Monday, December 22, 2008

What I Learned About Investing In 2008 : Lesson 1 - Patience

The Australian Stock Market has had a terrible year based on almost any measure you care to name. The All Ordinaries and major S&P ASX indexes are all down significantly from the beginning of the year and some market pundits are saying we still haven't reached bottom - but I guess we wont know when the bottom is until it has passed. World stock market indexes have fared little better and in some cases even worse.

It's approaching the time of year when I like to reflect upon my investment activities over the past year and consider what the coming year may hold. It's a great opportunity to take a couple of steps back and look at the year's events and my participation in and reaction to them from a safe distance. Time can sometimes give us a better perspective from which to consider our actions.

With that in mind, I thought I'd share some thoughts on what investment lessons I've learned from the tumultuous year that has been 2008. Before I started writing this, it was going to be a single post. But as I started writing, the words just stated to flow to I think I'll spread this over a number of posts.

Value Investing Takes Patience.

I like to consider myself a value investor or even a contrarian investor. However, in recent years (with the exception perhaps of 2008) this has taken more and more patience. Value investing opportunities become very scarce. I was accumulating cash, my trigger finger was becoming itchy but there just weren't any decent targets to take aim at.

Then the sub-prime mortgage came along and suddenly some of the shares on my watchlist were getting cheaper. To put things in perspective, the All Ordinaries had been as high as six and a half thousand in 2007 and fell to around five thousand in the first quarter of 2008 and looked like staging a recovery from that point.

I didn't want to miss the buying opportunity so I started buying. While I didn't spend all of my cash, in retrospect a think I spent too much, too early, leaving less in reserve for the opportunities which would emerge later in the year.

I think I fell for the old "this time it's different" line. You know the one where everyone tells you that there's been some sort of fundamental shift in how sharemarkets work. Think back to the dot-com boom (and bust). It 's happened many times over - the stock market crash of 1929, tulip mania - the list goes on.

Stock market commentators were saying that higher prices were justified. They said there was a great weight of superannuation money driving asset prices and that this was an ongoing and long term trend which would support shares prices. They said that industrialization of China had lead to a resources "super cycle" - everything was different now!

Even though I considered myself a skeptic, I was worried that the market would recover from this hiccup and carry on it's merry way, leaving me behind. I felt I needed to take advantage of the "relative" value in share prices, even though I didn't consider it absolute value.

Investing is a long term game. Even though the last bull market was a long one, history told us that it had to end. It also told us that the longer the bull market and higher it goes, the longer and deeper the bear market that follows it. Benjamin Graham, author of The Intelligent Investor and Security Analysis recommended buying blue chip stocks at no more than two thirds of their most recent highs. This was to protect investors from the market's inevitable manic depressive behavior. He believed there would always be another opportunity - that the market would always over-correct on both the upside and the downside.

Once again, Ben has been proven right. The Australian Stock Market has shown how quickly things can turn ugly. I should have had more patience in waiting for that value to emerge.