All too often we get caught up in short term thinking rather than focussing on the bigger picture, and this is especially so when it comes to investing. To illustrate, let’s consider what can be achieved with good shares and a little time. Put simply, had you invested one dollar in BHP shares at the start of January 1999 by 31 Jul 2010 your investment would have increased 592 per cent. During the same period other top 20 shares like CSL grew 599 per cent, Woodside Petroleum 473 per cent and Woolworths experienced a gain of 386 per cent. These figures are only for capital growth, and therefore dividends received or re-invested would have increased these returns. Of course not all shares are suited to a buy and hold over the longer term. The same dollar invested in Telstra experienced a loss of 57 percent, and 60 percent with AMP, not including dividends.

The key to investing or trading the share market is not to look for the next big thing or to find a new way of trading or even trying to pick the short term moves. With over four hundred years of world share market history to guide us, one thing we know with certainty is that nothing has changed in terms of the mechanics of markets. People continue to react to information and therefore the market will always do what it does. Regardless of how smart we think we are or how much new technology we have the other thing we can learn from the 400 years of market history is that we do not learn from mistakes.     

So what do we expect in the market?

You could be forgiven if you are thinking that the movements in our market are very much like driving your car with the handbrake on. You know something is wrong but you just can’t figure out what. Our market is trading at just below 4,600 points, which is the same level it was three months ago despite having two strong moves of 10 per cent plus and two nine per cent plus moves. The problem is that only half of those moves were up. Whilst this is exciting for short term traders, the same cannot be said for medium to longer term investors.

The longer this volatility goes on the more likely it is for the Australian share market to move down over the next few weeks. If the market fails to continue the current rise we could see it fall to below 4,200 points and possibly to 4,000 points. I would expect that a move down would be short and sharp with the eventual low occurring between 20 August and mid September 2010. Given this, it might be wise to take a cautious approach to investing until we can confirm which way the market is moving.      

I have said it before and I will say it again, for the life of me I cannot understand why anyone would want to own Telstra, it just does not make good investment sense. The government doesn’t want it, that‘s why they sold it, and recently the Future Fund sold out its holdings in this company.

So why do investors continue to hold onto Telstra? Many say because it pays a good dividend, but this is simply an excuse to justify why they didn‘t sell out earlier. There are many other good stocks on our market that pay solid dividends, and contrary to Telstra have actually risen in price over the years. It takes a lot of dividends to recoup from a fall of over 60 per cent, which Telstra has suffered over the past tens years. If you look at the real return investors received by holding onto this stock in the past 10 years, you would find most, if not all, would have been better off investing their money in a bank account.

The announcement this week that the government is forcing Telstra to break up its operations has compounded the fall in the share price, although in my opinion it is a good idea and one which may see the share price actually start to rise. That said you would have to wonder if those in charge of the Future Fund were aware of the government‘s intentions given that it is less than a month since the Future Fund dumped their holdings. It seems like perfect timing if you ask me.

So what can we expect in the market?

The All Ordinaries has continued to defy logic and over the past two days has risen strongly to now be trading near its highest levels in a year. Whilst the rising market is good for investors, what I am seeing is a false sense of security emerging from the general investing public. Many investors are now rushing into the market thinking that they are missing out on this current bull run. Some are even borrowing money in an effort to make up for the losses they experienced over the past two years.

In my opinion these investors are taking too higher risk because as the old saying goes ╘the amateurs buy at the top while the professionals buy at the bottom. Right now the amateurs are taking a boots and all approach to the market, while the professionals are being more cautious, which is evidenced by the low volumes being traded on our market over the past few weeks. 

I still believe the market will fall for at least two weeks, which should start to occur any time now. I am also convinced that the market will fall into November to below 3800 points. Only time will tell if I am correct, but as always protect capital by setting stop losses. Finally be patient because those who are will reap the rewards.

Over the years I have had numerous discussions about whether or not Telstra is really a good investment. Many investors have continued to hold this stock over the past 11 years, despite its poor performance, mainly because they continue to receive a dividend. However, I believe this is simply justification to make them feel better about holding a share that has averaged an annual loss of 1.51 per cent per annum from 1 January 1998 to 31 December 2008. In fact Telstra has suffered a 67.17 per cent fall from its all-time high of $9.20 in February 1999 to its recent low of $3.02 in April 2009. 

In the past 11 years, Telstra has only risen during 6 of those years, while suffering negative returns during the other years. If we include this year, it is currently down 7.83 per cent to 31 July, which means Telstra is a really 50/50 bet. Interestingly, Telstra is not the only stock that has performed poorly over this period. Investors only need to look at the likes of NAB or AMP to see that these solid companies have roughly achieved a 50/50 gain/loss record.

Holding on to a stock simply to receive a dividend can be detrimental to an investor?s portfolio especially when there are many other good stocks that have performed far better and also pay a dividend .The example of Telstra also highlights why buy and hold is not necessarily a good strategy and why using a simple stop loss can effectively minimize any downside risk to a portfolio.

So what can we expect in the market? 

Last week the All Ordinaries has risen to its highest level since October 2008, although the market is now displaying signs that the current bull-run is slowing. There is an old saying that what goes up fast usually comes down fast, and the All Ordinaries Index has moved up at a faster rate over the last 5 months, since the low in March 09, than what occurred following the long term low in March 2003. Given this we need to expect the market will fall away very soon, as it cannot keep rising at this pace.

As I mentioned last week, while I don╒t believe the bullish run will last for too much longer, I need to accept that it may move up further into August than anticipated. If the market continues to rise, probability suggests that it will fail to push through my upper target level of 4600 points. When it does fall, it could move down to between 3500 and 3700 points by mid September - how far the market moves down will indicate whether we can expect further falls or whether the next bull-run will commence. As usual only time will tell, but for now make sure you set stop losses so as to protect your capital.

Dollar cost averaging seems to be a hot topic within the industry of late. For those of you who may not understand this concept, it basically means that you continue to buy more shares in companies that you already own as they fall away in price in order to achieve a lower average purchase price. Now I don’t know about you, but I struggle to understand why anyone would want to buy shares in an asset that is falling.

If you dollar cost averaged Centro and ABC Centres in the past 6 months you would most  certainly be questioning whether this was wise given both that shares had already fallen significantly prior to the recent falls. I am sure those who employed the dollar cost averaging strategy to Telstra as it fell 62% over 6 years from $9.20 to $3.43 would still be regretting their decision as they could have made far more money in many other shares during this time.

In my opinion dollar cost averaging or buying shares as they fall away because they seem cheap is not smart investing for the simple reason that most investors do not know where the bottom is and to buy without knowing is speculating.

So what can we expect in the market?

Just when I thought our market was settling and would confirm a direction soon, it has once again behaved erratically, and fallen away over the past week. This erratic behaviour makes it very difficult to determine the short term moves in the market, although as I mentioned last week I believe the medium to longer term will be bullish. The only question that remains is when this will occur.

There is a high probability that the next bull-run will commence before the end of June and when it does it will produce some great gains in many top shares. In the short term we need to be patient as it is possible the market will pull back to the low of 5222 that occurred in January although there is a small possibility that it could also fall to around 4800 points. That said I believe the market will start to rise over the next one to two weeks, which if correct could be the start of the new bull-run. Again it pays to be patient because right now is the perfect time to ready yourself to enter the market when it does confirm a direction.     

I have said it before and I will say it again, it seems that we fail to learn from our past mistakes. One of the biggest issues I find continually perpetuated in our industry is the use or overuse of leveraging to invest. In January of this year the market experienced record levels of margin lending calls, which was also prevalent 6 months earlier in August 2007 and again 12 months prior in June 2006. 

This week the share price of ABC learning centres was decimated as a result of the company’s over use of debt, and the share holders are paying dearly. While borrowing to invest is a valuable tool for investors and businesses alike, it needs to be made very clear about the downside of using this facility. In my opinion, investors should not be allowed to borrow up to their limit and there should always be room for fluctuations in the market in case the worst occurs. If this were to happen, then margin calls could become a thing of the past.         

So what can we expect in the market?

Last week I mentioned that I was expecting some direction in the market very soon, and it appears as though it may be rising given that during three of the last four days the market has closed higher, with the All Ordinaries Index reaching its highest level since earlier this month. That said, the market fell away yesterday and it is quite possible it will continue down today although I don’t expect this down move to be strong or to last too long.

For the market to prove it is bullish, at least in the short term, we need to see it rise above 6057 points in the next week, which is a strong possibility given what has occurred this week. If it does rise to this price level, it may indicate we are starting the next bull-run.

While my bias is beginning to swing from being bearish to bullish in the short term, investors still need to be patient and to be sure of the market direction before making any investment decisions. Given the erratic nature of our market over the past few months, in which anything could and did happen, we need to be prepared in case the market does fall away.