Rudi's View | Mar 05 2007
By Rudi Filapek-Vandyck
Nothing impacts an investor’s psyche as deeply and severely as falling asset prices. Nothing.
No matter how hard market commentators are trying their best these days to sooth every form of investor angst, the weak point in all arguments on display is that prices of listed equities continue to drop. This is where the human instinct takes over and causes deeply rooted discomfort, even among professionals.
As a result, the Australian share market is experiencing its most severe pullback since May 2006. Investors better throw all books on seasonal trading patterns out the window because 2007 is going to look different from now on, very different.
To understand what is currently happening in the markets, it’s probably best we fall back on something most of us are all too familiar with: the psychology of the sports team.
Years before I became a financial journalist, I pursued a career as a volleyball player. I vividly remember the time my team took a 14-1 lead in the opening set of a game, only to lose it by 14-16.
What happened?
If you’d had asked me immediately after the set I would have stumbled over my answer, not knowing who was to blame or why. How can a team that only needs one more point to secure the set, with an advantage of 13 points over the opposing team, still lose?
I was there, on the field, but the only explanation I can come up with is that things somehow abruptly reversed so that everything seemed to go into the other team’s favour while my team simply couldn’t nail that one final point, no matter what we tried.
By the time it had become 14-14 we’d already lost with the other team advancing on elevated spirits while we felt like we were fighting the higher elements of life: angered, frustrated, and with internal divisions laying bare the weaknesses in our game.
It’s not uncommon for the team that wins the opening set in such a manner to swiftly win the two following sets and thereby the game – and that is exactly what happened in this instance as well.
I am certain that anyone who has played a sport, or who likes to watch it, can cite similar examples.
This is not about losing a set or a game. This is about experiencing a big mental blow and what it does to your mindset. After having experienced set number one, in the losing team, you all of a sudden find yourself playing more cautiously than before, and making mistakes you couldn’t even imagine previously. That’s because -whether you like it or not- uncertainty has crept in, deep inside.
What happens under similar circumstances in financial markets is an overall re-assessment of risks. Investors who felt compelled to sell all or some of their assets over the past week in order to secure profits (better safe than sorry!), or to avoid losses becoming too big can rest assured: you are/were far from the only one.
Of more importance than the selling of assets, by many at the same time (which leads to weaker prices which in return triggers more selling and thus weaker prices) is the change in overall market views that follows from it. All of a sudden the term “risk” has become very tangible, a danger, as it has shown itself in the form of falling prices and financial losses.
Regardless whether you are today in the market or not, your view has already changed since last week Tuesday.
From an Australian perspective, the best way to illustrate what is currently taking place is via the example of Telstra (TLS). Remember last year when T3 was nothing more than a plan? The market was so negative on Telstra’s valuation and prospects that even brokers who had been chosen to promote the shares to private investors kept their recommendation on Neutral. The majority of local securities analysts thought a valuation below $4 was more than appropriate.
Telstra shares seemed landlocked between $3.50 and $4.00 and risks were considered to be to the downside.
Fast forward to February 2007: three days before investors lost their nerve in Shanghai and Shenzen, triggering a worldwide domino effect, Telstra shares closed at $4.54 on Friday, February 23. In between, most securities analysts turned more positive on the industry dynamics and the company’s prospects, raising earnings forecasts significantly. Several experts have put their valuations north of $5 these days.
The odd thing about all this is that Telstra is fundamentally still the same company as it was prior to T3 in 2006. Management is still fighting the ACCC and government restrictions. Cutthroat competition in mobile is likely to stay, while growth in internet broadband appears to be slowing down. The internet search strategy by Sensis is not bearing any tangible progress. Etcetera, etcetera.
What has fundamentally changed for Telstra is the market’s view. Whereas before investors used to focus on the negatives and the risks and dangers, post-T3 they switched to a more positive view on the company and simply dismissed the same risks and dangers, zooming in on the positives instead.
The same company, but looked upon with a different view thus received a different valuation and a much different share price.
Since last week Tuesday, the same is happening on a global scale, though in the opposite direction. That in itself can only be regarded as a “fundamental change”.
