Market Talk

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					Market Talk
ISSUE 6: November 2009

If you are not sure what the markets are doing... Don't worry, every week Greg gives a weekly market update.
The Trend is your friend When I bought my first share back in 1977 I used to keep up with the price action by strolling into the bank and reading the ticker. Now this wasn’t the scrolling list of share prices on the local business news channel. This was a telex machine that printed out prices of shares after they were recorded on the share exchange boards. In 1980 at the height of Gold’s Bull Run to find out the Gold price we had to phone London to get a price. Getting information first put you at an advantage to the competition. I don’t talk much about those days anymore because when I say to my kids: “you know I remember when …” They just interrupt me and say “Yes dad we know, in the olden days…” Times have changed somewhat and here we find ourselves keeping up with our investments on computers and we have dedicated TV channels that have 24 hours of business news and Radio Stations that have dedicated slots for share market reports. Information has become accessible to everyone and the speed with which it is disseminated is incredible. This has really put the man in the street in a great position when it comes to investing. As I like to say in the olden days your connections were important and brokers were very popular at country clubs and restaurants for tips on how to make a quick buck on the markets. However some things never change and people still look for tips on what to buy or sell. What you often find though is that some people will continue to ask questions until they hear what they want to hear. Or someone will ask me about a particular share and then proceed to tell me why it is a great investment and justify why they should hold that share. What we have is peoples actions are influenced by their beliefs and their beliefs are influenced by all the information that they consume.

Decisions about money are almost always emotional. This leads one to deduce that markets or investors are dictated to by emotions and markets have a psychology. Most people have already made up their minds about their beliefs and are not that likely to change them. Whereas other people think that they are considering all available information, they actually exclude the most useful information by their selective perception. Market psychology is an extensive subject but what you must be is aware that this psychology has a huge bearing on the way markets react. That psychology is the reason for booms and busts that continue to repeat in market action over the years. Let’s look at a key mistake that some make from preconceived ideas in investing. When we buy a share we anticipate that it is going to go higher. When the action doesn’t conform we hate to admit that we are wrong. That is human nature and so we hold on in the hope that it will turn, after all if we cut the position we would be admitting we were wrong. My worst losses come from being pig headed and believing that I am right and the market is wrong. What you must accept is that you are going to be wrong at times and in this game when you are wrong it costs money. Remember if you have discipline and good money management you will make money by being right only 30% of the time. That is where the saying “run your profits and cut your losses” comes from. There is another saying that “the trend is your friend” and this is because the collective market psychology is hard to turn. This applies to both, the general trend in the market or the trend in an individual share. Being a contrarian often gives a big pay off but it takes a special kind of trader to make money that way. If we look at last week in the market, I called the market to close lower on the radio on Monday morning. That was a call made on information that I processed and was my perception. I was right in my call but as the week progressed I was at odds with my call because the data out last week was actually pretty good and as I have said before that when one is bearish you often lose opportunity. As I said, when we look at the news out last week it certainly looks like the green shoots are developing into something of substance. Central bankers made comment acknowledging this but they are cautious in nature and so warned that the recovery is still fragile. These bode well for markets in general but remember that most markets have run hard in anticipation of the recovery. But we learnt something today and that was that the trend is our friend. If we evaluate our positions that we have bought over the last few months most of those that are in the Share Builder portfolio are showing good gains. Clearly the trend still remains up and so at this stage it does not make sense to buck the trend. Remember though be proactive in your investing and keep a watch on developments. Friday saw the release of what is always considered a big economic data release in the US and this was the Jobs data. It was a lot worse than expected and saw the unemployment rate in the US jump to 10.2%. It was a bad number but the share market after the initial shock continued to rise. The reason being, that this signals that US interest rates are probably going to remain unchanged until 2011. This low interest rate environment is one of the main reasons why global markets have been as strong as they have been. So we have a big data point that was really bad but it isn’t changing the underlying driver of the market so it probably means that the trend remains intact. There may well be a correction on the horizon and I would be surprised

if there wasn’t one but I am not clever enough to know if it will be now or another 10% higher. This week is a quieter one in terms of economic data releases and I don’t see too much out there to upset the applecart. So as always trade well and let me leave you with another rule of trading. First loss is best loss. Take your losses while they are still manageable. Move on to trade again. Cheers for now Greg Volkwyn.

Did you know...
That you can now set up a scheduled transfer to your Share Investing account? This way you can always maintain your account balance and build up a greater cash balance to buy more shares! HOW? Log in to Online Banking and click on the ‘transfers tab’.

First National Bank - a division of FirstRand Bank Limited. An Authorized Financial Services and Credit Provider (NCRCP20)


				
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