One man sells and another buys…

One man sells and another buys…

About 2 weeks ago I was sent a link on you tube which contained the (now famous) interview between the BBC and Alessio Rastani where he was predicting the imminent collapse of the financial markets (and I guess the global financial system as we know it as well).

When I first viewed the clip it had around 16000 hits and I have just received it again (from another client) and it now has almost 2.1million hits. While there may be some truth to what he is saying, this is also a kind of self-fulfilling prophecy in that people listen to it, panic and then sell. Which results in more people panicking and selling and this then leads to wholesale panic and market meltdown. At least he was honest and admitted that if the market collapsed he stood to make money from it – so he clearly has a vested interest to see it fall (and will possibly go bankrupt if it does not).

As I reflect on this there are at least 2 things that come to mind.

1. There are many people currently predicting the imminent collapse. I was at a presentation recently where the presenter joked about this and made the comment that the markets had correctly predicted 9 of the last 3 recessions/crashes. Remember Fred Crookes who quite a few years back persistently predicted a major crash on the JSE – after getting it wrong so many times he finally got one right and the market did fall. I guess that if you predict something often enough it is bound to eventually happen. Bottom line is that no one knows where the market is headed – if they did they would not be talking about it they would be retired – but interviews like this make for “good viewing ratings”.

2. I also remember reading the following quote a few years ago “One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute.” This was by a chap called William Feather and what people fail to realise is that in order for shares to trade you have to have both sellers and buyers. So when the market falls and people are selling off massively, remember that for every seller there has to be a buyer! And this is where the real money is made – that’s how well known investors like Warren Buffett have made their money – they buy when everyone else is selling.

A third thing to remember is that when you invest money, you are doing it for the long term. Guys like Alessio are traders – they have no interest in the long term – they hope to make money from short term price fluctuations (which are often a result of irrational and emotional decisions made by so-called long term investors). I think Warren Buffett sums it up well when he says “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.” If you cant do that then perhaps you should not be investing your money – there are other options that you should be exploring.

The other options include things like asset allocation and target return funds where the equity exposure is limited and the fund manager makes use of the other asset classes such as bonds, cash and property as well. The aim of these funds is typically to preserve capital over all 12 month periods and to produce real returns of 3-5% over rolling 3 year periods as well. There are some really good managers in this space and many of them have in fact outperformed the ALSI over the last 3-5 years!

This article first appeared in Finweek 21st October 2011