If you happen to have watched the news during the past year, chances are you may have seen a mention or two of something called the “Credit Crunch”. You will have seen stories of banks going bust, stock markets in a panic, and grave announcements from Important People to “not panic”. Of course, that’s exactly the kind of thing that makes people want to start digging a hole in the back garden to keep their new gold coins in, but now is not the time to stop buying shares.
Not so long ago, back before the Dot-Com bubble, wise men with many letters after their name would calmly argue, all the while keeping a straight face, for something called the “Efficient Market Theory”. The market, they said, knew EVERYTHING there was to know about a particular stock or bond, and therefore, the current price the market was paying was clearly the RIGHT price given all available information. In the future things might be different, events might make a stock seem worth more or less, and the price would go up or down accordingly, but trying to out-guess the market, with today’s available information, was nothing more than a 50-50 bet, and stock pickers would do as well to use a dartboard as a broker’s recommendation.
How times change. While many people will still take a dim view of the recommendations of brokers, the idea that the market is rational should have died the day the Nasdaq went above 5,000. The events of the past 12 months are just another nail in the coffin of idea that large groups of people, risking large amounts of money, behave in ways that are in any sense “rational” or “efficient”. The plain and simple truth is that we cannot say that today’s stock prices are any more “right” than the prices of 1 year ago, but we can quite definitely say they are cheaper.
This matters because, as most successful investors through the years would agree, the time when you really make your profit on a stock is when you buy, not when you sell. For investors who plan to take a truly long-term view of the stock market, today’s prices present a wonderful opportunity to make much more profit in the long run, by buying shares cheaply today. It’s true that a number of companies have been caught out by global events, particularly banks exposed to bad housing loans, but anyone investing into a properly diversified fund or tracker product need not be worried by individual company failures.
True, prices may go lower still, which is why investors are often advised to drip-feed their money into an investment over a period of months or years, but the important thing is that by most long-term valuation methods, the market at today’s prices is cheap, and history has shown that investors who can summon the courage to take advantage of periods of cheap prices, are always rewarded, so if you have a pension or regular investment, keep on making those payments, and don’t let the gloom and doom of today prevent you reaping the rewards of tomorrow.