The result of the Brexit referendum became clear to investment markets on Friday 24 June during trading hours on the Australian sharemarket. The market (ASX200) reversed from being up 0.8% on the day to closing down 3.1% in the usual knee-jerk reaction that markets have to major political or financial events. Overseas sharemarkets duly followed suit. It may well be that markets for a while become more volatile again. However from a long-term investing point of view, nothing really changes. It may if you are British or European but that is another story.
There is no doubt that this can be unsettling for investors. However, you are not the only ones. An eminent (unnamed) market research firm allegedly polled the dogs as well as the humans. When asked how they found stockmarket life at the moment the dogs said “Ruff”. They also asked the horses (must have been related to Mr. Ed) would they currently invest in shares. To which the horses responded “Neigh”. Still, not many dogs and horses have well defined robust share portfolio strategies.
The political ramifications of the UK leaving Europe are both significant and very uncertain. But is this relevant to investors? In the short term, the answer is yes because share prices rise and fall. And there is going to be another bear market one day with either this or something else being the catalyst. A year ago I was writing the same blog but about Greece rather than Brexit. In fact, this blog is almost word for word the same as the Greece blog. The only changes are a bit of cutting and pasting (mainly deleting the word Greece and replacing it with Brexit). Crises in investment markets are regularly recurring events. As are the recoveries from them. And it’s always the current crisis that seems to be the important one. This time, a year ago it was Greece which along with all of the others has been consigned to history and surprise surprise life went on. Which it will this time too. I can’t see many British ceasing to eat black pud and drink warm beer as a result. If you want to read the Greece blog go to the July 2015 newsletter “Greece and Share Strategy No Trojan Horses Here” at www.lifestylefstas.com.au. You will see that little has been changed.
If you are a long-term investor with a robust investment strategy that results in you being able to make sensible investment decisions without having to try to pick what markets are going to do the current kerfuffle doesn’t matter. If anything it can provide opportunities such as selling shares that become significantly overvalued and buying shares when they become undervalued. The performance of the particular business in which you are invested is what matters over time not what happens in markets. In the June 2015 blog “Saying Moo to Thematic Investing” the long-term performance of a number of different stocks was compared with some big differences in performance over time. Yet all of these stocks were in the same market which was rising some of the time and falling some of the time.
So what does matter to long-term investors? That is to be invested in stocks that represent high-quality businesses, with favourable prospects and have been bought at a rational (not overvalued) price. If you are disciplined and restrict investment to stocks that meet these criteria you should over time get good results. This does not mean that there won’t be periods sometimes extended when the value of your stocks falls. It does mean that these stocks are much more likely to recover after market downturns and are also much more likely to maintain dividends. If you want to read about what does matter go to the November 2015 blog “The Eternal Caravan of Value Reincarnation” at www.lifestylefstas.com.au.
Shares that represent businesses that are either low quality, don’t have favourable prospects or are significantly overvalued may not necessarily recover. So if you are invested in these stocks (there are many in today’s market including quite a few so called blue chips) then watch out. Now is not the time to have these stocks in your portfolio. Not that it ever is of course.
That’s enough said at this time about Brexit. And Greece. And the next financial crisis whatever and whenever that may be.