Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 128

Adapting to buying shares when markets fall

The Australian share market experienced what felt like a virtually uninterrupted winning streak for the roughly six years between the March 2009 bottom of the GFC and the recent highs in April 2015. The falls since then are likely fresh in your mind.

The Total Return Index, including dividends reinvested, between the ‘bottom-tick’, ASX200TR index at 21298.06 on 6 March 2009, and the most recent ‘top tick’, ASX200TR index at 52822.21 on 27 April 2015, the advance amounted to over 148%. $10,000 became more than $24,800 without any of the stress and effort of individual stock selection.

If you sell, when do you buy back in?

Despite your memory of that period likely being constant gains, the recent fall is one of four double-digit reversals in the index over that period, the others being:

  • 15 April 2010 to 5 July 2010 saw a 15.0% decline.
  • 11 April 2011 to 26 September 2011 saw a 20.4% decline. A bear market is customarily defined as a reversal of at least 20% from the previous peak. The 2011 reversal is remarkable for the fact that the index was in a technical bear market for exactly two days, 26 September and 4 October 2011. Perhaps the shortest ‘bear market’ in Australian investing history.
  • 14 May 2013 to 25 June 2013 saw a 10.5% decline.

In Australia lately, the old line ‘sell in May and go away’ seems more applicable to April. The bigger problem if you chose to do so is when to return, for each of the falls described above, despite starting within 33 days of each other ended in different months.

There were a few other instances over the period with reversals that didn’t quite make it to double digits, so it really has not been a steady one-way path to profits. There have been plenty of opportunities to make big mistakes of timing, buying at tops and selling at bottoms.

Why do investors react in these ways?

Behavioural economists Daniel Kahneman and Richard Thaler have written excellent texts on the various ways our mind is predisposed to trick us. Over thousands of generations, humans have evolved to employ heuristics for much of our day-to-day decision-making. A heuristic technique allows for a rapid decision, but often not the optimal decision. Given we customarily make thousands of decisions daily, this process is critical to efficient operations, but it gives rise to occasional sub-optimal decisions.

When we were living as tribesman on the plains of Africa, heuristics were enormously useful: “Quick, a hungry-looking lion, better run” or “I’ve never seen anyone eat these berries before, so I won’t either.” In fact, those who failed to use heuristics ensured the tendency toward such decision-making techniques passed down through the ages because those failing to use them were often eliminated from the gene pool.

In the financial markets, heuristics will often lead to the wrong decision, so you need to train yourself to override these natural tendencies. In his book ‘Thinking, Fast and Slow’, Kahneman describes two systems of thinking. System 1 is the foundation for heuristics and it is very fast, almost automatic. System 2 is applied when we slow down and really reason out a problem. System 2 is what you need to train yourself to employ in your decision-making in financial markets.

Contrarianism is something that is given much lip-service in investment circles, but is much harder to apply in practice. This is for good reason, as the crowd is usually right more often than wrong. Despite this, crowds are occasionally also very wrong. When the stock-market is plunging, the driving force is usually a reason that sounds quite reasonable at the time. Inevitably, in retrospect, it seems overblown or short-term.

Once we can master the emotional side of investing, we place ourselves in a position of considerable advantage. We must train ourselves to consider whether whatever economic problem is causing the market concerns of the day actually has a practical effect on the underlying valuation of the business we are investigating. Suppose you were considering buying Telstra shares, and you decided at prevailing prices they would deliver a sound economic return over coming years. However, you didn’t buy because the debt issues in Greece caused you to feel uncertain. You probably made a mistake of reasoning. If you were considering buying BHP shares and the apparent slowdown in China caused you to feel uncertain about the long-term prospects for commodity prices, then your reasoning was probably on more solid ground. 

Opportunities arise in tough markets

When the wider market drops by 15%, there will often be individual stocks that might fall by perhaps 30% (or not at all, of course). In order to succeed at investing, we need to train ourselves to reflexively consider this as a likely opportunity and go searching for where the best opportunities have arisen.

We seem to be able to reflexively adapt our habits as consumers. When a desirable product that has previously been fairly valued or expensive suddenly becomes inexpensive, consumers pounce. These critical supply and demand structures often become disjointed in investment markets. For the patient and disciplined investor, as Albert Einstein said, “In the middle of difficulty lies opportunity.”

 

Tony Hansen is Chief Investment Officer at Eternal Growth Partners. This article is for general educational purposes and does not address the investment needs of any individual.

 


 

Leave a Comment:

RELATED ARTICLES

Learning when to buy and sell shares

Feel the fear and buy anyway

The ASX's 16-year drought: a rebuttal

banner

Most viewed in recent weeks

Maybe it’s time to consider taxing the family home

Australia could unlock smarter investment and greater equity by reforming housing tax concessions. Rethinking exemptions on the family home could benefit most Australians, especially renters and owners of modest homes.

Supercharging the ‘4% rule’ to ensure a richer retirement

The creator of the 4% rule for retirement withdrawals, Bill Bengen, has written a new book outlining fresh strategies to outlive your money, including holding fewer stocks in early retirement before increasing allocations.

Simple maths says the AI investment boom ends badly

This AI cycle feels less like a revolution and more like a rerun. Just like fibre in 2000, shale in 2014, and cannabis in 2019, the technology or product is real but the capital cycle will be brutal. Investors beware.

Why we should follow Canada and cut migration

An explosion in low-skilled migration to Australia has depressed wages, killed productivity, and cut rental vacancy rates to near decades-lows. It’s time both sides of politics addressed the issue.

Are franking credits worth pursuing?

Are franking credits factored into share prices? The data suggests they're probably not, and there are certain types of stocks that offer higher franking credits as well as the prospect for higher returns.

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Latest Updates

A nation of landlords and fund managers

Super and housing dwarf every other asset class in Australia, and they’ve both become too big to fail. Can they continue to grow at current rates, and if so, what are the implications for the economy, work and markets?

Economy

The hidden property empire of Australia’s politicians

With rising home prices and falling affordability, political leaders preach reform. But asset disclosures show many are heavily invested in property - raising doubts about whose interests housing policy really protects.

Retirement

Retiring debt-free may not be the best strategy

Retiring with debt may have advantages. Maintaining a mortgage on the family home can provide a line of credit in retirement for flexibility, extra income, and a DIY reverse mortgage strategy.

Shares

Why the ASX is losing Its best companies

The ASX is shrinking not by accident, but by design. A governance model that rewards detachment over ownership is driving capital into private hands and weakening public markets.

Investment strategies

3 reasons the party in big tech stocks may be over

The AI boom has sparked investor euphoria, but under the surface, US big tech is showing cracks - slowing growth, surging capex, and fading dominance signal it's time to question conventional tech optimism.

Investment strategies

Resilience is the new alpha

Trade is now a strategic weapon, reshaping the investment landscape. In this environment, resilient companies - those capable of absorbing shocks and defending margins - are best positioned to outperform.

Shares

The DNA of long-term compounding machines

The next generation of wealth creation is likely to emerge from founder influenced firms that combine scalable models with long-term alignment. Four signs can alert investors to these companies before the crowds.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.