Panic and Lose Money (29-Jan-08)

By Jason Fittler
Why is it that people panic?  People panic in many different situations and I am yet to hear a story where panic actually did some good. So why do we do it?

Between 01/11/2007 and 21/01/2008 our stock market lost 23.5%, this is a large loss and certainly something to be concerned about. A lot of people lost a lot of money but the losses were compounded by three factors: panic, greed and ignorance. I am pleased to say that during these events our clients were not influenced by any of the above factors. The most common comment I received from friends and family was “You must have had a busy week”, in fact no, my week was like most others.  I am proud to say our clients understand the markets and most were looking to take this opportunity to buy good quality shares at a discount.

Let’s take a look at the above three factors and what part they played in recent market events.

Greed
We all want to be financially secure and strive to achieve that goal; to grow your wealth is easy, but for commitment. Most people are determined to grow their wealth but are not truly committed. They want the benefits of financial succuss but not the effort it takes to obtain. If you talk to a self made person about how they obtain such success you will not hear a Hollywood story of rags to riches.  Instead it will be a story of overcoming adversity, of wanting to give it all up, of losses and heart ache and a story of being truly committed to achieving the result.

Over the past 4 years we have seen outstanding markets, as such people truly determined to make money have entered the market and borrowed as much as they could to improve returns. This was working well, until the start of November 2007 when it all started going south. High levels of gearing and margin call started to force these investors to sell their holdings. Due to their lack of long term commitment these “merely determined investors” decided to exit the market completely, losses in hand.

The thing about fast money is it works both ways.

Ignorance
I have mentioned many times, when dealing in something as complex as the stock market you need to have a guide. Someone who knows how it works, a good guide will make and save you more money then you will ever pay them in fees.

Information is your friend; the bulk of the selling in the retail space of the market came from the discount brokers. Investor who saved a few dollars on brokerage lost a fortune as they had no idea what to do in bad times. They had no idea of how to structure a portfolio, how much gearing they should have or what they were investing in.

Everyone is an expert at the BBQ, but truly, few really know what they are doing. Getting good advice will make you more money in the long term than you will ever save doing it yourself.

Panic
People panic because one; they don’t have the knowledge or experience to deal with the situation, two; they have no one to help guide them through the situation, and three; they’re only focused on the worst case scenario as the outcome.
 
One adviser I know mentioned to me that one of their clients truly believed the market was going to fall to zero and they would lose everything. This scenario is impossible but the client believed it due to poor leadership by their adviser.

Panic will never help the situation so if you find yourself anxious about the markets first contact your adviser.  If they’re panicking get yourself another adviser. Listen to what your adviser is telling you and follow their lead. Second, start to educate yourself about the markets so you better understand what is happening. If you do this in earnest you will also truly start to see the benefits of maintaining your relationship with your adviser. Third, never focus on the worst case scenario. Indeed consider it, but also look at all other scenarios.

The drop in the market between November 2007 and January 2008 had to happen; the market had to shake out the weak investors. The market needed to purge itself, history has taught us that much.