Please, let the markets tumble

Yes folks, asset prices can go down as well as up.

Since reaching 5,608 on 9 September, the S&P/ASX All Ordinaries is down to 5,186, a decline of 8%. The carnage has been widespread: Despite its $1b buyback, Telstra’s share price has fallen by 7%, with the big banks also down between 7% (Westpac and ANZ) and 8% (Commonwealth Bank and NAB). Wesfarmers and Woolworths have both declined 8% while resource stocks have suffered greater falls, with BHP down 10% and Santos a whopping 15%.

And these declines don't include further losses that may occur today.

Yes folks, asset prices can go down as well as up. Always assuming the best when investing – as many investors in the Australian property market appear to be doing right now – is fraught with danger. Using leverage only adds to the risk.

There is an upside. Declining markets make our job easier by creating interesting buying opportunities for those that ignore the panicky headlines, instead concentrating on the fundamentals of a business to determine the difference between price and value.

As Warren Buffett has said (implicitly referring to the short and medium term rather than the long term), if you want to buy stocks, you are hurt when stocks rise but benefit when stocks stumble because cheaper prices allow you to buy more of what you like.

This is not how most people think, however. Governed by the bookend emotions of fear and greed, they love it when stocks rise and panic when stocks fall. Regardless of whether those prices accurately reflect underlying value or whether it is in their self-interest for stocks to remain cheap, most investors prefer rising rather than falling prices. Were it not for this fact, value investing would not work.

We also tend to view macro forecasts with a great deal of skepticism. We really have little idea what is going to happen in the EU, are unsure of China’s ability to move to a consumption rather than investment-led economy and can’t predict where Australian interest rates will be in two or five years.

What can we be confident of? That a diversified portfolio of value-based stocks should perform well over the long term. Even before the recent declines, there were opportunities in healthcare (ResMed, Virtus and Monash IVF), retail (Woolworths and The Reject Shop) and more speculative buys in mining services. If the market continues to decline, more bargains should emerge.

And in any case, with the Reserve Bank keeping official interest rates at historical lows, even fairly priced stocks with half-decent yields pay more than term deposits. See? Market falls really aren’t that bad.

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