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?
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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.