Hard-earned wisdom

Here are a few lessons picked up during the past couple of weeks.

Markets are not rational

A big stick should be taken to the next boffin who blathers on about market efficiency and rational investors. When bank shares are worth more than 5 per cent less in a morning than people were prepared to pay for them the day before, or later in the same day, markets can give up all pretence of being rational. The so-called professional investors are as bad, if not worse, than the rest of us - dumping stocks in the panic only to buy them back when things take a turn for the better. The only people to make money from that are the possibly the tax man and definitely the brokers.

Bargain hunting takes bravery

Of course, the upside of irrational markets is the chance to pick up some screaming bargains when good stocks are oversold. If you have the nerve. There is a reason most investors follow the herd. Buying into a rising market is quickly validated because the rest of the herd is buying, too, driving prices up. But buying into a falling market is much harder. How much further does it have to fall? Will it get it cheaper if I wait? Oh god, I've just bought and I'm losing money already - I must be an idiot! In the end, you just have to forget picking the bottom, focus on buying quality stocks at fair prices with long-term earnings value and trust that some of those irrational investors will eventually come to see it, too. Don't forget that every share sold in a falling market has a willing buyer as well as a seller.

Leaders lead

Too many investors feel cheated because they assume leading blue-chip stocks will be safer in a crash. That is only sort of true. There is a reason these stocks are called leaders. They are among the biggest stocks on the market and the most liquid. When panicked investors want to dump stock, it is the leaders that are easiest to sell. So they will often lead the market down. But unlike second-rate stocks, those blue chips soon come back into favour, first with bargain hunters, then with longer-term investors. They lead in both directions.

Don't hold crap

Ever. Too many investors sit on bad stock decisions in the hope of selling "when things get better". It's not the crap that leads the recovery and it lags even in a boom.

Deleveraging is ongoing

Remember the global financial crisis? All that talk about unsustainable debt and how it would take time to work its way out of the system? It never really disappeared. The debt simply changed hands, with governments now the ones with the stretched balance sheets. The risks will remain high until excess debt has gone from the system.

Beware politicians

One of the incontrovertible facts that has always made government bonds such a safe investment is that, while you or I can't manufacture extra income to service our debts, governments can. They can print money and they can raise taxes. Or so we thought. The US Congress has now put the kybosh on that one. No wonder its debt was downgraded.

Yield is good

Stocks paying a solid income have two saving graces: there's a reasonable chance they're actually making a profit, and the yield can at least cushion you from some of the losses in a falling market.

The author holds CBA shares.