Beware of the perils of swimming against the tide

I was fortunate enough to be born and raised at Bondi Beach. One of the many benefits this provided to me – apart from the stunning beach itself – was early, accurate lessons in water safety and surf craft.

We were taught as youngsters how to recognise a ‘rip’ and what to do to escape its force.

“Don’t waste your energy trying to swim against it, you’ll be taken out to sea if you do!” said the friendly lifeguard. The threat of such a disaster was enough to make us all pay serious attention to his advice!

The ebb and flow of share market ‘tides’

This word from the wise lifeguard applies equally to the share market. It has a tidal energy and while fighting it won’t necessarily be fatal, it can prove very costly.

Consider the technology boom we have been experiencing for decades – best measured by the US NASDAQ index. This s a classic example of an unstoppable tidal force with its progress over the past 10 years recording a massive 450% gain.

Fighting this force can be dangerous

Some ‘clever’ investors have predicted a major correction in the growth of technology shares. While there have been occasional minor slumps – the Nasdaq did drop more than 1% in late 2018 – this proved to be a rare blip in the tech sector’s unstoppable tsunami of growth.

Other share market tidal trends should also be respected by serious investors. There is the irrepressible growth in online retail sales versus the ebbing tide of steady decline in some more traditional areas of retail.

The recent spate of store closures and entries into voluntary administration are testimony to the tough times many retailers have been enduring. Once household names like Just Jeans, Starbucks, Harris Scarfe, Bardot and more are either shrinking or disappearing altogether.

Against this, shares like Kogan.com Ltd (ASX: KGN) and JB Hi-Fi Limited (ASX: JBH) and Webjet Limited (ASX: WEB) are riding the online wave with considerable panache.

The nimble amongst the traditional retailers like Harvey Norman Holdings Limited (ASX: HVN), Coles Group Ltd (ASX: COL) and Officeworks – a division of Wesfarmers Ltd (ASX: WES) have chosen to go with the flow and have dramatically strengthened their own online representation.

That’s swimming with the tide – not against it.

A major lesson learnt

Once, there was a very well-known and successful investor called Brian Price (now Executive Chairman of the Finance and Energy Exchange). Brian was convinced that the tidal technology surge that powered the NASDAQ and ASX would one day face a correction.

His strategy was to short sell the NASDAQ, believing he would make a financial killing when it fell. As the months and then years rolled by without an interruption to its growth, he kept on increasing his short position

When the technology share market finally did drop and lost 70% of its value, Brian had been required by his lenders to exit his position and he lost millions. Fortunately, he had made other more favourable investments which compensated him for this mistake.

Back at the beach

It always surprises me just how much simple wisdom can be learnt as a child. I guess a young mind is far less crowded than ours are today and can retain these lessons.

But it is certain that elements of the share market do move with the relentless force of tides. Trying to swim against them can be very costly indeed.