The Valor Blog.
Investment News and Views, Direct from Our Team.

Coin flippers come out to play…

Its that time of the year again when the coin flippers come out of their shell and make ridiculous predictions for the various share market indexes for the next 12 months. Shane Oliver and John Abernethy have both predicted 10% to 15% returns for the market.

I call them coin flippers because the probability of guessing where the index will be in 12 months is not much better than a 50/50 coin toss.

This practice is about as useful as dart board investing. The answer is that no-one knows where the Dow Jones is going to be at the end of 2013 or whether the All Ordinaries is going to be higher or lower.

Shane Oliver’s famous call in 2007 that the Australian market would reach 8000 in the next year was a fantastic example of coin flipping.

The regular offenders of the coin flipping calls are the brokerage houses. Once again, it all comes down to incentives. How do these guys get paid? They get paid when you buy and sell shares. If you keep your shares they dont get paid as much, so it is in their interests (not yours) to attempt to make you buy and sell regularly.

There are a large group of people who like to move in an out of the share market as if they know what is going to happen in the next 12 months. This is a very good way to miss out on some of the best returns available.

If stocks you own are over valued, it may be wise to trim your position, but it is not wise to be buying and selling in and out of the market on a regular basis because of a gut feel.

There are sectors of the market we believe are at greater risk than others and for those of you who are able to invest your superannuation with discretion, you have the ability to reduce risk by avoiding these sectors. Mining and housing related sectors of the Australian share market are likely to have greater headwinds over the coming years. We caution those over exposed to these sectors.

A better practice is to ignore the markets and invest in wonderful businesses and hold them for extremely long periods of time. Always keep some powder dry to add to your positions if markets offer irrationally cheap but high return and sustainable businesses.

At Valor Private Wealth, we would like to make a prediction that the share markets in free markets (not “roach motel” markets like China) will gradually grow over the very long term and continue to create wealth as they have for the last century. There will be market corrections one in every 4 or 5 years on average and your portfolios will fluctuate. It is not these market fluctuations that you should worry about, but the long term growth in the value of the businesses you invest in.