Perhaps predictably, the airwaves and newspapers are still full of little else. Speculation is rife, and there’s little point adding to it here. Which isn’t to say that the drama still unfolding in Greece isn’t without lessons for investors. Or, for that matter, doesn’t offer some potentially very profitable opportunities as well. And I’ve certainly been taking advantage of those opportunities. Have you?
Let’s start with the basics. On April 27, the FTSE 100 closed at 7,103 — an all-time high. Now, after some weeks of Grexit worries, the market is down 8%. And…
Perhaps predictably, the airwaves and newspapers are still full of little else. Speculation is rife, and there’s little point adding to it here.
Which isn’t to say that the drama still unfolding in Greece isn’t without lessons for investors.
Or, for that matter, doesn’t offer some potentially very profitable opportunities as well.
And I’ve certainly been taking advantage of those opportunities. Have you?
Let’s start with the basics. On April 27, the FTSE 100 closed at 7,103 — an all-time high.
Now, after some weeks of Grexit worries, the market is down 8%. And judging from the sea of red on my screen, it’s likely to be heading further south still.
So it’s not surprising to hear pundits speaking of panicked investors fleeing equities, and racing lemming-like into German bunds, United States treasuries, and Mongolian yak futures. (Okay — maybe not that last one.)
It’s predictable, to be sure. But not necessarily a profitable course of action. German bunds, for instance, currently yield 0.7% — implying for UK investors a real (inflation-adjusted) rate of return that is negative, ignoring the effect of any further depreciation in the euro.
What will it mean?
Now, let’s just put events into context. The market is down 8%, and could go further.
Just for the sake of argument, let’s assume a 10% fall. It might be more; it might be less — the point is that no one knows.
But do the events presently unfolding in Europe mean that decent, solid, British companies are going to make 10% less in profits?
I very much doubt it.
For while some businesses will find that a weaker euro makes for a tougher export market, businesses importing from the eurozone have cause for cheer.
And for those businesses with minimal exposure to the euro, then the overall impact is likely to be, well, minimal.
We’ve seen this movie before
Of course, with the media reporting hordes of investors fleeing equities and heading into Mongolian yak futures and heaven knows what else, it’s only natural to want to join them.
But why? Those of us with long memories have seen this drama play out many times before. Black Monday, the Russian debt default, the South East Asian financial crisis, the collapse of Long-Term Capital Management, the first Gulf War… the list is long, and being added to every few years.
But despite its length, I’ll wager that few of you recall such events in anything but the very broadest terms. Far less the fear and panic that gripped financial markets at the time.
And so, I’m sure, will be the case with today’s unsettled markets. In a few years’ time, it will be a huge ‘so what?’.
Traders vs. investors
The real problem for us investors, of course, is that a lot of the blame lies with sloppy media reporting, and flawed logic.
Let’s deal with the former, first. To be blunt: arguably, very few real investors are fleeing anything. The fleeing is mostly down to stock market traders—namely, City professionals.
Because for traders, switching out of asset classes is perfectly reasonable. But that isn’t to say that it’s the right thing for you and I, who are prepared to take the long view.
Which brings us to the flawed logic. Because investors like you and I should actually welcome such periodic waves of panic in the markets, and see them as a buying opportunity.
That’s right: a buying opportunity.
Nervous markets = lower prices
To see why, let’s paraphrase slightly the words of Warren Buffett.
Who memorably put it this way: if you’re a net buyer of stocks — rather than a net seller of stocks — should you welcome low prices or high prices?
Low prices, of course.
Because with lower prices, we can — naturally enough — buy more shares for our money.
Which can have a big impact on our performance. Do the maths, for instance, and you’ll see that with a 25% decrease in a company’s share price, you can buy 33% more shares — and obviously get a 33% increase in income, assuming an unchanged level of dividend.
And I’m certainly a net buyer of stocks — and hope to be for many years yet. You too, I’m guessing.
Pushing the ‘buy’ button
So it shouldn’t be a surprise that I took advantage of the opportunity that these market worries has presented.
On Monday morning, as markets digested the Greek ‘No’ vote, I was buying into a FTSE 100 engineering business that I’ve had my eye on—and whose shares are already down 12% from my previous purchase price.
And with markets seemingly set for a nervous summer, I’m hoping it will be the first of several such purchases.
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