Surviving The Mother Of All Stock Market Corrections

As expected, last week’s Moowsletter – ‘Fat Pitch Investments’, left a few subscribers sitting bolt upright in bed worrying about a possible stock market correction in 2015. And if you were one of those, then in a perverse sort of way it served its purpose.

Here’s why…

The Most Important Question Of All
If the stock market experienced its worst crash ever, would you consume less?

•    Would you spend less on groceries every week?
•    Would you cancel your phone and internet accounts?
•    Would you disconnect the gas and electricity?
•    Would you close all your bank accounts, cut up your credit card and sell the house to get rid of the mortgage?

Of course you wouldn’t. The tale doesn’t wag the dog. In fact most people don’t even watch the stock market until the media whips them into a frenzy.

The Most Important Lesson Of All
Only one thing matters.

You and I ultimately determine the value of shares and the direction of the stock market. It is our consumption which grows businesses and drives up stock prices. We think it’s the stock market but it’s not.

Just have a look at the price charts of stocks such as Woolies, Coles, Westpac, ANZ, NAB, CBA, Telstra, AGL and a host of others. You will notice a pattern. They gradually grow because they all sell staple products which you and I rely on for our survival.

The only reason people get burnt on the stock market (and every other market) is because they pay more for an asset than what it’s worth. It’s like paying $6 for a $4 coffee.

The time to worry about the stock market is when John and Jenny in Mortgageville stop buying groceries, cancel their phone and internet accounts, and never use a bank again to hold their savings or borrow money. In fact you can’t even have an economy without the banks. They facilitate the flow of all money. Hence the heavy regulation.

Crash and Bounce
The value of a stock is determined by how much profit it makes every year. Period. Everything else is just noise.

E.g. If Woolworths grew its profits every year by 10%, then each year it would be worth 10% more than the last and in principle its stock price would follow as well.

That’s why its stock price has gone from $2.60 in 1994 to a recent high of $38.92.

During that time, it has survived the Asian meltdown in 1997, a market correction of 22% in 2001 and then got the tripe kicked out of it in 2008. During the GFC it went from a high of $35.30 to a low of $23.69 before recently making an all-time high of $38.92.

We keep consuming, the population keeps growing, and Woolies profits and share price gradually head north.

And if Woolies was an investment property, you would have bought it for $260,000 in 1994 and it would now be worth $3,892,000! Enough to make your eyes water.

Granted, not every stock has performed as well as Woolworths, while some have performed better.

However, the point is this. In aggregate, if the top 200 stocks (The All Ordinaries Index) grew their profits each year, the stock market would continue to appreciate in value as well. And that’s exactly what it has done since day dot, before you and I were even thought of.

And if the stock market does experience a correction, start backing up the truck. It will be like Boxing Day at David Jones. The mother of all sales.

Have a great week…up or down!
P.s. next week I will share with you the biggest mistake made by all investors preparing for retirement. It’s a simple but very painful mistake and it has nothing to do with debt.

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This information has been prepared without taking into account your objectives, financial situation or needs. Before making a decision based on this material, you should consider its appropriateness in regards to your objectives, financial situation or needs. You should seek advice about how the relevant laws impact on your particular circumstances. Suncow Wealth Pty Ltd is a Corporate Representative No.441116 of AFSL 393254.