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May 08 Pages in PDF
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Are there any more surprises to come? Peter Hegarty, author of The Artful Stock Picker tackles some commonly held finance myths. The subprime fallout It may be all over by mid-year and we may not have to worry any further. But if not, and our share market has not recovered by then, nearly everybody’s superannuation fund is going to report a negative return for the year. A down year now and then is not essentially a bad thing and is probably inevitable. Nevertheless, it is going to give a lot of people a shock. What will be their reaction? Lethargy is a powerful force and most people will grumble for a few moments then forget all about it and pour another beer. In my humble opinion, they will turn out to have made the right decision. Others will insist on doing something about it. Some people will blame their fund manager and will take steps to move their nest egg to another fund. This will be largely, or totally, a waste of effort. This is because most funds strive to imitate one another. They do this by following an index tracking investment plan. Few funds diverge from this plan and so, like lemmings, they all fall prey to the same systemic ups and downs. Quite a lot of people are already expected by the funds to feel so burned that they will amend their risk elective. That is, they will ask to have all or most of their funds moved from what they perceive as a high risk form of investment, namely the share market, into cash or something close to cash. In my view this will, in most cases, be a disastrous decision. Quite simply the market goes up and down, and always, so far, up again. Anyone who has suffered in a downswing only has to keep breathing until the upswing restores their position. To lose in the downswing and then throw away any possibility of recouping your losses in the inevitable upswing is financial suicide. But many people are going to do just that, and nothing is going to stop them. How can I be so sure that this time it won’t be different, and this time that the market will fail to recover? Well if that were to happen it would be the first time, and I am not prepared to bet on that happening. Warren Buffett is said to be the world’s greatest investor. He should be. He is the world’s wealthiest man and he did it all by investing in the stock market. He tells us that he would not think of leaving his money in cash just earning interest because he simply can’t afford it. Margin lending revisited It was only last November that I warned you about using a margin loan to buy shares. I said, “When you hand over the decision of when to sell to someone else, you render yourself helpless.” Boy oh boy, have the Opes and List debacles ever brought that home to roost? I believe that small investors in the thousands are unwinding their margin loan agreements and withdrawing their Chess sponsorship agreements with their brokers. And that can only be a good thing for the health of the country. A footnote on child care And it was only in March this year when I cast a jaundiced eye at child care centres as an investment. I did not specifically mention ABC, but I did not have to. While I was writing, unbeknown to me, it was hitting the fan for that company. But there is more. While the fan was clogging, some of the biggest broking houses in the country were recommending ABC (quaintly coded ABS by the Stock Exchange) as a buy. I will not name them as some people become disagreeable when outed. This confirmed for me once again that I don’t need to pay top fees to a big name broker for advice like that. Email: peter_840@hotmail.com |
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