The Australian stock market has posted some good gains recently with the ASX All Ordinaries Index and S&P/ASX 200 Index both closing above 5100 yesterday. Instead of the markets showing some weakness as I expected, they appear to be rallying even despite falls in commodities prices and warning signs that the Chinese economy may start to slow again. This makes it difficult to get a feel for where the markets might be heading and economic stimulus measures in the United States, China and Japan complicate the outlook even further.
As a long term investor I don’t place too much emphasis on short term trends. Rather than trying to predict where the markets will be in days or weeks I am more concerned about where they will be in months or years. I also don’t expect to be able to time with any great accuracy the purchase of stocks or other assets at the bottom of a cycle nor sell them right at the top of a cycle.
My investment strategy is based on getting the market trends almost right in two or three year blocks. That means with some luck, I will generally be moving into positions when the market is weak and hopefully taking some profits when there are profits to be had.
I usually miss buying stocks at rock bottom prices and quite often sell them before they have peaked, but as long as I sell them for a profit I figure I am doing okay. For example I sold all BHP Billition shares during 2010 at just over $44 and then watched them head near $50.
I sold them because I turned bearish regarding the outlook for commodities and although I did not time the sale as well as I could have, I did get the long term trend right and BHP shares peaked months after I sold and are now trading around $32.
But sometimes I get things horribly wrong as I did when I ventured into Babcock & Brown shares during the depths of the GFC. At the time I expected financial related stocks to recover and in fact generally most of the blue-chip ones did. However Babcock & Brown was a wipe-out and that trade almost cancelled the gains I made from BHP. Thankfully I held onto other banking stocks and they have also eased my pain.
So now when the markets appear to be moving upwards against my expectations I find it useful to sit back and review the big picture. What long term trends may I have picked correctly, which ones have I made a mess out of and what am I expecting over the next two or three years.
After the Australian stock market hit the GFC low in early 2009 I wrote on many occasions about how the All Ords/ASX 200 has been basically been moving sideways and that I expected them to trade within the 4800-5200 range. My attempts to nail down a figure for All Ords/ASX 200 however at the end of each year hasn’t been too successful but at least generally speaking I did make the rights call over the longer term.
So far this year the Australian stock market has moved higher than I expected so once again my short term outlook is off the mark. But they are still within the 4800-5200 range and I don’t expect they will break much upwards out of that range although I do expect them to dip down below that range this year.
What is making me cautious about the outlook for the Australian share market is that although commodities prices are falling and mining stocks have slipped back, the overall market has been pushing up against this trend.
Lower interest rates and overseas money looking for investment opportunities has helped push up the market. But the long term support for much of these gains i.e. increasing company profits, doesn’t seem to be a major factor.
As a long term investor I am sitting on my hands. If the market keeps rising then I make money, but I am not inclined to buy into this rally as I believe it is not sustainable.
There are some stocks/sectors I am watching closely however. The big miners like BHP Billition & Rio Tinto for example are getting down to prices that are tempting and I am also interested in stocks with exposure to Europe & Japan. I am also looking into listed companies related to agriculture and healthcare.
If I do buy into mining stocks again it would be as a long term play where I would hopefully see some decent gains in two or three years time. Meanwhile I would sit back and watch the dividends roll in.
At this point I wish to remind readers that I am not offering financial or investment advice. My articles are based on my personal observations and analysis of the markets plus some crystal ball gazing.
All of us need to bear in mind that forecasts and predictions regarding the stock market or economy involve a lot of guess work. So although I believe it is important to have an investment strategy and to try and form a view of how the markets may move, I also accept that things seldom turn out exactly as planned.
In short, it’s good to have a plan, but it also pays to be ready to adjust to the new reality when that comes along and shakes things up!
Finally let’s have a look at the long term trend for the ASX All Ordinaries Index between 1988 and 2013.
ASX All Ordinaries Index 1988 – 2013
On the chart above I have marked a trend-line in green which shows that the All Ords is basically moving as it did before the mining boom took hold. Since I expect iron ore, copper & gold prices etc to remain under pressure for the next few years, I reason that the market should move upwards pretty much along this trend line for a while.
Along the way there will be some dips, maybe some big ones, but I will be looking at these as chances to buy rather than a reason to sell and join the panic.
It’s not a strategy without risk, but for now that is my long term stock market investment plan.