mercilessly are thankfully few and far between. Only now may we finally be getting to the other side of the indiscriminate selling. Now we’ve just got to contend with the discriminate selling, but that’s another story.
There are of course just two simple rules to making money in any market…
1) Buy low
2) Sell high
Seems rather obvious, hey? So why did many of us, including me, not follow those two simple rules? There were a combination of factors, but boiling them down to just a few, I’d suggest the main ones were greed, ignorance, stupidity, over-confidence and greed.
The Forgotten Four Letter Word
When markets are rising, the easiest thing in the world is to buy shares. As markets keep rising, shares get more expensive. But because they are rising, you keep buying. You are lulled into a false sense of security. You relax your rule of buying low. You get greedy. You don’t sell, because shares are going up, and selling means you miss out on more profits. Greed overcomes cautiousness. Risk is a redundant, forgotten four letter word.
When the stock market world caved in during October and November 2008, you found yourself breaking both your simple rules. Having bought high, you sold low, either because you were forced to sell for financial reasons, or you just sold to end the pain and preserve whatever capital you had left.
Buy These Shares Or Avoid Like The Plague?
What idiots. If it gives you any comfort, which it shouldn’t, at least you were not alone. But your average investor generally likes to travel with the crowd, not against it. Of course, any above-average investor worth their salt knows they should be travelling against the crowd instead of with it…they are the few who bought low and sold high. They are probably buying again now.
Or maybe not. We remain in uncertain economic times. I could give you plenty of reasons as to why companies like Lloyds TSB (LSE: LLOY) or Rio Tinto (LSE: RIO) are screaming buys today. I could give you just as many reasons as to why they should be avoided like the plague.
The Greatest Challenge
There are no easy answers in this market, in this economy. The future, as ever, remains uncertain. But that shouldn’t stop you investing in the stock market. People easily forget that even in the good times, the future is uncertain. A year ago, how many people predicted the extent and the timing of the great stock market crash of 2008?
We can’t predict what our economy and what our stock market may look like 12 months from now. My hunch is that the market will be a bit higher, but the economy will still be a little sick. But it’s nothing more than a hunch. I do however predict some shares will be significantly higher 12 months from now, and even more will be significantly higher 5 years from now. Picking the right ones is today’s great challenge.
More: Seven Bargains In This Crazy Market
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> Bruce Jackson doesn’t have an interest in any of the companies mentioned in this article.
