Here we go again

THIS is my 20th year in the investment industry and it has prompted me to reflect on how investors’ psychology has remained constant in an ever-changing world.

If there’s one thing I’ve picked up over the years, it is that the key to making money remains good, old-fashioned common sense.

Having entered the industry at the tail-end of the 1987 stock market crash, there was an air of pessimism about and ‘capital stable’ investments were preferred.

In the years following, we had quite a severe recession. Unemployment hit 11 per cent, interest rates were up to 17 per cent, and bank shares such as those of Westpac were hammered and came down as low as $2.50 from its peak at $6. People were scared the banks were going to collapse; money was being withdrawn from savings accounts in the millions. Does this sound familiar?

So ‘capital stable/protected’ is where the masses flocked, offering secure returns of more than 10 per cent. Is there such a thing? They missed the share market rally of 1992-1994 with returns of about 40 per cent because they believed it to be too risky, and their capital stable became ‘capital unstable’ as the bond market wiped $1.5 trillion off global government bonds.

At this point, total confusion set in.

The self-managed superannuation fund (SMSF) sector grew from 97,000 funds in 1995 to 187,000 funds in 1998.

Surprise, surprise; shares and bonds recovered soon after the masses exited, and retail balanced funds averaged over 11 per cent from 1995 to 2000. Property remained flat until late in the period. Now it was a case of getting back to basics – 11 per cent from a balanced fund sounded simple and very cheap. Many thought SMSFs were too expensive and hard to run anyway.

Dot.com was now the buzzword. Those small mining stocks were converted to ‘doyouwanttomakeeasymoney.com’ with price-to-earnings ratios that meant you might get your money back in just over 20 years.

Actually, there was only the promise of some earnings, at a much later date. It didn’t matter, as the internet was the new age: “It’s different this time, no tomorrow! My taxi driver has a hot tip.”

All this took place just as the masses loaded up on ‘iStock’, exiting that underperforming property market. As quick as you could say ‘hot tip’, the dot.com was now dot.gone, and the September 11 2001 attacks jolted the markets.

Nevertheless, the excesses built up in the system finally took hold, and in 2002 the ASX crashed by 22 per cent. It took the Iraq war in March 2003 for the market to turn. Meanwhile the property they had dumped was also starting to take off.

Then the inevitable happened – a return of that pessimistic fear of shares. The masses were cashing up just prior to one of the best periods of share growth we have experienced in this country, of 150 per cent in five years.

It took a few good years for the confidence to return, and by then both shares and property had already extended themselves.

On the flip side, those in the more basic investment space were again complaining.

“My adviser has me in a balanced fund and it is only doing 15 per cent per annum, the share market is giving me 40 per cent. Maybe I will go DIY. Shall I put a beach house in my super fund? It will give me 300 per cent – that’s what it has done since 2004.”

For reference, term deposits were more at than 8.5 per cent in 2007, but the masses wanted risk.

“It is different this time, China will save us.”

Now, about that common sense I referred to in the beginning; I can’t see much here.

Sure enough, the 20-year period was bookended by another recession, banks were on the brink of collapse, those Westpac shares halved again ($30 in October 2007 to $15.50 in March 2009). Remember, they were $2.50 in 1992.

Some said they would never touch shares again, too risky; maybe a 4 per cent term deposit is a better choice.” The air of pessimism is once more upon us.

But did you hear? January 2010, shares up 50 per cent.

The more things change the more they stay the same