Why Roosevelt and Keynes' wisdom is spot on now
Updated: Apr 26, 2020
Franklin Roosevelt famously stated " we have nothing to fear , except fear itself." He was identifying a core feature of human reality. This was during the depths of the 1930s Depression. Humans are herd animals. Our fear is often contagious and self fulfilling, especially for an economy. During the same period, John Maynard Keynes emphasised the role of " animal spirits" in affecting economic activity. A collective loss of confidence is the accelerant of an economic downturn.
The share market slumped again today. Who knows how it will react tomorrow? Or the next day. There is an air of panic. The question any investor should be asking is whether this virus is the Black Death or a transient nasty. I'm leaning heavily towards the latter. Panic is an over reaction.
Here's my reasoning from a purely investing point of view. My medical knowledge is limited. I own shares in electricity companies, airports, retirement villages, casinos, phone line companies and property trusts. These are businesses that provide modern necessities. They provide stuff that we all buy and consume or use on a regular basis.
In the past few years our share market has been on a bull run. This has been underpinned by ultra low interest rates and an inflated housing market and the success of KiwiSaver. KiwiSaver has provided a big pool of funds that has underpinned our share market. That is a good thing. We should own our most successful companies.
Many older investors have sought better yields from dividends from listed companies. Keeping their money on term deposits with banks provides little real return after tax and inflation. The usual risk versus return trade off.
The NZX which operates our share market responded to a surge in share investing by launching a whole raft of index funds. These funds are pAssive buyers of shares. Novice share investors are often told to buy index funds because they offer instant diversification and very low fees. But these index funds still have to buy shares in underlying companies, either here or abroad. They go up when there is a bull market and they go down in a bear market. Markets around the world have turned very bearish as a result of this virus.
The New Zealand share market is tiny by world standards. Less that 1 percent of total value of world share markets. We are a minow. Yet the success of KiwiSaver and the effect of ultra low interest rates have lead to a massive surge in our share market in recent years. This froth is now abating. Share markets hate uncertainty. This often leads to overreaction. Panic selling invites further panic selling.
But there is a core principle of share investing . Lesson 101 . A share is part ownership of a company that makes and sells stuff. The Corona is a nasty flu with a higher mortality rate than the norm. Yet people still need electricity. They need phone connections. They need retirement homes. They need power lines and broad band Internet. They need office space and factory and retail premises. Our share market represents the most profitable parts of our economy. Those investors who panic in the face of such an event are likely to lose.
Peter Lyons (M.Comm) teaches scholarship-level Economics and has authored several New Zealand curriculum economic texts. His inspiration often comes after a dram of whiskey. Just one mind you. So if you're ever stuck in a room full of economists, grab the seat next to him. For a conversation peppered with wit, wisdom and weirdness.
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