Summary: Understand that share price falls are how the market expresses fear, ad capitalise on this by having a plan, consider selling cheap stocks already in your portfolio for even cheaper options, and forget about picking the bottom of the market - instead, look for underlying value.
Key take-out: Focus on individual stocks rather than broader market sentiment.
Key beneficiaries: General investors. Category: Economy.
As my colleague James Carlisle pointed out on Monday, when thinking about Brexit the Michael Caine quote from The Italian Job comes to mind: ‘You’re only supposed to blow the bloody doors off’. UK "leave" voters have done a good deal more than that.
The referendum was meant to be a pressure relief valve. Instead, it’s blown up the whole shebang and the wreckage is flying high, while global share markets crash. United Kingdom Prime Minister David Cameron has gone, his gamble splitting the Tory Party, perhaps irreconcilably, while the Labour shadow cabinet has resigned en masse.
Brexit may well break up the UK and embolden far right European parties elsewhere. If EU leaders were looking for an excuse to make the UK departure hurt they have all the ammo they need.
What now? Remember the interminable Grexit of 2012? If you found that painful, just you wait. Things could get a whole lot worse. Before the referendum economist Anatole Kaletsky drew a parallel between a Brexit and 2008 – yeah, remember that? – claiming that “financial markets will amplify economic anxiety, breeding more anti-establishment anger and fueling still-higher expectations of political revolt.”
If it plays out like that things are likely to get worse before they get, err, worse. No one knows of course, but we can be certain of two things: The only time top EU officials move fast is when they’re on the Eurostar, and that financial markets loathe uncertainty.
It’s possible the UK economy avoids the recession now predicted, dodging a property market crash that would wreck the banking sector. Foreign investment may continue to prop up a current account deficit and perhaps the EU becomes less bureaucratic and more accountable – bit of a stretch, that one. Still, over the next few months things might settle.
Not many experts – and we now know what ordinary people think of them – believe that but, hey, why not look on the bright side?
For investors, hope is not a strategy. So, what is?
The first thing is to understand that share price falls are the market’s expression of fear. The more fear there is, the cheaper stocks become. That’s something to be welcomed. In investing, if you want “certainty”, you’ll pay for it. Understand that and instability is to your advantage.
Second, have a plan and write it down. If you know what stocks you want to buy and the price you want to pay, overcoming that sense of foreboding as your finger hovers over the "Buy’ button" is that much easier.
Third, if cash is tight, think about selling cheap stocks already in your portfolio to buy ones that are even cheaper. Don’t get hung up on companies that you’ve owned for years. Be ruthless. It’s all about price and value.
Fourth, don’t pile in at once. Buying cheap is good, buying cheaper is better. As prices fall, increase your holding, ensuring a good margin of safety (over the coming weeks we’ll explain that concept, but if you think of buying dollar coins for 50 cents you’ve got the gist). This is the only sensible antidote to volatility. Forget trying to pick the bottom of the market. That happens by chance, not skill.
Fifth, stick to high quality businesses, which usually emerge stronger after difficult periods. Don’t stack your portfolio with speculative stocks and always maintain sensible diversification.
Finally, remember that Australia emerged from the global financial crisis almost unscathed, which in retrospect was a remarkable feat, and that we’re on the doorstep of the world’s only rapidly-growing region. We have our problems but they pale against those of almost every other developed economy.
With the prices of many stocks falling since the shock news, we’ve already upgraded a handful of companies, including NAB (click here to read more), Virtus Health, GBST and Oil Search. More may follow. Flight Centre, for example, is closing in on our Buy price and all the big banks are as cheap as they’ve been for several years. It’s an exciting time.
Of course, things may get worse before they get better. But without a clear idea of the value of a stock, you’re left second-guessing market sentiment, and that never works. So, use value as your guide and price as your reason to act. And stay calm. At least until Donald Trump is elected.
John Addis is the founder of Intelligent Investor and editor-in-chief of InvestSMART.
Disclosure: Staff members may own the securities mentioned in this article.