£91 billion – that was the figure that was wiped off the value of the FTSE 100 at one point on Black Monday, though this figure declined to £74 billion by the close of play.
The VIX — more commonly known as the Fear Index, a measure of market volatility — spiked sharply as investors took flight during a punishing day’s trading in London, not to mention across the globe.
The rout continued across the pond with the S&P 500 losing almost 4% by the close of play, while the Nasdaq and DJIA were also off by over 3.5%
As readers will be aware, all this appears to be down to fears that the Chinese economy is slowing at a much faster pace than previously thought. I believe that the current political chaos in Greece isn’t helping matters, either.
The chart below painfully illustrates the panic seen over the last few trading days:
Time To Be Greedy?
It is often at times like these that the best opportunities can be found. Indeed, as I looked across my own portfolio (down by 3.7% on the day) I noted that not one stock within showed a gain, though there had been no negative stock-specific news.
Looking across the FTSE 100, investors saw shares in the likes of Royal Dutch Shell, BP and Glencore dive. However, this didn’t surprise me – they have been sliding for some time due to falling commodity prices.
What was slightly more surprising, though, was the fact that we also saw shares in quality businesses such as Bunzl and Mondi fall by over 6%. This looks to me like an overreaction, possibly creating an opportunity to own shares in well-managed businesses for the long term.
Time To Be Fearful?
All that said, the fears that a major world economy is slowing faster than predicted are there for all to see. As we already know, many of the constituents of the FTSE 100 derive the majority of their profits from across the globe; for some, Asia is where the majority of their business is done. Two businesses that spring to mind are insurer Prudential and premium retailer Burberry, both global operators, but both have a significant presence in China and the surrounding Asian area.
If these fears turn out to be a reality, I wouldn’t be surprised to see the share prices of these and other China-focused businesses slide further. As we have already witnessed, though, the knock-on effects are being felt across the world – if these fears continue to spread, investors could well be in for a bumpy ride.
Time To Be Realistic?
Those readers who follow the investing legend that is Warren Buffett, who coined the phrase “Be fearful when others are greedy and greedy when others are fearful”, should be well aware of what he means. Currently, investors are worried — with good reason — about various macro-economic factors, with the focus being on China and, to a lesser extent, the issues in Greece and across the rest of the Eurozone.
As these fears work through the system, we are likely to see the volatility continue; indeed, as I type, the Shanghai index — China’s benchmark index — has fallen further. However, elsewhere, investors have seen gains in Australia and Japan.
To my mind, a disciplined approach is required by investors who want to make money out of this volatility. You can bet with a good degree of certainty that you will never buy a stock at the bottom or sell at the top: the market is notoriously difficult to time.
The trick to making money here is time in the market – not timing the market. In short, buying quality companies at attractive prices, and owning those shares over the long term, is the way to achieve financial independence.