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Smart Investor: why I'm unconcerned by ‘double dip’ fears

The intelligent investor should use the boom/bust cycle to his advantage.

 

The intelligent investor should use the boom/bust cycle to his advantage, writes Smart Investor.

The prospects of the UK slipping into a 'double dip' recession, i.e. that the current respite from the recession of 2008-2009 will not last and we will fall back into negative growth, have dominated financial media coverage in recent months.

Of course the technical definition of a recession is just two consecutive quarters of negative growth, so recessions can come about quite easily. This is in stark contrast to the world of stock markets where a ‘bear’ market is said to exist when price levels have fallen by more than 20% from their peak.

Recession or no recession, are the media missing the point? Have they clung onto Gordon Brown’s famous last words regarding the end of the boom and bust cycle?

Like it or not, the economic cycle includes one part boom and one part bust, with varying time periods between the two. The sooner you can accept this the sooner you will benefit from it, for it is through respecting and living within this simple law that you can beat the market.

Why does this law exist? Simple, human nature. At his core man is ruled by two basic emotions: greed and fear. When things are good and asset prices are increasing man becomes greedy and takes larger risks, buying assets at too high a premium to their intrinsic value. When problems occur in the economy (which they inevitably do) and man realises he has paid too much for his assets, he becomes fearful and tries to recoup as much of his initial investment as possible.

The length of time between these two events will vary, as will the extent to which greed and fear are present, but the point is that these two events will always occur because it is human nature; it is in our DNA.

In terms of today, the respite from the 2008-09 recession was brought about through a fiscal stimulus of a scale that has never been seen before. The UK is now around £900bn in debt; the highest peacetime national debt in history. Without this state-aid we would most likely not have had a respite but would have experienced continued and uncompromising negative growth. So perhaps it is logical to assume that now the agenda has changed from stimulus to cutbacks, the UK economy will continue the course it should have taken.

It is also worth noting that the greedier man becomes the more fear he will inevitably experience i.e. the bigger the boom, the bigger the bust. If you need any convincing about how big this bust could and should be, it may be worth checking up on growth figures from 1997-2007, all fuelled not by increased efficiency or productivity but by a credit boom whose failure was inevitable. A situation of consistently increasing personal and government debt cannot exist in the long run.

So how can the intelligent investor use the boom/bust cycle to his advantage?

Talk of a double-dip is of no real concern to the intelligent investor; he should feel no fear because he understands that this particular recession may be slightly longer than first envisaged, but that this is helpful as it means he will have more time to apportion his capital.

So, when the media talk of high unemployment, high inflation, falling asset prices and wild interest rates, do not succumb to the common emotion of fear, and instead realise that this is the opportunity to buy assets at below intrinsic value.

You are unlikely to buy them at their lowest ebb, but if you apply simple, disciplined rules when valuing assets, are patient enough to wait for these valuations to appear, and are able to throw off the shackles of fear then you will become a player and not a victim of the boom/bust cycle.

19 comments so far. Why not have your say?

Alan john

Aug 29, 2010 at 09:31

What a lot of nonsense.". It is easy , with insights, to say "a credit boon whose failure was inevitable", the problem is that very few people saw the credit crunch coming.Was Stephens one of the few who knew?(I heard of Roubini not of Stephens).And then "IF..........you are a winner" Yes, with if everything become easier.

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Richard White

Aug 29, 2010 at 11:37

Re` Alan john. Of course everything is easy with hindsight.Everybody i speak to claims to have `Seen it coming` but this is patently nonsense!! If they had all foreseen the event by definition it would not have happened because they would have behaved differently. People do not act in a rational manner,thank goodness as this throws up valuation anomalies others amongst us can exploit.

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Steve Taylor

Aug 29, 2010 at 12:09

One would hope that the 'smart investor' would include fund managers, then none of us would need to worry, but as long-term records of outperformance aren't common in this industry I can only assume Mr Stephens has a hat through which he's chosen to talk.

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Peter Thoresen

Aug 29, 2010 at 12:45

You also need to keep a lot of cash in reserve because in a double dip recession you may not be able to sensibly liquidate any assets if and when you need the cash.

If you've got some some spare money for long-term investment then it's a different story: you just need to find those undervalued companies able to survive the recession. Easier said than done!

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mark douglas

Aug 29, 2010 at 15:23

that's the way it goes, everybody knows.

They are trying so hard to drive us out of cash, low rates shy-high Gov bonds and even corp bonds.

I'm not a sheep and I'm fighting against being herded, but where do I go?

no where says a little voice in my head, just be ready.

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A Donald

Aug 29, 2010 at 15:33

Even Gordon Brown knew that the crash of the banks was inevitable. He even spoke about how unstable the banking system was, but decided to bury his head in the sand and go along with them.

The main stream financial press were writing about the banks in 2005, about the unsustanable debt they were building up - so the FSA / Gordon Brown would have known about it.

Robin Cook resigned when he saw irrational behaviour before the Iraq war.

Gordon Brown decided to ignore the irrational behaviour.

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David Jackson

Aug 29, 2010 at 15:44

If you really couldn't see the last bust coming you shouldn't be investing at all. Just remember the "Investment Industry," will make the same money either boom or bust and you will be paying for this whatever happens.

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Gerry Simpson

Aug 29, 2010 at 16:28

Steve would have us beleive "the 'smart investor' would include fund managers", I don't think so. Fund Managers are salesmen, they get paid regardless, all they care about is getting you to buy into their fund.

Hence they never say, "Now is a s**t time to invest", they only say "Its a great time, full of opportunity", now what was the title of this article again?

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Grant

Aug 30, 2010 at 09:58

I think it's sensible to say that now is a reasonable time to invest. The market is notably down since the spring and so long as you are prepared to sit things out for a couple of years, the prices at the moment should represent good value, especially as you are getting hee haw in a savings account.

But... could the market fall significantly again? Clearly it could, but did people think the markets were due to fall in April... I don't think so. Things were much more positive and everyone felt we were out of the woods.

Therefore now... people are fearful so this is generally a good time to invest. In April, people were positive / greedy so that was generally a good time to sell.

It's not rocket science if you don't look at much more detail than that. But people have a habit of getting embroiled in things and trying to pick out details and make small gains here and there.

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Grant

Aug 30, 2010 at 10:05

Gerry, while I accept that retail Fund managers will always try and put a positive spin on things to encourage folk to invest, I am pretty sure that these guys also care about getting a good return and having a good fund.

The majority of fund managers will have their own money in their fund and there is a LOT of vanity and Ego-based chest beating in the industry about who has the 'best' funds.

Not to mention a pretty hefty bonus culture.

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Pertan

Aug 30, 2010 at 11:15

Genius is the person who can work out where the market ought to be instead of where it is now. The very reason that stock markets fell is surely because they were overpriced for whatever reason, be it a credit crunch or economic outlook or as the article suggests fear. Markets are supposed to be efficient and try to anticipate some 9 months ahead of the situation today. The smart investor theory might work if you have a deep enough pocket like Warren Buffet. The less fortunate or smart amongst us have to rely on our investments for retirement and can ill afford to sit out huge losses like Buffet has done and to keep buying in order to average out the cost.

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Michael Hellman

Aug 30, 2010 at 11:56

I suppose the lesson is dont be afraid to take your profits.

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rich banker

Aug 30, 2010 at 12:35

History is NOT Bunkum - Henry Ford was wrong.

Why

Well every LABOUR socialist/communist gov leaves the UK in a mess.

Especially when Scots are in charge

Poor Gordonb Bigot Brown - he really did think he was God or perhaps he just heard voices.

NOW Camerclegg seem to be talking us into a double dip but they will be OK as will all those who control the purse strings and give themselves mega undeserved rises.

Dave is too busy cooing at his new baby to care, and he and his wife are very fiscally comfortable - no doubt they will be paying to do up the nurseries at No. 10 and Chequers.

Cleggy is doing a Compo, all he needs is a ferret and a flat cap - Not many of these in his posh constituency Up North in Hallam Land. And he must be insulated by an earning wife and his EU severance pay/pensions, plus MP's salary and expenses and his Deputy PM money.

Meanwhile where did Flash Tony get his money from for all these houses/flats - 15 now in all - a good socialist? bunkum. A typical expenses grubbing politico. Call in the Fraud Squad NOW.

PS I am still awaiting my Equitable Life COMPENSATION, at least £1/2 million needed.

Tell me the country cannot afford it when all gov pensions have been cut by 50% and all gov pension plans are fully funded by the employees of gov.

Yes 50% that what ELAS have done to my pension and the Pru are as bad or worse. The CEO Tiddjy Thane or whatever was too busy with his failed dopey plan to take over Asia it seems to get me any profits and they had the cheek to say they needed to be prudent and stack up reserves instead of declaring a decent return.......

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Cynical Investor2

Aug 30, 2010 at 13:41

Science Principle, ' for every action there is an equal and opposite reaction'. The principle can be applied to most things.

The message, I read, is Man is Greedy and always wants more. The trick is knowing when enough is enough. Better a half starved mortal than an over weight corpse!!!!

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Steven Dotsch

Aug 30, 2010 at 16:28

I am probably in the minority here with a contrarian view.

I am not so much in favour of "buying-anytime-and-hold"; I rather favour "buying during the dips" and hold as part of the Early-Retirement-Investor.com investment strategy.

Gathering cash in the meantime, in order to re-invest in solid high yielding companies when the occasional crash happens.

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Rajah Brookes

Aug 31, 2010 at 09:28

"At his core man is ruled by two basic emotions: greed and fear."

How sad when thirteen people comment but not one actually questions the validity of this statement. It may be true of speculators and gamblers but let's not tar the whole of humanity with that particularly sad and pathetic brush. We're a better and more diverse species than that.

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an elder one

Aug 31, 2010 at 11:21

Most of the foregoing commentary shows that investment - at least in the private domain - is governed by emotion rather than quantitative judgements such as the rational valuation of the subject article or company, by whatever criteria one might think to apply; even if one had the whit - most of us don't. We private investors can only hang on the coattails of the big movers and the 'wise words' of those selling advice, but more than anything Lady Luck; beware those selling bright ideas, they, in all probability, make their profits by the selling of verbiage.

Some of course accept that the movement of the market is mainly based on sentiment and emotion and do wizard things with charts that reflect the fortunes of whatever, and one can always try astrology.

Sure we would all like to buy things cheap, but when are they cheap; who can tell, they can get cheaper in the short term or the longer. One can argue that the best strategy is to stay out of the market altogether when it is in such a mess; an alternative is to ignore all that and exercise stop loss on those failing and take reasonable profits on the successes - leave some for the other chap; not easy!

Mr Stephens suggests a strategy than many before him have propounded; it always seems a nice idea, though a difficult psychology and one only seen in complete clarity with hindsight.

As far as the big bubble is concerned, the fact that so many alledgedly saw it coming and did nothing can be put down to fact that they could not know precisely when it would end and were thus driven to stay in for more profit - call that greedy if you like, since their judgement failed them; this was the fault of the big movers and their machinations.

After 20 years of mucking about with equities, my philosophy is to invest in strategic assets such as natural resources, oil, mining, including gold, etc, whatever the ups and downs and in companies who have by all accounts cornered the market in essential things - it nevertheless pays to get in cheap if one is able.

etc.

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Mike Howarth

Aug 31, 2010 at 11:28

Simple, start now on drip feeding and take advantage of pound cost averaging keep your nerve if/when the market dips and perhaps increase your drip

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Anonymous 1 needed this 'off the record'

Aug 31, 2010 at 14:32

thought it was a good article really.

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