Buyers beware! Remember '87

No big panic, but I wouldn't be buying yet. Here's why.
I think there is just a chance that we might see some major hedge fund collapse. Moody's has referred to the possibility in the US.
The big redemption date for hedge funds for the third quarter was last Wednesday. They have to collate investor requests to cash in their chips and meet them. We are too close to that date to be counting our chickens on a recovery. If Sentinel, a relatively low- risk money market fund, reported panic selling then what do you think is happening with other more exposed funds? We have yet to find that out.
If the redemptions are big, so the hedge fund selling will be big and the credit crunch will get worse. The abyss is still there. In the face of that I wouldn't start doing acrobatics in case I fell in.
Stocks take three times as long to build confidence as they do to lose it, so there's no real point rushing to buy. The bounce will be slower than the fall. Confidence is severely bruised. Leave the heroics to the traders. Sure there will be some short-term money to be made fluking the bottom but that's not easy, it's not investment and it could kill you.
In the 1987 crash the market lost just 14 months of gains. We have lost six months. If we lost 14 months of gains we would fall to the levels of June last year c another 16 per cent down from here to 4800 on the All Ords. That would make a 25.5 per cent fall. In 1987 the All Ords fell 47.8 per cent (the FTSE fell 36 per cent, the Dow Jones fell 36 per cent, the S&P 500 fell 33 per cent). Don't want to suggest this will happen but there is a remarkable overlap between the profile (not the magnitude) of our performance in the last two years and the performance of the All Ords over the 1987 crash (see chart). This is a log chart, measuring percentage movements of the All Ords now and the All Ords then. Don't get too upset c it's a picture, not a prediction. But it does suggest you stay on the sidelines. On this profile we could fall another 16 per cent - and what other guide do we have?
Some encouragement:
Again, the All Ords has lost only six months of gains. Losing that is not going to halt the economy, kill the housing market or change lives.
The Australian economy will be supported by China growing at 9 per cent until 2015 and probably beyond. No one's mentioned that in the last two weeks. Australia is a great long-term investment opportunity c the international funds will be back.

The massive fall in the Aussie dollar is good in a way. When the dust settles and the international fund managers look up they will see China, Australia and a currency that was on its way to parity that has dropped out of sight on short-term concerns. They will be back.
Since 1989 the stockmarket has fallen more than 10 per cent on 11 occasions and has recovered that fall within five months.
Some of the recent share price falls are just great for people looking to invest (sorry to those of you who have lost money). Maybe you were a bit lazy slotting that $1 million into the equity market having slotted it into the super fund. This is a godsend. You can buy BHP at $33 instead of $39.79, Rio at $83 instead of $105, NAB at $37 instead of $44.70, Leighton Holdings under $40 instead of $47.45. Let alone Macquarie Bank at $67 instead of $98.64 and Babcock & Brown at $19 instead of $34.78. A delicatessen of cheaper stocks.
The game now is to build a long-term investment portfolio and to do that you need to focus on the stocks not the market. Target a few stocks, target prices you'd like to buy them at.
Signs of the bottom:
¡ Macquarie Bank and Babcock & Brown go up.
¡ You hear broker research talking about value instead of the market.
¡ You hear strategists discussing price-earnings ratios being below the historic average.
¡ The Australian dollar starts going up. This will drag international institutions back into the market. They are the first to exit and will be the first to return when the currency rights itself.
Stocks to buy after the crash:
¡ Foster's - more drinking;
¡ Fleetwood - more caravans;
¡ Babcock & Brown Communities - early retirement.