Pitfalls were seemingly around almost every corner for investors in 2016 and 2017 and I had my fair share of people saying to me things like: “This stock market lark is far more dangerous than you claim.“
They were wrong, of course, and the rational long-term investor makes the most of short-term hiccups. But how?
Bad news is good news
When you see headlines like “UK votes for Brexit, bank shares plummet,” what do you think? One rather vocal friend of mine told me I was nuts to have been holding bank shares, and I’m sure many were panicking about the fall in the value of their investments.
But the canny investors out there were surely thinking: “Ooh, I wonder what tempting bargains there are today.“
As it happens, if you’d snapped up, say, Lloyds Banking Group shares in their immediate depths after the Brexit plunge, you’d be sitting on a very nice 31% profit today. And with Barclays you’d be up 47%.
There was even more good bad news for housebuilders, whose shares also plummeted (as if our chronic housing shortage would suddenly disappear when we leave the EU!) Taylor Wimpey shares are up 58% since the post-referendum crash.
So whenever you hear wailing and gnashing of teeth, start looking for bargains and get on to your broker.
Avoid the madness of crowds
I reckon that famous 1841 book by Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds, is one of the best books an investor can read. The South Sea Bubble (in which even Sir Isaac Newton was caught) and the Dutch tulip mania are two old examples, but the 2,000 dotcom bubble is still fresh in many minds.
It’s actually a phenomenon that’s happening every single day — I could pick half a dozen stocks at any time that I think have been pushed up too high by investors just following the crowd. Most growth stocks go through such a phase early in their lives (as happened at ASOS) before economic reality sets in.
And the madness of crowds is what lay behind the post-Brexit slump that inspired my first lesson, above. Oh, and there’s the Bitcoin surge too.
So ignore what the crowd is doing, ignore the emotive headlines, and stick to your own long-term strategy based on solid fundamental analysis.
Politicians are a fleeting inconvenience
Do you remember when Ed Miliband put the wind up utilities investors by announcing a Labour plan for drastic controls and price-capping? Actually, do you even remember who he is now? Share prices wobbled, but if you look at the charts today you’d be hard pushed to even see the Miliband dip.
I’ve never been much of a Thatcherite, but one phrase uttered by Mrs T has stuck with me: “If you try to buck the market, the market will buck you.” She was quite right on that one as feeble attempts by politicians over the years have repeatedly demonstrated.
Maybe Jeremy Corbyn will win an election and try to implement his 1960s style of Socialism. But you know what? I doubt he’d get the time make such a fundamental change, and the market will surely carry on past him in the long term. And if he should get in, don’t forget rules one and two.