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Trouble is opportunity

Cover of The Laws of Wealth by Daniel Crosby Only nine stocks in the FTSE 350 haven't bounced back after Brexit vote shock

Do you have the confidence to buy shares when there is a sudden drop in the broader stock market? Judging by the size and speed of the bounce back in
equity valuations since the Brexit vote shock, it certainly pays to make bold moves if you have money you can afford to lose.
It has been almost impossible NOT to make money by buying shares in the FTSE 350 index if you waited for the initial Brexit shock to die down. I calculate that only nine stocks in that index haven’t risen in value since the end of the second trading day following the EU referendum vote.
In other words, 97% of the FTSE 350 would have delivered you a profit if you bought just before the market close on 27 June 2016 and still held the shares at the start of this week (22 August 2016).

SHORT-TERM EFFECT
The surprise result of the EU referendum saw many shares collapse in value on Friday 24 June and Monday 27 June as investors tried to comprehend the potential impact of the vote. The FTSE All-Share, a key benchmark for UK shares, fell by 7% across those two dates.
On a stock by stock basis, many big companies fell by more than 30% over those two days as investors deemed them most at risk from changes imposed by the Brexit decision.
Those unprecedented share price declines prompted many investors to go bargain hunting, hence why the market quickly bounced back. Fuelling this upwards momentum was a swift resolution to political uncertainty with the appointment of a new prime minister and cabinet, and no action so far on starting the exit process from the EU.
Not everyone has the stomach to buy when there is a cloud of bad news. No-one can know for certain when market sentiment will move from bad to good. Yet time and time again you will hear the phrase ‘buy when everyone else is fearful’. The Brexit bounce back shows why this is true.
Indeed, just look at last year’s big sell-off in August 2015 when fears about China triggered a short-term market correction. That proved a great time to buy shares amid price weakness as equities didn’t stay down for long.

WALK THE TALK
‘Trouble is opportunity’ writes Daniel Crosby in his book entitled The laws of wealth: psychology and the secret to investing success. He says it is easy to talk about being greedy when others are fearful, but quite different to do it. That is because we are wired to process and hold on to negative events, he claims.
I talked to some of the stockbrokers about trading patterns on the day of the Brexit vote and it seems that investor behaviour quickly switched from selling to buying by the afternoon of that day’s trading
session (24 June). That was much faster than one might expect given the potential severity of the news for many companies, should Brexit trigger a recession and reduction in business investment.
Once the news had time to sink in over the weekend, the Monday’s trading session (27 June) saw another bout of selling, but the worst was essentially over by the end of that day.
You could argue that this two-day sell-off was purely the result of investors being caught off guard
with the vote outcome. Once that‘news’ had been digested, the market shifted its focus to other events and ‘panic’ was replaced by ‘acceptance’ and so investors were happy to buy shares once more.
The real test for the direction of the market will come once the Government triggers Article 50 which is the formal pathway to Britain’s EU exit. That could cause another stock market wobble, particularly among domestically-focused companies. We’ve already seen signs that this event could be a powerful force.
A rumour last week that the UK wanted to invoke Article 50 in the first half of 2017 triggered another sell-off in sterling and temporarily caused stock prices to fall. I wouldn’t be surprised to see a longer-lasting period of market volatility compared to the June 2016 two-day correction once we have confirmation on the Article 50 timetable. Don’t get complacent amid the current stock market strength – we are by no means in safe territory.

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