Gemma Dale: 5 key takeaways from the decade

nabtrade modernised online trading in Australia ten years ago… when the ASX200 was trading around 4500, the RBA cash rate was 3.25%, and no one had heard of Afterpay. The last decade has offered incredible opportunities for investors, and a number of lessons also. So what have the last ten years taught us?

The market can stay irrational for a long time, and in quite extraordinary ways

One of the great finance maxims, that ‘the market can stay irrational longer than you can stay solvent’, has been attributed to many, primarily economist John Maynard Keynes, but apparently wasn’t recorded in use until 40 years after his death. Regardless of the author, the last decade has clearly illustrated this principle – it shouldn’t be rational to buy profitless companies, pay hundreds of thousands of dollars for a picture of an ape or ignore quality stocks trading on low multiples, but these strategies resulted in strong returns for many investors this decade – for a time.

Boring metrics like price to earnings (PE) ratios, interest cover and even just earnings, were not highly prized when cash was cheap. Extreme examples in the US included the GameStop mania which broke at least one hedge fund. Those who refused to buy into the hype of high growth, ‘long duration’ stocks looked flat footed; even Warren Buffett was said to have ‘lost it’. It’s easy to second guess yourself when you’ve been wrong for a long time, and it’s costing you money.

The cycle continues

Now, however, the party has been brought to a painful end thanks to central banks realising cash rates had been too low for too long, and swiftly changing course. All the winners in the boom must now contend with inflation at thirty year highs, normalising interest rates and a far more discerning capital market, with global markets retreating in anticipation of a hard economic landing. The companies that traded on PE ratios three, four or twenty times the average have fallen back to earth; former darlings have lost more than 90% of their value (Z1P is a popular example). Perhaps it wasn’t different this time. But quality companies will prevail.

Monetary policy is nothing to be trifled with

Now that rates are close to the normal range, it’s hard to fathom how they could have been held so low for so long. Or why quantitative easing became de rigeur in slowing economic conditions. The consequences of extremely easy monetary policy will be felt for decades, and it is likely investors who underestimated the power of central banks will be more cautious in future. Many nabtrade investors have held cash reluctantly.  

Cash is not a drag on your portfolio

While Nassim Taleb objects to the use of the term ‘black swan’ to describe the Covid19 pandemic (he alluded to the potential for a pandemic in his book of the same name), it still shocked the world. Markets plummeted, reflecting the chaos inflicted by the virus, and very few investors avoided the selloff. Yet the turnaround came quickly, and was remarkably swift. Those with cash – including many nabtraders, as cash was at record levels in January 2020 – were able to capitalise by buying shares on sale. While the real return on cash has been negative for much of the last decade, it has also been the best performing asset class this year. Cash gives you choices – and a slightly better interest rate now.

Investing is easier than it’s ever been

Twenty five years ago, a retail investor would have to look up a stockbroker in the Yellow Pages in order to buy shares for the first time, and pay around $100 for the privilege. She could trust the broker’s advice, or do research via a stock tipping newsletter. Today, with real time market data, free quantitative and qualitative research and brokerage rates still falling, building wealth through equities is as easy as opening an app. For those who don’t wish to take stock-specific risk, exchange traded funds (ETFs) have made the hardest decision – what to buy – easy, and international trading offers access to the world’s biggest and best companies a breeze.

It’s not always easy to make money on the sharemarket, but for the majority of investors, building wealth through owning quality companies has become a reality. Which is the best lesson we’ve learned.

Analysis as at 4 October 2022. This information has been provided by WealthHub Securities Ltd the ASIC Market Integrity Rules and a wholly owned subsidiary of National Australia Bank Limited ABN 12 004 044 937 AFSL 230686 (NAB). Whilst all reasonable care has been taken by WealthHub Securities in reviewing this material, this content does not represent the view or opinions of WealthHub Securities. Any statements as to past performance do not represent future performance. Any advice contained in the Information has been prepared by WealthHub Securities without taking into account your objectives, financial situation or needs. Before acting on any such advice, we recommend that you consider whether it is appropriate for your circumstances.