While astute investors will always keep a handle on what’s moving the markets forward, the danger of reacting to the bipolar nature of equities is it can put you on a rollercoaster from euphoria one day to despair the next.
If you belong to this investing cohort, it’s time to stop taking a ‘put it all on red’ approach to the share market and get out of the 24-hour driven news cycle that only suspends you in a permanent state of anxiety.
One of the problems with the share market is that it tends to treat whatever presents itself at any given moment as permanent, when they’re in fact they can be wrong, temporary or both.
The litmus test as to whether you’re a slave to the 24-hour news cycle is if you’re waking up too fearful to check your share market or super fund balance.
All things must pass
Right now, much of the share market volatility relates to heightened uncertainty surrounding how global markets will respond to United States President Donald Trump’s attempts to restructure the global economy.
Added to anxiety levels, the media tends to ‘buy the rumour and sell the fact’ when it comes to reporting.
Equally vexing for investors, within complex trading environments it’s not always evident at face value whether a company's result is good or not - and sometimes the financial media is the last to know.
It was former Beatle George Harrison who pegged the immortal line “all things must pass”, and yes, that too includes Trump.
A bipolar market can be your friend
The biggest mistake share market investors make is buying stocks on momentum – aka taking bets on stocks continuing to trend up or down – rather than on fundamentals like core earnings and sales.
Instead of treating shares as a piece of a business that they buy, momentum traders simply see stocks as numbers that are permanently wriggling up or down on a screen.
Rather than letting share markets fashion bipolar optimism or depression, it’s your job as an investor to take advantage of it.
It may appear counterintuitive, but when markets fall and no one else sees anything but doom and gloom – that’s when you want to invest in really good quality stocks or quality funds with a good track record.
The power of being a contrarian
Roger Montgomery founder and chairman of Montgomery Investment Management suggests investors think of the share market as something akin to auction house.
If the room is empty and no one is bidding, Montgomery reminds investors that’s when they want to buy.
However, when the room is packed and people are throwing money at the auctioneer, he says it’s time to leave.
Montgomery also reminds investors of the old axiom of the world’s most famous and successful investor, Warren Buffett.
“Buffet said… be greedy when others are fearful and fearful when others are greedy,” recalls Montgomery.
“When everyone is thinking the worst, that’s when you should be really excited, and when everyone is thinking the best, zip up your wallet leave and don’t buy.”
Sit tight and get grounded
Given that markets are always going to display varying degrees of volatility, Montgomery reminds investors that they really don’t have to do anything when markets rise or fall.
He also reminds investors that unless they’re traders, asset classes like equities and property are by default long-term investments which over time will typically ride out short-term dips.
“Within the current volatile market, it’s more important to remember that the higher the price you pay (for a share) the lower your return will be, and the reverse is also true,” says Montgomery.
“When the market is behaving like a headless chicken, that’s when you want to get money out from under the bed and start investing.”
Investing or gambling
Montgomery reminds Australians that if they’re buying an asset class like shares or property for no other reason than it’s going up, that’s tantamount to ‘betting on the red’.
Sadly, he says too few people stop and realise they've unwittingly crossed the rubicon from investor to speculator.
Laughably, he also reminds investors that having read an article or watched a TikTok video doesn’t equate to proper research: The best option is to seek qualified advice.
“Investing is understanding something about companies and understanding how they create wealth,” says Montgomery.
“The way a business becomes more valuable is actually really easy to understand.”
A business generates wealth or increases in value, adds Montgomery by generating a return on the money - aka equity - that’s been put in and left in that business.
He says the businesses that generate the most wealth over time are those that generate the highest return on the amount of equity put into the business.
This article does not constitute financial or product advice. You should consider independent advice before making financial decisions.
