“The main purpose of the stock market is
to make fools of as many men as possible.” ~ Bernard Baruch
Yesterday, 16 January 2020, the Australian share market reached record highs with the
benchmark ASX200 breaking the 7000-point milestone for the first time in history. It closed 0.67%
higher at 7,041. Looking at this year alone, in terms of world markets, the ASX has been
the best performing developed economy market this year having surged 5.3% over the last
two weeks. The broader All Ordinaries index followed a similar trajectory reaching record
highs as well, closing at 7,158 yesterday.
So what’s going on here? Australia has been burning with some of the worst bushfires in
recorded history. Retail stores have been struggling with more than 160 stores already
set for closure, and we’re only one fortnight into the new year. But yet, the share market
is going gangbusters. What the hell’s going on?
Well first of all, it tells us one major thing — don’t try to predict the share market.
Even when the land around us is burning, the share market has continued its steady climb
upwards. Now of course, this doesn’t mean that it will continue this way, but it does
go to show you that there are many factors at play, not just the latest news.
Secondly, if you don’t invest in the share market due to fear or otherwise, then you’re
guaranteeing yourself a certain result. Not investing equals no returns. In economics,
it’s called an opportunity cost. If you want to play it safe, yes, you could just
put all your money in the bank. If you’re lucky, you can pick up a term deposit with
an interest rate of around 2%. However, you mustn’t forget that inflation is projected
to trend around 1.9%, meaning that if you’re earning only 2% interest in the bank, most
of that will be eaten up by inflation. You’re essentially not earning anything while the
bank profits.
This is a trend across the world. Central banks are slashing interest rates to try to
spur on their economies. Consequently, savings rates are falling meaning you’ll probably
be getting less and less interest throughout 2020.
And this leads on to the answer to our question — Why are markets so high? Well, I think
the major reason is that there is nowhere else for investors to put their money, especially
for casual investors like myself. Taking into account inflation, savers have been given
the royal screwgie, earning not much better than 0%. Consequently, we have a flood of
investors putting a large portion of their savings into the Australian share market.
Is this healthy? I don’t know. But it certainly is the current reality.
Just as a note, current conditions in the ASX are fairly expensive. The current P/E
ratio (price-to-earnings ratio) is about 18.2x. The historical average for the ASX is around
15. I’m not going to go into too much detail about P/E ratios, but I will just read a couple
of excerpts from Australia's largest online stockbroking firm CommSec,
“Essentially a P/E ratio reflects the earnings potential of a company in the eyes of investors.
The P/E ratio of the broad Australian share market has for the most part fluctuated between
10 and 20, with a long-term average of around 15. When share markets and the wider economy
are doing well, investors tend to be more confident about the future earnings potential
of companies, causing P/E ratios to rise. If you are considering buying shares in a
company it can be useful to compare its P/E ratio to that of the broader market and particularly
other companies in the same sector. A company’s current P/E ratio should be considered in
conjunction with its previous and forward (projected) P/E ratio and broader financial
performance and outlook, as well as that of its peers and the wider market.”
Essentially, P/E ratio is just another piece of fundamental analysis to help you assess
the value of a share. It’s not foolproof and is certainly not the only way to assess
the value of the share market. The ASX is currently sitting at about 18.2x, which is
considered fairly high, so use that information how you will.
If you do choose to invest in the Australian share market, I would certainly recommend
a broad-based ETF. Examples include iShares Core S&P/ASX 200 ETF (IOZ), or Vanguard’s
Australian Shares S&P/ASX 300 Index ETF (VAS). These are especially useful for investors
who aren’t willing to look into individual companies. Investing in individual stocks
takes a lot of work, Sure, the payoffs can be better, but you could also lose all your
money if the company you invest in goes bankrupt. That’s not to say that ETFs are entirely
safe, but they certainly do lower the risk associated with individual company fluctuations.
Anyway, the Australian share market is up, despite all the disasters going on around
the country. If you’re tired of earning a pitiful amount of interest in the bank,
then it might just be time to start investing in the share market. Remember, you probably
won’t be able to time the market (most people fail at that) but you can choose how long
you stay in the market. So called buy-and-hold investors ignore the daily fluctuations. They
just keep investing regularly over many years knowing that given enough time, markets typically
go upwards. You can choose to participate if you want to, or you can sit on the sidelines.
But you already know the result if you just sit back and spectate — a life of ever-decreasing
returns.
Thanks for watching.