Australia has a problem.
It’s called bravado. Australia is walking with a swagger.
That means trouble. Because you know the old saying: pride comes before a fall.
Pride is one of the biggest pitfalls for most investors.
That’s why you should try to avoid it. Because if you do, it will give you a clear view of the market… and help you save money and make money too.
Below we’ll give you our three top tips to avoid investor pride so you don’t have an investing fall.
But first…
A Social Experiment
“For a few souls at the employment margin who might make up that rise to a 5.5 per cent unemployment rate, one hopes they will be able to take compensatory pride in belonging to the nation that’s leading the developed world in returning to a budget surplus.” – Michael Pascoe, Sydney Morning Herald
Perhaps the publishers of the Sydney Morning Herald could help us with a two-step social experiment.
It was suggested by Slipstream Trader, Murray Dawes after we sent him a copy of the Pascoe article…
Step 1: Move Michael Pascoe to the “employment margin”.
Step 2: Ask him if he’s proud that Australia is “leading the developed world in returning to a budget surplus.”
We look forward to hearing the outcome of the experiment!
[Ed note: by the way, as we write, Murray has just finished recording his latest free weekly stock market update video on the Slipstream Trader YouTube channel. Click the market update link to view it.]
The Pascoe quote is a perfect example of Australian mainstream arrogance. Things are so wonderful even those who lose their jobs will stand back, suck on their pipe and say, “it’s great to be unemployed.”
Mainstream commentators are convinced Australia is a special case… immune from overseas debt problems. So they overlook what is obvious.
That’s pride and blinkered thinking. It’s the old head-in-the-sand treatment. And it’s also one of the biggest mistakes most investors make.
Fortunately, ditching your pride to become a disciplined investor isn’t hard. You just need to follow three easy tips…
Sounds obvious right?
Wrong. Investors overpay for stocks all the time.
They see a stock price going up and figure it must be good.
By the same token, those same investors also see a falling stock and assume it must be cheap, “Why, it was a dollar last week, today it’s only 50 cents… apart from the price nothing has changed.”
That was the investor thinking behind the rush to buy BlueScope Steel [ASX: BSL] “on the dips” this past six months:
And why not? Three years ago BlueScope Steel was trading at $12 per share. Today it’s around 40 cents a share.
Bottom line, a falling share doesn’t mean it’s cheap… and a rising share doesn’t mean it’s good.
When it comes down to it, there’s no substitute for doing proper analysis (technical or fundamental), rather than jumping on a bandwagon… or thinking you’re a contrarian just by buying a falling stock. That’s not contrarian. In many cases it’s just plain dumb.
The great thing about buying shares is no-one else needs to know about it. If you pick a stock and it’s a dog, you don’t have to tell anyone… you don’t need to be embarrassed… you can just lick your wounds and sell it.
Of course, as the editor of a share tipping newsletter (Australian Small-Cap Investigator), when we tip a stock, people do know… all 20,000 of our subscribers.
But here’s the thing: whether you tip stocks for your own benefit or for others to invest in, admitting you’re wrong is just as important as picking a stock-doubler.
The thing is, when do you know you’re wrong?
Mostly, you know you’re wrong when the price is going against you. But many investors ignore the message. The easy way is to deny you’re wrong… to make excuses for why the stock is falling, “It’s a great company, I can’t believe the price is going down.”
Remember the aim of investing is to make money.
You can’t make money if the stock price is falling (unless you’re like Murray and you short sell stocks).
So, if the price goes against you, it’s important to swallow your pride. You sell. Now, doing that is hard… because pride is a powerful emotion. That’s why we use trailing-stop orders.
If a stock price falls to a set level, we tell our Australian Small-Cap Investigator subscribers to sell. Sometimes we get bad mail from subscribers who are annoyed… they’d prefer it if we stuck with it.
That’s pride too. But we prefer to tell subscribers to cut their losses and get out. After all, after reflecting on the stock, we can always get back in.
This is the first thing many investors lose when they enter the stock market.
Not only do they buy and hold on when they shouldn’t… but many investors start making up outcomes to fit their investments rather than thinking about what investments to make to meet expected outcomes.
The housing spruikers are a classic example. Because the Aussie housing market didn’t crash in 2008, the spruikers picked out everything that appeared to be different in Australia and claimed those were the reasons why Aussie prices would never crash:
Housing shortage… population growth… coastal cities… “marvellous water views”… and so on.
It didn’t matter that each of those reasons had nothing to do with Aussie house price growth – it was all about the credit bubble.
We see the same in the Aussie stock market. When investors have so much skin in the game they justify their position rather than stepping back to reconsider whether their position makes sense.
That’s all part of fear and greed… of missing out if stock prices rise after they’ve sold.
All up, investing is only as hard as you make it.
But if you apply these three simple tips to your investments it should reduce your investing mistakes, and help you get out of any unforeseen mistakes you do make… because believe us, you’ll still make mistakes. It’s how you manage them that counts.
Cheers.
Kris.
Related Articles
Individualism Versus Collectivism
Ditch the Copy-Cats and Back the Innovators
A Bright Future for Destruction
It’s Time for the Market to Decide
From the Archives…
Stock Market Predictions
2011-11-25 – Kris Sayce
Stocks on the Australian Market Today – Three Things You Need to Know
2011-11-24 – Shae Smith
The Gospel of Gold and Silver
2011-11-23 – Kris Sayce
China’s Bubble Will Pop in 2012
2011-11-22 – Greg Canavan
ASX Stock Market Winners, Losers and the Newly Dumped
2011-11-21 – Aaron Tyrrell
For editorial enquiries and feedback, email moneymorning@moneymorning.com.au
November 30th, 2011 at 11:36 pm
Well TRB how will Chanos fare with China hitting the accelerator, and central banks increasing liquidity?
US job creation is accelerating, and retail salea are above pre GFC levels
Equities will soar tomorrow.
December 1st, 2011 at 6:19 am
Peter – The Chinese can turn the spigot so that public money is spent so that will certainly help demand for AUS.
But equally true, depending on foreign investment rules which may become more accommodating, chinese businesses with profits from govt and non govt spend may decide to invest in AUS or US housing.
So there’s potential for more demand flowing to the west.
Of course US is unsustainable with $1.5t to $2t deficits per year, especially with a trigger happy QE mentality. So AUS looks a better bet.
AUS interest rates will drop significantly when spending (credit expansion) doesn’t resume soon enough.
Our dollar may drop then and foreign investors many find AUS affordability of assets very appealing.
Downside risk is huge. But we have bullets and external moneyflow.
If it is that bad, then why isn’t the stock market down 30%. Why aren’t sophisticated investors and hedge funds pricing the market on that basis? Are they really that naïve?
There’s a big difference between slowdown and end of world scenarios.
We have many more iterations to go through.
Never underestimate political will. China will spend and we will drop rates and stimulate (forget surplus).
December 1st, 2011 at 7:39 am
Yes M&M we will reduce interest rates, and that will help the economy.
I really don’t believe the Chinese are supporting our house prices though, they do buy but not in sufficient numbers to make a real difference.
It will be the new buyers who will move in to support house prices.
BTW drood, did we ever cement the terms for that big mars bar bet? Brisbane is down about 9% according to RP data, my estimate is that it won’t fall past 15% and before Xmas 2012 it will have turned upward.
Nationally we will hit 10% falls, with an uptrend commencing late 2012 or early 2013.
All of the above is nominal, not adjusted for inflation.
There ya go Tom – now you can criticise me if you also give us your prediction, otherwise p*ss off.
December 1st, 2011 at 8:00 am
Peter – I’m just thinking outside the square.
If things turn to crap then who knows what kind of policies the ranga will come up with. They just may allow more foreign investment.
Its something desperate govts might do. I have read that many Chinese SME owners have property in USA and can make a break for it should China crash.
The problem with Kris’s and many economists models is that they can’t predict human nature and therefore govt policy. That’s why Steve Keen has been wrong about a crash in housing so far but I think right about credit expansion and the effect on housing.
Housing may crash, but not until all stones have been turned.
December 1st, 2011 at 10:57 am
PF…..”I,m more than willing to bet my mars bar on another at least 10% “correction” by this time next year.
We just have to decide how its measured” …….. was my original statement. Seems you now want the same bet.
December 1st, 2011 at 11:19 am
Residental Building approvals fell 10.7% in October where it was expected 3.3% rise. News from today.
December 1st, 2011 at 11:58 am
China manufacturing dropped little bit.
http://www.zerohedge.com/news/china-manufacturing-contracts-new-export-orders-see-biggest-2-month-drop-dec2008
December 1st, 2011 at 12:32 pm
M&M – yes quite a few wealthy Asians hold property in stable economies including Australia. Quite a few near me actually, I can’t blame them for that.
They don’t buy starter homes though, so they no real effect on first time buyers.
December 1st, 2011 at 12:34 pm
Drood it’s your choice, either ABS or RPData – it’s all the same to me. They both track each other closely although there is a slight time gap to reflect the different data collection method.
Shall we say this time next year or Xmas 2012 – again I’m easy on that.
December 1st, 2011 at 3:16 pm
A recent article by Bill Zheng, CEO of Investors Direct postulates that property prices are predominantly determined by two factors
1. The money supply of the nation.
2. The wealth of a nation.
The money supply in Australia has increased at around 9% per annum since the late 70`s. pretty much mirroring the rise in house prices.
Regardless of which particular industry caused a nation to prosper, be it, agriculture, mining, I.T. or whatever, at any given time, the wealth of that nation always ends up with the bulk of that wealth sitting in residential property, with around 70% of any industrial nations wealth existing within its property market.
So the question of will our property prices continue to rise over time or fall ? Can be answered by will our wealth as a nation continue to rise ?
Given that Australia is well positioned to benefit from “the Asian Century ” which represents 50% of the worlds population and 36% of trade and that Australia has the resources they require i.e.
The worlds largest deposits of brown coal,lead,nickel,uranium,zinc and silver.
The worlds 2nd largest deposits of iron ore,bauxite,copper and gold.
The worlds 3rd largest deposits of industrial diamonds and lithium.
The worlds 4th largest deposits of manganese ore.
The worlds 5th largest depsosits of black coal.
Australia is already the richest nation in the world on a per capita basis recently nudging out Switzerland and Norway and this is set to continue over the next 2 decades at least.
Mr Zheng says “Unfortunately, most people living in Australia do not see it like that. As the saying goes… Fish discover water last…., we cannot see what we are in because we are surrounded by it.
Drood and Peter it will be an interesting wager. My observation is that in that shorter time frame ( 12 months ) either of you could end up being right but over a 3 year time frame my mars bars are on a rise.
December 1st, 2011 at 6:02 pm
PF – I am not here to give predictions, because I don’t have an ego big enough (as you apparently do) to pretend I know what is going to happen.
In any case at least you are now using actual figures in your predictions, unlike most of your previous drivel from comments a few years ago, so for that, bravo, it will make it easier to point out how hypocritical your criticism of predictions on this site are in future.
No more than 15% falls in Brisbane and 10% Nationally with an uptrend in late 2012 early 2013 you think? What are you basing that on? why not no more than 20% and 15% nationally? where is your data? your modelling? or are you just talking through your rear as most property/investment spruikers?
Unfortunately, it appears that you’re not much chop when it comes to putting figures to your predictions, this was among the first of yours I found in a simple search from 2010 – “I reckon that about $1500 AUD will be the peak for gold, and that has come and gone” –
Gold currently around $1710AUD and was up to $1800AUD a few months ago. Hmm, don’t think I’ll place too much weight on your opinion.
Keep the definitive projections coming PF.
December 1st, 2011 at 6:04 pm
Roger – perhaps I should stay on a steady diet so that droods Mars Bar doesn’t fatten me up when he concedes.
I suppose I could jog every day.
December 1st, 2011 at 6:10 pm
Good grief Tom when did I say that about gold?
Thank god I don’t take life as seriously as you mate, but I’m quietly confident on my propery call -if I turn out to be wrong, well too bad for me.
Get a life Tom, it’s too good be “Les Miserables” 24hours a day. Go and smell the roses, drink some wine, and stop whinging. Who knows you might get laid one day.
December 1st, 2011 at 7:27 pm
PF….What is your bet? mine is a 10% drop nationwide by this time next year ( not xmas as some peeps might get a house for crimbo , they,ll be so cheap) . if you are just betting against that , no problemo, ABS will do.
Tom, nobody asked you to give a prediction and if you would like to know what mine is based on, its the AB indication graph, the CGAT index and a bit 0f astrology, PF,s is based on the fact he wants my mars bar. Butt out.
December 1st, 2011 at 8:03 pm
drood – I gave my prediction @ 3.
As I understand it I say a max of 10% and you say a minimum of 10% so there may not be much in it.
ABS data for November 2012 then – is that OK?
December 1st, 2011 at 11:24 pm
done ( and i probably have been )