Rising share prices over the past 12 months or so have been making investors very happy.
And why wouldn’t they be happy? The index is at its highest point in almost 5 years.
Share prices are up 10.5 per cent since the beginning of 2013 and 21 per cent over the past 12 months. If you include dividends, the share market is up 26.7 per cent over the past year. In fact, if you include dividends, the ASX 200 is only 2.5 per cent below its all-time high, set in November 2007.
With these sorts of returns, investors have almost shaken off the pain of 2008 and 2009.
Higher prices aren’t the investor’s friend
For long-term investors, the last few years have been tough. With our collective heads now above water, all finally seems right with the world.
If you’re in retirement, and living off the proceeds of slowly selling down your investment portfolio, the market is exactly where you’d want it. However, for the rest of us, higher prices are nothing to cheer. Yes, you read that right – and here’s why.
In last year’s letter to Berkshire Hathaway shareholders, Warren Buffett addressed exactly this problem. He wrote: “The logic is simple: If you are going to be a net buyer of stocks in
the future… you are hurt when stocks rise. You benefit when stocks swoon. Emotions, however, too often complicate the matter: Most people, including those who will be net buyers in the future, take comfort in seeing stock prices advance. These shareholders resemble a commuter who rejoices after the price of gas increases, simply because his tank contains a day’s supply.”
The petrol price is a great analogy, as are power prices. Who among us (other than those with an energy-dominated share portfolio, perhaps) rejoice when power prices rise? Of course, we all want higher share prices in the years and decades ahead, but we should be wishing for that process to be slow in happening, so we can save and invest at lower rates today.
Feeling better? Don’t relax just yet
Unfortunately, most investors take more comfort from a rising tide than the reality that the higher share prices go, the harder bargains will be to find.
To invest well, we need to take a contrarian mindset. We need to, in Buffett’s words, “be greedy when others are fearful and fearful when others are greedy”. Simply applying that approach would have seen investors buying only cautiously in the run up to the GFC and more eagerly in 2008 and 2009 – or at the very least, resisting the fear-induced temptation to sell when markets slumped.
Be careful of inflated expectations
Remember, prices only increase for two reasons – either profits grow, or investors are simply prepared to pay more for each share. I’m not suggesting we’re in any sort of bubble at the moment, but we’d be well advised to buy carefully from this point on.
Investing is an inherently uncertain pursuit. The investor’s job is not to eliminate uncertainty, but to put the odds in our favour. You do that by getting yourself a good adviser and working together to create a diversified portfolio. Make sure the stocks you pick are great businesses and are attractively priced.
Bye for now
Source: The Age May 10 2013
This material provides general information current at 10th May 2013 which PFG Financial
Services believes to be reliable at the time of publication. However we are not the author of this information and therefore do not confirm its content.