Did you see the news?
Stocks took a beating yesterday.
The S&P/ASX 200 dropped 104 points. At the low point it was down 130 points. Overnight the US market took a 2.3% pummelling. And this morning the Australian market is set to cop it again.
What caused the slump?
Well, first the stock market didn’t like the news that the US Federal Reserve may slow down on money printing later this year. And soon after the market heard bad economic news out of China. My colleague Greg Canavan recently released a special report to prepare his subscribers for exactly the kind of situation that now seems to be developing.
If anyone needed an excuse to sell stocks, they got two rather than one.
It seems like it’s time to give up on investing and sell those stocks…
If you’ve thought about giving up you wouldn’t be the only one to think that.
Finance website MarketWatch quoted legendary fund manager Stanley Druckenmiller speaking at a Goldman Sachs conference:
‘The importance of my skills is receding. Part of my advantage, is that my strength is economic forecasting, but that only works in free markets, when markets are smarter than people.‘
He went on:
‘Ten years ago, if the stock market had done what it has just done now, I could practically guarantee you that growth was going to accelerate. Now, it’s a possibility, but I would rather say that the market is rigged and people are chasing these assets.‘
Stanley Druckenmiller is the former managing director at Soros Fund Management. He left Soros’ firm to set up his own firm, Duquesne Family Office.
Those sound like the words of a disillusioned man. If a big hitter like him thinks there’s little point investing, what hope is there for the rest of us?
Market Manipulation is Yesterday’s News
We hear people say all the time that the market is rigged. Heck, we’ve said it a number of times too.
But here’s some breaking news: insiders have openly rigged the market for at least the past five years. And they’ve rigged the market less openly for many years before that.
Let’s be serious. Do you really think central bankers have only just started manipulating interest rates? Do you really think the big merchant banks have only just started manipulating the interbank rate market?
Do you really think that the big investment funds and Wall Street insiders have only just started getting tips so they can front-run market sensitive news?
Anyone who thinks this stuff is new is…well, we don’t want to be too harsh…let’s just say they’re naïve and leave it at that.
It’s like those folks kicking up a stink about the NSA spying on phone calls and internet usage. They act as though that’s breaking news too. The reality is that anyone with half a brain knew that stuff was going on.
But it’s not just Druckenmiller. The pages of mainstream financial websites have gone apoplectic in the past 24 hours. All the top stories on Bloomberg News covered the crashing global markets.
And it’s not just stocks that have come under pressure. Gold has taken a beating too. On the plus side, if you own assets priced in US dollars, you’ve got some protection.
Gold may have fallen in US dollars, but thanks to the lower Australian dollar, the gold price is higher than where it was a month ago. It’s a similar story if you own US stocks. The lower Australian dollar cushions the blow.
But all this news about crashing markets reinforces something we always tell you: don’t invest every penny in the stock market. It’s also why we tell you to own gold. Remember, we told you to stop thinking and fussing about it, and just do it. It’s a no brainer.
So, does that mean gold is better than stocks? No, of course not. Gold is an insurance policy against disaster. Saying you prefer gold to stocks is like saying you’d rather your house burned down so you can collect on the insurance.
Businesses are Still Doing Business
As we’ve explained before, if you want to build wealth you need to invest in businesses that generate (or have the potential to generate) revenue and profits.
Sure, the stock market has taken a pasting in recent weeks and days. But you know what? The roads were just as busy this morning as we drove from Frankston to Albert Park. People are going to work, companies are selling things and people are buying things.
So regardless of what the markets say, businesses and consumers are still doing stuff.
Of course, what you have to do as an investor is figure out how much of an impact these events will have on the broader economy and individual businesses. You need to work out if a company’s share price reflects the value accurately, or if it’s over- or under-valued.
Well, despite falling stock prices (or perhaps because of it) when we look at the market we see plenty of undervalued stocks. We see a bunch of overvalued stocks too…but we try to stay clear of those if possible.
In short, it pays to remember that the stock market is made of individual companies. Bad news may drag the whole market down, but that’s why you need to buy stocks that appear to be the best value. Then when the market recovers you’ve got the best chance of the share price going up as revenues, profits and dividends rise.
So the mainstream can scream and shout as much as they like about the billions wiped off the market. The Age loves that headline with its market blog, and used it again yesterday. And doubtless they’ll use it again today.
Funnily enough they didn’t report on the billions added to the market over the course of the previous week…that would be too inconvenient.
A Market Crash is an Opportunity to Buy
Put simply, we’ll continue to yawn at the actions of the central banks. After five years of listening to their rubbish we’ve long since figured out that you shouldn’t let them influence how you invest.
Mr Druckenmiller may have given up on the markets, and may be questioning his value as an analyst, but we’re not about to give up that easily.
As far as we’re concerned, with everything going on and stocks taking a beating, this is a great time to be an investor.
We’ve previously advised you to have no more than 20-30% of your wealth in stocks. But now, with prices crashing, it’s time to think about raising your exposure. Just last night we issued our latest research report for Australian Small-Cap Investigator subscribers where we recommend two great buying opportunities.
No one – not even the Federal Reserve – is going to scare us away from investing in the world’s best wealth builder: the stock market.
From the Port Phillip Publishing Library
Special Report: The Sixth Revolution Has Just Begun
Markets and Money: QE is Dead, Long Live QE
Money Morning: The US Economy Butterfly Effect
Pursuit of Happiness: Calming a Property Market Storm
Australian Small-Cap Investigator:
How to Make Big Money from Small-Cap Stocks