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Optimism returns to the market!!!

Discussion in 'Managed Funds & Index Funds' started by AsxBroker, 17th Feb, 2009.

  1. AsxBroker

    AsxBroker Well-Known Member

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    The market is doing better than you think - Feb. 16, 2009

    I'm also seeing clients who are starting to invest part of their funds back into the stockmarket for yield which is also great to see after a horribly destructive 2008.

    Cheers,

    Dan

    PS this is general information and does not take into account your personal situation. Before making an investment decision speak to your FPA registered Financial Planner.
     
  2. Chris C

    Chris C Well-Known Member

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    As long as they aren't leveraging in, and buying for the longer term, now probably isn't a terrible time to get in as long as they are ready to ride the market a little lower in the short term.

    I definitely agree that market is through the first of its rough patches. A lot of companies have revised down their future earnings, the system has already weeded out a lot of fragile companies, and I think the world is slowing waking up to reality and the future, albeit bleak isn't as uncertain.

    That said I still think we have further south to go, though not at the rate of knots seen late last year, though there may still be some big corporate failures to come and further government bailouts and nationalisation of corporations, but I'm getting the impression from the buzz on a lot of market forums that people are starting to expect this. So the price falls might not be as severe as the first leg of the bad news.

    EDIT: LMAO, trust me to post that I agree optimism may slowly be returning before the Dow opened tonight, and now the Dow is down by 275 points and looking like it is in freefall. Ben and his FED buddies will have to get their Plunge Protection Team assembled quickly for an 10am rally because I don't the market can wait till 3pm for them to come in a save the day.
     
    Last edited by a moderator: 18th Feb, 2009
  3. AsxBroker

    AsxBroker Well-Known Member

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    Anyone that goes in for leverage is very brave in the short term.
     
  4. Chris C

    Chris C Well-Known Member

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    I'm personally starting to wonder if leveraging into the market for investment purposes won't be advantageous any time in the next 5 years or so...

    Like I often look at margin loan rates, the cheapest are like around 8%pa at the moment, and whilst I know as the cash rate drops they will probably drop too, but even if I could get rates at 5 - 6% I just don't see the market reliably growing by 7 - 8% pa on average over the next 5 years, which removes the attraction of leveraging into the market from a buy and hold perspective...

    I know that is a bit downer to say, but I can't help but think the repercussions of this crisis, as I see it playing out, will only lead to fostering new beliefs about the use of debt when it comes to investments, and without the growth based on debt expansion I wonder if the market can reliably grow by 8 - 10%...
     
  5. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    You're forgetting income. You only need the TOTAL return (income + growth) to be higher than the cost of finance to make leverage attractive. While growth is likely to be fairly low in the short term, yields should generally be higher than they have been.

    I'm not saying this will necessarily make the returns high enough to justify leverage - but low growth isn't the entire story.
     
  6. Chris C

    Chris C Well-Known Member

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    Sorry, in my head I was factoring income as well. It just didn't transfer to my fingers whilst typing..

    :D

    I know that seems unusual given that yeilds on STW are presently 10.8%, but I just don't see yeilds of 5%+ a few percentage of growth over the next couple of years...

    I'm really quite interested to see what yeilds are like when all is said and done, given that I'm expecting at least mild rates of deflation which should put pretty signficant downward pressure on revenues and increase the cost of holding debt.

    To be honest, the more this crisis unfolds, the more I realise that growth should never really be the driving force behind investment. So much "growth" can be attributed to pure M3 money supply growth, and for the most part growth is just speculation. I know that is contradictory coming from a guy who is largely in gold right now, but I think that when all is said an done people we be looking for reliable income/rents/dividends more so than growth, because it was the pursuit of growth that got us into this mess.
     
  7. rambada

    rambada Well-Known Member

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    I agree. Very much back to Robert Kyosaki and assets putting money in your pocket. I believe this is going to be the new catch cry for quite a while. With % rates down and yields up, residential IPs are looking good.
     
  8. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    FWIW - I mostly agree with you. A growth-only-and-to-heck-with-the-income strategy is not sustainable without very deep pockets or a lot of luck ... (unless you are able to spend time to make trading or flipping work - but that's not an investment strategy in my books). You need to be able to hold onto your investments and income is very important in achieving this.

    However, an income-only strategy is not going to build wealth very quickly.

    I think there needs to be a balance between the two.
     
  9. Chris C

    Chris C Well-Known Member

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    I think this is part of the problem. The idea that everyone, including myself, had about how wealth could be built quickly.

    The reality in my mind is, true wealth can and should only be built through a process of consuming less than you produce, not this idea that wealth can be created by borrowing credit to speculate on commodity prices, like home values.

    If money supply doesn't grow at any significant rate (particularly M3 money supply) then real growth should only be represented by productivity/efficiency/innovation gains which is just reflective of the systems ability to produce more.

    Think about it this way, if all business's primary growth comes through increased consumption of their goods, but consumption of goods in an economy is limited by productive output (as in people can't borrow money to buy items) then a business's growth is limited by the rate at which the economies productive capabilities grow.

    At the end of the day debts need to be repaid, and if you think about it logically, debt is just borrowing money against your future earnings, so over the long term consumption needs to equal production. In Australia you only need to look at our level of debts and our trade deficit to see we have a LONG history of consuming more than we produce, and this is a burden that is going to take a long time to amend, as the vast majority of our debt was not spent on increasing our productive capabilities rather was spent on the speculative commodity investment of housing.