It is intensely tiresome trying to remain cheery when the world is tumbling all around us. But this is no time to panic and give up on the longer term strategy. At present, markets are being driven down by sentiment rather than valuation.
The unwillingness of the banks to lend to each other can only be caused by their belief that if they do, they will not get their money back and they will go bust. Oddly, their refusal to trust one another has led to the very thing that they were so desperately trying to avoid. Both HBOS and RBS have now lost their independence, though maybe that was the game plan in the first place. And one of the things that has been becoming ever more apparent is that the survivors of this crisis will be in a massively more powerful position than before; what we shall end up with is a greater, more robust and very well capitalized banking industry.
The falls in equity prices, despite what is reported, have had very little to do with this supposed fear of a bit of a slowdown next year and everything to do with forced liquidation of margin positions. This means that we are seeing, at last, some totally outstanding valuations in global businesses with sensible balance sheets, from which patient investors will eventually make money.
We are also witnessing an extraordinary desire by western authorities to re-inflate economies. The co-ordinated cut in interest rates was very welcome and will be followed by more, whether jointly or severally. Bad debts are being absorbed by governments, bank balance sheets will be recapitalized, by a combination of governments, sovereign wealth funds, Asian banks, private equity and by individuals.
At the start of this week, my business partner and I had an enlightening conversation about the pro and cons of buying into the markets now and it become clear that everyone is currently terrified of short term losses, and with good reason. Where there is threat, there is also opportunity however, and, although we all need to be looking at the long term potential rewards on staying true to the initial strategy where our objectives are to obtain real returns above the rate of inflation, perhaps being brave and investing more now is worthy of consideration if you have a more aggressive investment appetite????
We hear institutional cash levels are at near record levels; surely it cannot be long before the brave move back in to the markets and there can be precious few sellers left. How long before the total fear of more losses becomes the scramble to avoid being left behind once the recovery starts? It sounds a very silly hypothesis now, but it will happen.
In conclusion, we believe that holding cash as a long solution does not work because inflation will erode the real value. Real returns can only be achieved through investment into risk-based assets and unfortunately this means that capital values will fluctuate over short periods when things are tough. For the less experienced investor or those with a less aggressive investment appetite, we don’t believe that it is possible to time the entry into markets without significant risk and this is evidenced by the considerable swings in market prices, experienced in recent weeks. The best way of avoiding losses is to sit tight and accept that the long term benefits outweigh the short term risks.