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Plato's truth

After copping an absolute material mauling this year, investors, wealth builders and retirees need to take stock and ask what have I learnt from this shocking stock market shake out? And given how a lack of leadership has created and compounded the problems, it might be through leadership that we arrive at the right ‘philosophy’ for future investment.

This guy seldom gets a run in Wealth sections of newspapers, but Plato got it right for investors when he observed: “The greater part of instruction is being reminded of things you already know.”

That’s what the 2008 experience has taught me.

Similarly, the tragic year on the stock market has reminded me of the words of William A. Ward which had a great take on education:

“Committing a great truth to memory is admirable,” he said. “Committing it to life is wisdom.”
So what investment lessons do we commit to life?

The first lesson is that when you read that a stock market has returned 20-30 per cent for four years in a row, that it is the time to reduce your exposure to the stock market and increase your cash and fixed interest deposits.

In an ideal world you would have taken your profit, gone to cash, ridden up the interest rate rises where bank deposits were yielding over 8 per cent and accepted the capital gains tax bill.

Given the slump on the stock market, a tax bill is a better alternative to the losses endured.

But is this a lesson for a long-term investor? History has shown that time in the market is a more profitable strategy than trying to time the market, but the crash of 2008 must raise some doubts about this maxim.

And this is where my second lesson comes in. Timing the market is unbelievably hard. To prove my point, go back to March this year.

The high on the S&P/ASX 200 was 6,828 on November 1, 2007 and by March 18 the index was at 5086 and what we though might be another correction was a crash and a bear market. And so there was a bounce.

The index worked its way up to 5,949 and that was nearly a 17 per cent bounce. It was a bear market rally, but we did not know that. It was downhill from there.

By September we had gone back to around the 5000 mark and the market looked like that was where it wanted to be. Then Lehman Brothers was allowed to fail on September 16 and we dropped to 4,607.

Then the Congress debated the bank rescue package and we fell to 3,960 around October 10. And this was followed by the Paulson change of mind on how to rescue the banks and we slumped to 3,697, but wait there was more.

We hit a new low of 3,352 on November 20 and on the following day, the rumour was leaked that Tim Geithner was to be Obama’s Treasury Secretary and then we got the Citigroup rescue followed by another $US 800 billion to help US consumer credit markets.

The end result has been four days of Wall Street rises and the S&P 500 had bounced 19 per cent over that time.
That’s 2008 in a nutshell, so what are the lessons?

Imagine an adviser who saw the November sell off and got his client into cash at 7 per cent in January. He might have lost 12 per cent, but now he was in a safe 7 per cent and all might be forgiven.

Then the client sees the market take off again and see he has missed 19 per cent. They then get back into stocks and watch it tumble another 43 per cent.

This experience could kill an adviser-client relationship and even a nest egg. The final nail in the coffin is if they threw their hands up on November 20 and went to cash, again, and they missed the recent bounce.

The lesson remains that timing the market is perilously hard.

Another lesson for this year is that property trusts have become too much like shares and investors need to look at direct property in good rental areas. Steps need to be taken by the federal Government to allow self-managed super funds to borrow to buy investment properties. Sure, there have been changes in this area, but they involve complications and products made by financial institutions.

When I first looked at financial plans and saw their calculations were based on average annual return of 7.75 per cent, I used to think this was very conservative. I now think it is historically sensible, and when interest rates approach these levels in the future I will go into more defensive mode.

Laurence J. Peter once used this ripper of a quote: “There is only thing more painful than learning from experience and that is not learning from experience.”

Published on: Friday, December 05, 2008

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