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Home / New Zealand

Tales of greed aren't a signal to bail out

Mary Holm
By Mary Holm
Columnist·
7 Jul, 2002 08:52 PM4 mins to read

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By MARY HOLM

Q: The news is full of tales of corporate greed and fraudulent accounts in the United States, much like it was in New Zealand after the 1987 sharemarket crash.

Excesses that were tolerated over the last seven years are now shunned.

Actually those excesses weren't just tolerated, they were
demanded. Any financial adviser who couldn't earn 20 per cent or more lost clients, any chief executive who couldn't "beat the numbers" was quickly replaced by someone who could.

Eyes were closed to the fiddles required to do this, so long as the stock kept climbing.

The "investors" wanted those who would tell them what they wanted to hear, and they got what they demanded.

Now it is all "shock, horror, we've been robbed".

The search for scapegoats means the crowd is starting to accept that it has lost its money and wants someone [else] to blame for its own greed.

In the past this has meant shares performed quite badly for a few years as valuations declined back to normal.

Do you have any comments on this, and specifically on the thought that shares might be a lot less attractive than usual over the next two or three years in the US, as the excess valuations work off?

A: I think you're getting carried away.

There are certainly some worrying stories coming out of America about fraudulent accounts and so on. But I can't believe most US companies have suddenly gone crooked.

I also think the term "excesses" is a bit strong.

Certainly, things went mad in the US high-tech sector in the late 1990s. Beyond that, though, share prices probably rose somewhat more than they should have, and have since fallen.

The market decline has lasted longer than usual. But it's been nothing like New Zealand's 1987 crash in magnitude.

What about the future? You're quite right that US shares might be a lot less attractive over the next two or three years. But let's stress the "might".

They might also do rather well.

Andrew Bascand, fund manager at Alliance Capital Management, recently said he expected the US market to rise around 8 per cent in the next year.

Others are saying that now looks a good time to buy international shares, bearing in mind that US shares make up more than half the world's shares by value.

In a recent newsletter, MoneyOnline notes, "Over the last 30 years, there have been no declines [in global shares] lasting more than two consecutive calendar years.

"In most cases, down years have been followed by surges in excess of 20 per cent."

There are no promises that such a surge will happen this time. But another year of losses would be historically unusual.

Economist Tony Alexander, like me, won't forecast share prices. But he says in his BNZ Weekly Overview that if he had diversified offshore investments, he wouldn't sell now.

People, he says, tend to think whatever has just happened will continue.

"If house prices rise we think they will continue to rise. If share prices fall we think they will continue to fall.

"At heart our uninformed forecasting technique is not very sophisticated - which of course is of immense benefit to professionals who know that in most cases what goes down goes back up again.

"The tendency of the masses to oversell and overbuy can be relied upon to produce some good asset price entry and exit levels."

According to you, "the crowd is starting to accept that it has lost its money". But you've actually lost only if you sell.

Do you really want to be one of those who bail out now and create great buying opportunities for the professionals who Alexander writes about?

Let's give the last word to successful US share investor Warren Buffett.

"Our capital markets are simply a relocation centre," he is quoted as saying. "They relocate wealth from the impatient to the patient."


* Mary Holm is a freelance journalist and author of Investing Made Simple. Send questions for her to Money Matters, Business Herald, PO Box 32, Auckland; or maryh@pl.net

Letters should not exceed 200 words. We won't publish your name, but please provide it and a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice outside the column.

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