One of my favourite sayings following the GFC was ‘when the tide goes out you can see who is not wearing swim shorts’; another great metaphor we can thank Warren Buffet for. In fact I think he prefaced this with ‘the rising tide lifts all boats’; equally true.
Back in 2005 everyone was making money, regardless (often in spite of) what they invested in. In late 2007 this had reached euphoric highs. By early 2009 the tide was low and many ‘investors’ were left exposed with global ramifications. It was suddenly very hard to make money and no-one wanted to invest.
This ominous warning however does carry a silver lining. That is, it is easier to make money in a rising market. In fact, it’s a reminder that the machinations of the markets and economies are cyclical and do return to an equilibrium – the cycle of prosperity, euphoria, pessimism, and so it repeats.
It’s hard to know when the tide has turned. The signals aren’t as loud as when the market is peaking and everyone is rushing to invest. Look at any performance chart and you will see that the stable returns over time are myth. They assume you are invested throughout. In reality much wealth is lost by entering and exiting markets at the wrong time, or just not being in the market when the spikes in growth occur.
The tide is now slack and we know what follows a slack tide. I’m not discounting the European issues – many priced into markets but reasonable to expect there may well be more to come. Nor the potential consequences to Australia and the world of a Chinese slow down. If you can pick markets successfully and reliably, this blog is irrelevant. If not, I suggest you should be preparing to invest.
I was fortunate enough to hear Mark Bouris’ thoughts on the business and conditions over dinner recently. He reminded the group that the Packers invest in rising markets – it’s easier to make money (and therefore harder to lose money) in these conditions. His view is that conditions are now reminiscent of a rising market.
So keep an eye on the tide, and swim between the flags.