Investment Matters

The share-market panic: CIO comments

The first few weeks of 2016 have delivered a sharp punch to the nose for investors.  Global share-markets now officially in a “bear market” (jargon for a share-market falling 20% from its most recent peak). 

The Australian market has fallen some 8.5% this month, the worst since the depths of the GFC – October 2008.

As Howard Marks, a famous US credit manager, once said, “the investment world is full of people that were right exactly once”.  If you call the market as going down you have a 50/50 chance on any given day/month/year of being correct.  If, however, you try and call it right every day your odds diminish at an alarming rate - the likelihood of correctly calling a 50/50 bet for 5 successive days is only 3.1%. 

Notwithstanding the poor odds of being successively right in the short- to medium-term, it does not stop the media and most in this profession from assuming the share-market is telling us what is going on in the world.  The market is managed by people, some who are super smart and some not so.   But all of whom are driven by emotions.

Notwithstanding what they say on Bloomberg or ABC news, the share-market doesn’t tell us what is going on in companies.  It doesn’t tell us, day-to-day, about the value of a company.  Does anyone really think that the value of CBA has fallen by 20% in the last 6 months?

No, in the short-term the share-market tells us how people ‘feel’.  

The market might just as well, if it were under-valued (i.e. with a low P/E), be crazily bid up.

Buy cartoon

As a result in the short-term the market moves much in the same way a manic depressive moves, euphoric highs and depressive lows, whilst the reality of the world changes much more slowing than we 'feel' it does.