‘The market is a manic depressive’
But why do we act so differently when the markets fall? Why do we act counter-intuitively and sell shares instead of buying shares more when prices are falling? Surely, if the company is strong, has good prospects, good management and has a proven track record, we should be buying more stocks by virtue of the fact that the share price will weather the storm and will recover.
Our counter-intuitive behaviour could be the result of our not being confident in our ability to understand the stock market. It is something “out there” and not tangible.
We seem to forget that the shares we are buying are companies that we know and use. Shares such as FNB, Checkers, Woolworths, MTN and Standard Bank are all traded shares, and if we are buying unit trusts, which hold those shares, or if we are directly investing in the stock market, we are essentially buying a piece of the company.
We may assume that the share price is an accurate reflection of company value, that shares are traded at a fair value and that we cannot overpay or underpay for a share.
If we look at what has happened these past few weeks, we know this statement not to be true. Stock markets are highly volatile.
As Warren Buffett says: “Remember that the stock market is a manic depressive.”
Markets are influenced by consumer sentiment, a health crisis, and what is happening in other markets. Any bad news can influence a market; as a result, currencies and the stock market fall. The share price is not only determined by company value but also by market sentiment.
South Africa being an emerging market, our currency mostly tracks other emerging-market currencies. It can be influenced by what is happening locally, but, as a whole, our currency is affected by other emerging markets. When a global crisis occurs, investors move their money to developed countries where they feel their money is safe. Once the crisis is over, the money flows back into emerging markets. We are fortunate, as investors can easily invest in and out of our stock market; we are very transparent, and we can offer high yields, which they are after.
Our clients understand that in times of crisis the worst action to take is to disinvest or move investments into cash. They acknowledge that by doing so, they will realise their loss and will be difficult to recover. As any entrepreneur will tell you, in times of crisis, new opportunities arise. By staying invested in the stock market, when the markets recover, the opportunities will present themselves.
Ideally, the best course of action is to stick to the basics: stay invested, invest more where possible, spend less and watch your cash flow. We should be buying shares, saving more and investing into our long-term retirement planning. By following the fundamentals of seeking true value and not letting our emotions get the better of us, we can overcome the crisis and create wealth.
Sigrid Madonko is a Certified Financial Planner professional and director of Quintus Wealth in Cape Town.