WARR HUNT

Introduction

Discounting & Investment MarketsBy Sam Hunt

Price discounts thrive on the principle of urgency: if you don’t buy now, at the discounted price, you’re likely to miss out on saving some money. The anticipation of missing out is exactly why discounts work.

Discounting & Investment Markets By Sam Hunt

sam hunt

I think now, looking back, we did not fight the enemy; we fought ourselves. The enemy was in us – Chris Taylor, Platoon.

Price discounts thrive on the principle of urgency; if you don’t buy now, at the discounted price, you’re likely to miss out on saving some money. The anticipation of missing out is exactly why discounts work.

The concept of price discounting is easy to understand when it comes to buying things we want, but this is turned on its head when it comes to investing in the stock market. When stock markets decline by more than 20% – which they have done, on average, about every 10 years since 1980 – we begin to actively fear we are experiencing a permanent loss of our capital. We are confronted with an impulse to sell before the permanent loss worsens, rather than take advantage of the ‘discount’ on offer.

The following graph illustrates the expansion and contraction period of the S&P ASX All Ordinaries Index for the period 1980 to present:

The impulse to react and sell is an instinctive human response, and over time it has historically proven to be a serious mistake. Indeed, for some people, it has turned out to be a mistake from which their long-term financial plans can never recover.

As illustrated, the stock market, for which my proxy is the S&P ASX All Ordinaries Index, has declined on average by more than 20% every 10 years since 1980. For the record, the All Ords was 500 at the start of 1980, and as I write it is now around 6,000.  This suggests that, however deep the many price declines may have been in the interim, the long-term appreciation in the value has erased those declines and carried equities to new heights.

I am not making a prediction, as past performance is no guarantee of future results. I also do not seek to trivialise the seriousness of the economic and financial crises which instigated all the significant stock market declines in the past, right up to the COVID-19 pandemic. What I invite you to observe is that in every case so far, the declines were ultimately surmounted.

Thus, in a well-diversified portfolio, there has historically been a critical difference between a severe but temporary price decline, and a permanent loss of investor capital.  The former, as we have seen, is almost commonplace. The latter, however, has historically been avoided where the investor was educated as to the risks of investing, and had a plan in place tailored to their financial objectives.