• 04 Dec 2019
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Most people assume that when the market goes up, something must be going well.

In November, the Australian market reached a new all time high (price), which is not much of an achievement given it only just got above the pre GFC level which is over a decade ago, but it was amazing that it did it with banks falling. Even Europe (Stoxx 600 index) hit a new high, but has not done any better than Australia since the GFC and with lower dividends. The US has also made new highs, but the US has left it’s pre GFC high a very long way behind.

Something must be going well?

This is the assumption that most investors make. They assume prices are justified. Most news articles are trying to find reasons to justify the price movements. Often price moves are reasonable, but when humans operate in a system of uncertainty there are plenty of times when price moves make little sense to us. Prices move due to demand from investors buying vs supply from investors selling. There are many types of investors using different strategies. For Intralink it will always be quality, value and positioning.

To us a month like November makes little sense. There was a bit of hope over a trade war stage one agreement. It seems that everyone is so scared of not being invested when Trump and Xi Jinping eventually kiss and make up and there is little elsewhere to attract them, given the absurd interest rates on offer. Then prices start rising and we get the buying from fear of missing out.

Only if you keep your eye on valuations and understand how valuations work, can you get a feel for what the market is pricing in and if these assumptions are conservative of hopeful. If they are simply based on hope, watch out if the hope fades. We have not seen earnings rising, we have seen multiples expanding. In investment terms you are paying more for the same thing. We do not like to do this unless something major has changed. In fact, we are always more likely to take profits in such an environment.

Something would have to go pretty well in December to justify the continuation of this rally. People that rely on hope can get lucky sometimes. Outsiders sometimes win the race. We live in a world where most things are uncertain (most likely is not the same as certainty). However, success over time and control of risk requires significant knowledge and the right way of thinking, allowing you to make sound, well informed decisions again and again, day in day out, year in year out. The other option is to cross your fingers and hope you will be investing in one of those great periods, but that is beyond our control.

That is why we seek to educate our clients, as the disciplined approach to investing is a very hard mindset to maintain.

For further information or to discuss how we can help you, please speak to your adviser.