The FTSE 100 is already down 20% in 2009. Could this be the bottom of the market? Not necessarily. There is one important ingredient missing.
The news isn't pretty: The FTSE 100 index recently dropped below 3,500, a level it first passed way back in February 1994, over 15 years ago. Ouch.
Many former stalwarts are faring even worse: Lloyds Banking Group (LSE: LLOY) shares are languishing at just 42p, having peaked at £10 in 1999, a drop of 96%. By the time you read this, with the Government having increased its stake in the ailing bank to 77%, the loss could be even greater.
BT Group (LSE: BT-A) are also in the doldrums, trading at just 74p, as are other former high fliers like Xstrata (LSE: XTA), Land Securities (LSE: LAND) and Man Group (LSE: EMG), just to name a few.
It hurts, there's no doubt. And as we watch shares fall to new lows day after day, it seems as if the market's slide will never end.
But while these sorts of apocalyptic figures make for exciting minute-by-minute updates on the news wires, they're not much use to you. They don't say anything about how shares will behave in the future, which is what actually matters when you're deciding how to invest today. That's one reason investors always ask, "Is this the market bottom?"
Well, Is This The Market Bottom?
Opinions vary. US-based Nouriel Roubini, one of the few economists who predicted this crisis, wrote a January piece masterfully titled "The Latest Bear Market Sucker's Rally Is Losing Its Steam as an Onslaught of Awful Macro and Earnings News Takes Its Toll," in which he predicted the S&P 500 Index in the US could fall as low as 500 – around 25% below where it stands now.
But last October, in a New York Times op-ed piece, superinvestor Warren Buffett compared today's overwhelming pessimism to 1932, 1942, and the 1980s -- all fantastic times to buy shares. Although Buffett doesn't try to time market bottoms, his urge to "be fearful when others are greedy, and be greedy when others are fearful" has helped him to make eerily prescient moves in the past.
When he says it's time to buy, it pays to listen.
Don't Try This At Home
The UK's answer to Warren Buffett is Anthony Bolton. Back at the beginning of 2009, in an FT.com article titled "How to spot the market’s turning point", he began with the words "My strong advice for most investors is not to try to time markets." He also urged investors not to focus on the current economic outlook when making their investment decisions.
It seems like madness, especially now, as you would think the dire state of the UK economy is driving our market lower and lower. And it is. For now.
But as both Bolton and Buffett have been at pains to emphasise, the stock market moves 6 to 12 months in advance of the economy. If you think the economy will stop bleeding sometime over that time period, around now is probably a good time to buy shares.
But I admit it's tough to do, especially after the weeks from hell stock market investors have just endured. 2009 was supposed to be a better year. So far, the FTSE 100 is down 20% in 2009. Thanks for nothing, Mr Market.
And then there's the economy. But what if it gets really bad?
Another Great Depression?
Comparisons between the Great Depression and the Great Wipeout of 2008/9 are growing ever louder.
Unemployment is on the rise. We are seeing depressingly long lines of people queuing up to register for jobs and/or for unemployment benefits. House prices are in freefall, and there is little or no good economic news on the horizon.
Yet this is nothing like the Great Depression. Back in the early 1930s, inflation was running at over 20% and unemployment was as high as 25%. The economic conditions were far, far, far worse than we're seeing today, and are likely to see ever again.
So does that mean we've already seen the bottom of the stock market?
This Is When The Bottom Will Come
Not necessarily. The bottom only comes when sellers stop selling.
As Anthony Bolton says…
"The general environment at lows can be uncertain and worrying. It is normally darkest just before dawn and, just as you’re looking into the abyss, feeling that the financial system might collapse or that no-one will ever buy equities again, the market turns. The bad news has by then fully permeated investment thinking and the last seller has sold. Markets hit the bottom not because of the appearance of buyers but when sellers stop selling."
It all backs up Bolton’s advice that investors not try to time the market. As he says: "It is better to take at least a three-year view when buying equities and not to attempt to switch in and out."
The 3-Pronged Approach To Investing In These Difficult Times
So, how should you approach this market today?
1. It's very difficult to time the market bottom. Just because shares have fallen and valuations are low, does not mean they can't fall further. So if you're going to need the money in the next three to five years, there are safer places for it than the stock market – try a savings account, for example.
2. Market timing isn't necessary to achieve great returns. You don't have to buy at the bottom to generate great returns. Committing new money to the stock market during these times of high pessimism will likely prove a great investing strategy over the next three to five years.
3. Stick to a proven stock-buying strategy. Warren Buffett built his more than $50 billion fortune in large part by purchasing stable businesses in strong competitive positions -- at discount prices. He didn't try to time markets; he just bought shares when they were cheap.
And he says they're cheap again today.
If Buffett's investing approach makes sense to you, now's a great time to begin bargain-hunting. Like Buffett, Chief Analyst at The Motley Fool’s Champion Shares premium stock picking service is amazed by the bargains he's finding today. If you'd like some help getting started, click here to try the service free for 30 days.
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> Of the companies mentioned in this article, Bruce Jackson has a tiny beneficial interest in Lloyds Banking Group, having hung onto his HBOS shares for far too long. He also has a savings account, for what it is worth.
