This Silly Selling Must End Soon

Published in Investing on 8 October 2008

As the UK Government steps in to shore up local banks, global stock markets are still on a knife edge, as are the nerves of ordinary stock market investors. Shares are cheap, but that’s not enough to turn things around. We need a few days of calm. That’s all.

I used to enjoy it when stock markets tanked.

I enjoyed the period from January 2003 to March 2003 when the FTSE 100 fell from 4000 to its bottom of 3287. As others were selling, I was buying. When the rebound came, it came quickly. I was being greedy whilst others were being fearful – classic Warren Buffett stuff.

More recently, we saw a decent wobble in August and September last year, just as the whole sub-prime crisis was kicking off. Again, I was a buyer, and again, the rebound came quickly.

Next was January this year. As a reminder to just how far markets have fallen in such a short space of time, on January 21st 2008, the day the FTSE 100 index fell 5.5%, the index opened at 5900. Today it trades at just 4600.

Anyway, I was a buyer around then too, sticking to the theory it was best to buy during the periodic times of mass panic.

Fast forward to now. My portfolio is looking rather sick. My cash available for investing is low, so even if I wanted to, I wouldn’t be able to buy much of anything.

Every day I see the value of my portfolio heading south. I still own shares in Barclays (LSE: BARC) and HBOS (LSE: HBOS), having first bought them some years ago, but at prices higher than they trade at today.

This Is No Longer Fun

I no longer enjoy this tanking market.

It’s mentally tough seeing the value of your portfolio sink heavily on a daily basis. I’m confident that in the full course of time, some of the shares showing losses today should be profitable. But it will take time.

I’m also realistic enough to fully admit that I’ve permanently lost money on some of my investments. HBOS, for example. It will take years, if ever, to get back to break-even on some of my other investments.

There are 3 important points to be made here before I go on…

1. The price I initially paid for a share is irrelevant today. The market doesn’t care, and nor should you.

2. In the face of an investing loss, many investors are fixated on getting back to break-even. It’s a mistake. You don’t have to make it back the way you lost it. There may be better options. Losses are part and parcel of the investing game.

3. It’s always instructive to remember a share that has dropped 50% needs to gain 100% just to get back to break-even. Finding companies that gain 100% from any level is very difficult.

Mistakes I’ve Made, Part 36

Mistakes – I’ve made more than a few. But just because the share price of a company has fallen, doesn’t necessarily mean you’ve made a mistake. As I said above, on a 2 to 5 year perspective, from here, I expect the share prices of many of the companies in my portfolio to rise.

But today, the gloom remains. In the US overnight, The Dow Jones Industrial Average dropped 508 points, or 5.1%, to 9,447, meaning it has dropped 29% in 2008, the worst fall since 1937.

Right now, in the US at least, this is the worst market in 71 years! No wonder I’m not enjoying this particular tanking market. At least I’m not alone, as most stock market investors would be having similar painful feelings.

When Will This Market Turn?

What is it going to take to turn this market around? Clearly no-one is going to start buying just because shares are cheap, because they’ve been cheap for a while.

We need the credit markets to thaw. Today they are frozen shut. Banks are unwilling to lend to each other, not surprising really, as like us, they are unsure which will survive in their current guise, and which might fail.

Credit makes the world go round. Excessive debt is what’s got us into this mess in the first place, but we’re not talking about excessive debt now. We’re talking about everyday businesses and people.

Everyday Businesses & Mortgages Are At Risk

Many businesses have lines of credit with their banks. They are perfectly good businesses, and the debt levels are far from excessive. What if, suddenly, banks cut off those lines of credit? Many businesses would be doomed – they can’t just quickly raise money at the drop of a hat.

For home owners, what if, at the end of a period of fixed rate mortgage, your bank refused to roll your mortgage over to the standard variable rate? What if they decided they didn’t want to loan you money any more, and you had to sell your house quickly in order to pay back the outstanding balance?

[As an aside, why not give the Motley Fool Mortgage Service a try to see if we can beat your existing mortgage? We search the whole market with our award-winning no-fee mortgage service. It costs nothing to try!]

We Just Need A Little Calmness

Central governments have been trying to thaw the credit markets. It hasn’t worked so far. Today the UK government will part-nationalise the UK banks.

Will it thaw the credit markets? It should. In time, I think it will. How long? It could happen any day.

Like the stock market, the credit markets are completely lacking in confidence. They are wrought with fear…the fear of failure. They just need firstly a few days, then a few weeks, of relative calm.

Then we can all get back to the business of buying great companies at good prices.

> Amidst all this gloom, if you have cash in the bank, now might be a good time to compare savings accounts at Fool.co.uk.

> Of the companies mentioned in this article, Bruce Jackson has a beneficial interest in Barclays and now a very small beneficial interest in HBOS.

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Comments

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supasap 08 Oct 2008 , 10:05am

I think society needs to make its mind up, do we want free market capitalism where things can and do go wrong because of the excesses of fear and greed or do we want state managed economies with steady eddy rates of growth lower differences between rich and poor planned income streams in retirement and basic levels of security for families ie if you can work you will be provided with a job, less exciting perhaps in one sense but is free market what we really want...... seems to me we like to pay lip service to market economics especially during the good times of growth even ironically the fortunate members of the middle classes looking forward to to their index linked pensions (independent of the fortunes of the world) but when the bubble bursts it's all about regulation, nationalisation, state intervention and suddenly hey we are all Keynsian again - so going back to the "if you can't stand heat" metaphor why not design cooking so the kitchen never gets that hot in the first place? God knows there's enough resources to house and feed everyone if it is planned properly and we keep fear and greed at bay....

macroeconomix 08 Oct 2008 , 11:22am

I think you need to look at some financial history Bruce. That's the best lesson to take from all this.

Western economies are debt laden, with significant disequilibriums in our economies. You need to be more forward looking, look at the future earnings, not at the value metrics of the today and now because they are quite simply irrelevant in this environment.

It is why I try to encourage folks to look at the Austrian School of economics and understand business cycles, and the way our monetary system actually works!

Rest assured, I think it may get substantially worse from here until next year. Though there are some long term bargains to be had now .. particularly from those sectors with very clear earnings visibility (e.g. the O&G sector ;)

jerryrc 08 Oct 2008 , 12:34pm

""For home owners, what if, at the end of a period of fixed rate mortgage, your bank refused to roll your mortgage over to the standard variable rate? What if they decided they didn’t want to loan you money any more, and you had to sell your house quickly in order to pay back the outstanding balance?""

Bruce, when would a lender decide, on a mortgage with a decent unexpired term (i.e not the end of the fixed rate period) suddenly decide to foreclose ? Are you not confusing the end of a fixed rate period with the end of the repayment term ? - you've got me worried....

supasap 08 Oct 2008 , 4:03pm

AvensisTom, I have just watched the silver bear film that you sent the link for.... it is good and you probably need to keep attaching it to all the posts on here as people turn less frequently to the "old" ones, transience being the name of the game... so thanks for that, it is always refreshing to hear what is essentially a communist diagnosis and proposal to save the world from someone with an American accent, I learnt very much the same as a younger man reading the Ragged Trousered Philanthropist when he talked at length about the "money trick" where those who create the true wealth cannot buy it all back from the few who own it. In terms of what the next steps are, I suppose it is still as unlikely as it was back in England in the nineteenth century when Marx was writing that people will a) realise the awful reality of the money game and b) have the bottle to do something about it.... the Labour party never even talk about socialism for instance, I don't hear Obama asking the American people to give up perpetual credit and debt and dismantle the concentration of power of the financial and political elite (which is where I depart from the sentiment of the film citing the bankers as all powerful, prefer the concept of the C W Mills analysis of a circulation of elites in the business, poilitical and military world but that is splittinng hairs

gartons 09 Oct 2008 , 10:01am

Sorry to post the same comment twice but it applies equally to both articles.

Can anyone in their right mind realistically consider investing in the stock market at present?

Unless of course, you're gambling with other people's money which is how the clowns in the City make their undeserved bonuses.

MrContrarian 09 Oct 2008 , 1:57pm

Can anyone in their right mind realistically consider investing in the stock market at present?

"The secret to getting rich on Wall Street is to be fearful when others are greedy and greedy when others are fearful."

I would not buy banks but there are many very cheap shares with solid businesses or assets today - Charter, Dana Petroleum, Encore Oil, Soco International are some that I own and would buy if I did not have any.

Ginger125 09 Oct 2008 , 6:38pm

When is supasap going to get off his political soapbox and start trying to give some practical answers?

Saveaholic 09 Oct 2008 , 7:03pm

I think I'm in my right mind (it's so difficult to know for sure) but I'm still investing bit by bit - I'm thinking 20-25 years ahead, when all this will hopefully be a barely visible blip on the graph. I think we're probably in for a fairly uncomfortable couple of years, but while my existing holdings have taken a pounding, the shares/units I'm buying during this bear market are looking like good value for money and will quickly start showing a profit when the good times start rolling again.

Only buying when the market is high seems a daft strategy to me. Of course, it could be that this 'crisis' heralds the end of capitalism and civilisation as we know it, but if that's true I reckon my portfolio will be the least of my worries.

supasap 09 Oct 2008 , 8:10pm

ginger125
I wasn't aware I was on a soap box but looking at my post I can see where you are coming from... if you want practical answers I suggest you view the videos that avensistom posted and others have posted eg money masters on google.... or indeed read the Ragged Trousered Philanthropist if you have time and then spread the word, like you I have no power on my own but spreading the word about how a handful of financial blaggards are determining how much you pay for your house and car and the existence of business "cycles" which is them having a laugh at our expense ie hey hey good times folks fill yer boots with credit folks followed by er sorry we don't want to play anymore can you just suffer for a while whilst we buy your assets at rock bottom prices again.... But ginger125 if you think this is too "political" what advice do you have? Stick your head in the sand and try and believe that the unequal distribution of power and money is a natural order or be taken in by tinkering at the edges policies of the political puppets eg "we will freeze your council taxes for two years" ..... Jees to think that people still get worked up about Labour versus Tory arguments..... that is political with a very very small p.... we need to dismantle the apparatus of the financial elite put it into the hands of the people

zcfr 10 Oct 2008 , 11:06am

I started buying ftse 100 for the first time in my life in august 07 and bought from 6000 to 6700, so obviously I am not delighted. But then I had read enough before I started buying to be prepared for the worst that capital markets could do.As a result I stopped just short of investing 20% of my savings believing that the only diversifier available to stock market investors that really works is time. Buy your shares over time and allways remain liquid enough to buy more, whatever might happen. You cant get rich that way but I believe that over time I will do better than leaving my money in the bank, after all as a member of the down trodden working classes I am quite aware that every day folks get out of bed and most of us strive to do our jobs as well as we can, and who reaps the finnancial bennefit? the share holders thats who so sod it I am buying shares again and will follow this market all the way to the bottom, remaining liquid at all times. Its ivestors who believe that above average returns from the stock market can be sustained without a correction who suffer. I bought again yesterday and this morning and will do so again, given the utter pancic out there I wouldnt be surprised to see the index at at 3500. Just be steady and assume that above average returns will allways eventually return to mean and adopt a strategy which can cope with this.
zcfr

supasap 10 Oct 2008 , 9:16pm

good luck zcfr............ I am trying to persuade my other half with spare dosh to invest now... you will make money I am sure

Chrisw25 11 Oct 2008 , 8:37pm

Good luck zcfr..... I believe you have the right idea. If you have some spare cash and are looking long term then now seems a good time to invest. I started about the same time as you but pick individual shares. So far the dividents paid out added up to over 10% -- far better than any saving account. My shares lost 33% in value which includes dealing costs, but as this is an retirement investment and I don't need access to the cash now I'm still hoping that the value will go up in the next 35 years when I plan to retire.
And Supasap---your ideas of government controlling moneys and banking systems have been tried and failed too just look at East Germany and other Eastern European Countries. How about making Bank Directors and Excecutives pay back their bonuses to save some banks, I'm sure that would save the taxpayers a few pounds.

TonyBritten 11 Oct 2008 , 10:06pm

One of the problems that will be encountered when the market turns is the constant rush of sales that will occur each time the market has sizeable thrusts upward; in this scenario there will be many shareholders who want to exit because they have shattered nerves coupled with those doing quick In and Outs. Eventually these actions will burn themselves out and a new bull dawn will start.
We must not forget that when Interest rates fall, the market rises. I am a long termer and I let my holdings fall with the market - these paper losses I have are huge, but no one could have known the depths to which it would descend. In 3-5 years time these troubled times will be as relevant as the Battle of Bosworth Field.
If you have spare cash now and are interested in the low prices then you can drip feed into the market. Don't forget to ensure that your selections should be with companies with sound balance sheets - the important figure is "Net Current Assets".

supasap 08 Oct 2008 , 10:05am

I think society needs to make its mind up, do we want free market capitalism where things can and do go wrong because of the excesses of fear and greed or do we want state managed economies with steady eddy rates of growth lower differences between rich and poor planned income streams in retirement and basic levels of security for families ie if you can work you will be provided with a job, less exciting perhaps in one sense but is free market what we really want...... seems to me we like to pay lip service to market economics especially during the good times of growth even ironically the fortunate members of the middle classes looking forward to to their index linked pensions (independent of the fortunes of the world) but when the bubble bursts it's all about regulation, nationalisation, state intervention and suddenly hey we are all Keynsian again - so going back to the "if you can't stand heat" metaphor why not design cooking so the kitchen never gets that hot in the first place? God knows there's enough resources to house and feed everyone if it is planned properly and we keep fear and greed at bay....

macroeconomix 08 Oct 2008 , 11:22am

I think you need to look at some financial history Bruce. That's the best lesson to take from all this.

Western economies are debt laden, with significant disequilibriums in our economies. You need to be more forward looking, look at the future earnings, not at the value metrics of the today and now because they are quite simply irrelevant in this environment.

It is why I try to encourage folks to look at the Austrian School of economics and understand business cycles, and the way our monetary system actually works!

Rest assured, I think it may get substantially worse from here until next year. Though there are some long term bargains to be had now .. particularly from those sectors with very clear earnings visibility (e.g. the O&G sector ;)

jerryrc 08 Oct 2008 , 12:34pm

""For home owners, what if, at the end of a period of fixed rate mortgage, your bank refused to roll your mortgage over to the standard variable rate? What if they decided they didn’t want to loan you money any more, and you had to sell your house quickly in order to pay back the outstanding balance?""

Bruce, when would a lender decide, on a mortgage with a decent unexpired term (i.e not the end of the fixed rate period) suddenly decide to foreclose ? Are you not confusing the end of a fixed rate period with the end of the repayment term ? - you've got me worried....

supasap 08 Oct 2008 , 4:03pm

AvensisTom, I have just watched the silver bear film that you sent the link for.... it is good and you probably need to keep attaching it to all the posts on here as people turn less frequently to the "old" ones, transience being the name of the game... so thanks for that, it is always refreshing to hear what is essentially a communist diagnosis and proposal to save the world from someone with an American accent, I learnt very much the same as a younger man reading the Ragged Trousered Philanthropist when he talked at length about the "money trick" where those who create the true wealth cannot buy it all back from the few who own it. In terms of what the next steps are, I suppose it is still as unlikely as it was back in England in the nineteenth century when Marx was writing that people will a) realise the awful reality of the money game and b) have the bottle to do something about it.... the Labour party never even talk about socialism for instance, I don't hear Obama asking the American people to give up perpetual credit and debt and dismantle the concentration of power of the financial and political elite (which is where I depart from the sentiment of the film citing the bankers as all powerful, prefer the concept of the C W Mills analysis of a circulation of elites in the business, poilitical and military world but that is splittinng hairs

gartons 09 Oct 2008 , 10:01am

Sorry to post the same comment twice but it applies equally to both articles.

Can anyone in their right mind realistically consider investing in the stock market at present?

Unless of course, you're gambling with other people's money which is how the clowns in the City make their undeserved bonuses.

MrContrarian 09 Oct 2008 , 1:57pm

Can anyone in their right mind realistically consider investing in the stock market at present?

"The secret to getting rich on Wall Street is to be fearful when others are greedy and greedy when others are fearful."

I would not buy banks but there are many very cheap shares with solid businesses or assets today - Charter, Dana Petroleum, Encore Oil, Soco International are some that I own and would buy if I did not have any.

Ginger125 09 Oct 2008 , 6:38pm

When is supasap going to get off his political soapbox and start trying to give some practical answers?

Saveaholic 09 Oct 2008 , 7:03pm

I think I'm in my right mind (it's so difficult to know for sure) but I'm still investing bit by bit - I'm thinking 20-25 years ahead, when all this will hopefully be a barely visible blip on the graph. I think we're probably in for a fairly uncomfortable couple of years, but while my existing holdings have taken a pounding, the shares/units I'm buying during this bear market are looking like good value for money and will quickly start showing a profit when the good times start rolling again.

Only buying when the market is high seems a daft strategy to me. Of course, it could be that this 'crisis' heralds the end of capitalism and civilisation as we know it, but if that's true I reckon my portfolio will be the least of my worries.

supasap 09 Oct 2008 , 8:10pm

ginger125
I wasn't aware I was on a soap box but looking at my post I can see where you are coming from... if you want practical answers I suggest you view the videos that avensistom posted and others have posted eg money masters on google.... or indeed read the Ragged Trousered Philanthropist if you have time and then spread the word, like you I have no power on my own but spreading the word about how a handful of financial blaggards are determining how much you pay for your house and car and the existence of business "cycles" which is them having a laugh at our expense ie hey hey good times folks fill yer boots with credit folks followed by er sorry we don't want to play anymore can you just suffer for a while whilst we buy your assets at rock bottom prices again.... But ginger125 if you think this is too "political" what advice do you have? Stick your head in the sand and try and believe that the unequal distribution of power and money is a natural order or be taken in by tinkering at the edges policies of the political puppets eg "we will freeze your council taxes for two years" ..... Jees to think that people still get worked up about Labour versus Tory arguments..... that is political with a very very small p.... we need to dismantle the apparatus of the financial elite put it into the hands of the people

zcfr 10 Oct 2008 , 11:06am

I started buying ftse 100 for the first time in my life in august 07 and bought from 6000 to 6700, so obviously I am not delighted. But then I had read enough before I started buying to be prepared for the worst that capital markets could do.As a result I stopped just short of investing 20% of my savings believing that the only diversifier available to stock market investors that really works is time. Buy your shares over time and allways remain liquid enough to buy more, whatever might happen. You cant get rich that way but I believe that over time I will do better than leaving my money in the bank, after all as a member of the down trodden working classes I am quite aware that every day folks get out of bed and most of us strive to do our jobs as well as we can, and who reaps the finnancial bennefit? the share holders thats who so sod it I am buying shares again and will follow this market all the way to the bottom, remaining liquid at all times. Its ivestors who believe that above average returns from the stock market can be sustained without a correction who suffer. I bought again yesterday and this morning and will do so again, given the utter pancic out there I wouldnt be surprised to see the index at at 3500. Just be steady and assume that above average returns will allways eventually return to mean and adopt a strategy which can cope with this.
zcfr

supasap 10 Oct 2008 , 9:16pm

good luck zcfr............ I am trying to persuade my other half with spare dosh to invest now... you will make money I am sure

Chrisw25 11 Oct 2008 , 8:37pm

Good luck zcfr..... I believe you have the right idea. If you have some spare cash and are looking long term then now seems a good time to invest. I started about the same time as you but pick individual shares. So far the dividents paid out added up to over 10% -- far better than any saving account. My shares lost 33% in value which includes dealing costs, but as this is an retirement investment and I don't need access to the cash now I'm still hoping that the value will go up in the next 35 years when I plan to retire.
And Supasap---your ideas of government controlling moneys and banking systems have been tried and failed too just look at East Germany and other Eastern European Countries. How about making Bank Directors and Excecutives pay back their bonuses to save some banks, I'm sure that would save the taxpayers a few pounds.

TonyBritten 11 Oct 2008 , 10:06pm

One of the problems that will be encountered when the market turns is the constant rush of sales that will occur each time the market has sizeable thrusts upward; in this scenario there will be many shareholders who want to exit because they have shattered nerves coupled with those doing quick In and Outs. Eventually these actions will burn themselves out and a new bull dawn will start.
We must not forget that when Interest rates fall, the market rises. I am a long termer and I let my holdings fall with the market - these paper losses I have are huge, but no one could have known the depths to which it would descend. In 3-5 years time these troubled times will be as relevant as the Battle of Bosworth Field.
If you have spare cash now and are interested in the low prices then you can drip feed into the market. Don't forget to ensure that your selections should be with companies with sound balance sheets - the important figure is "Net Current Assets".

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