I’m an optimist. I believe stock market crashes, certainly scaled, healthy ones as the one we are experiencing are good for us. If we’re investing by the book we should be fine and accept what happens in the markets these days as normal and probable. I’ve written before on my worries about the current stock market pricing, especially the Chinese and Indian markets, and the risk of missing on terrific future growth and potential in these markets for the years to come. These markets are now letting out some long overdue air.
As any investor I consider stock market crashes an opportunity. We must always keep in mind common behavioural patterns and market phenomenology. Here are some of my more spontaneous observations on what’s happening:
#1 This could be the turn of the tide
Technical analysis acts on trends and support lines. Trends are analysed for different periods of time and do not change lightly. However, there is always the surprise of the trend begin reversed in a couple of days. Looking back to the past we can see significant return and loss happen in selected days, usually with no specific foretelling reason. That’s why markets are so hard to predict.
The stock markets have treated us very favourably these last 5 years. It is only a question of time before the next economic cycle begins. Has it begun? Are we in now officially in a recession. I believe the answer is a big yes and I’ve written on it these past weeks. The Fed’s rate cut proves it beyond a doubt (if you have any).
#2 Controlling the markets is impossible – 2008 Olympics
I’ve heard a common belief echoing in 2007. According to this belief the Chinese market will not experience any significant crash before the 2008 Olympics. However, if there is a bubble in the Chinese market and we do expect it to explode by the 2008 Olympics it is bound to happen sooner then expected (basic game theory, we all know what is going to happen). There is no real way to control the markets, even in China. As written in previous posts and many other articles the Chinese stock market was bound to experience some sort of sell off. The main question I myself and facing is whether now is a good time to get back on the promising Chinese dragon’s back?
It does depend who’s buying. For us household investors there is a saying: Never catch a falling knife. However, you could just start reaching for it. Two days ago I wrote about diversifying an investment over time. This could be a potentially good time to mildly increase our investments in more promising markets. Naturally, no one knows what the future brings and there is much at risk (furthermore diversifying over time suits long-term investment periods).
#3 Overshooting and collateral damage – bargains are not as easy to find as promised
I believe most of you will agree it isn’t rational to collectively lower most of the companies market cap’s by 5%-10%. This is what happened these last two days. Obviously, it is rational to assume there are bargains out there. Furthermore there is a common behavioural pattern of overshooting effect in reaction to bad or good news in stock market prices. If investors reacted irrationally and hysterically then there are even more bargains out there.
The unfortunate fact is that we as household investors have a very hard time identifying these bargains. Unless you enjoy the thrill of the risk I don’t think we should even try. There is a false sense of opportunity these days shared and encouraged by the business media to go and hunt for bargains as that is what the professionals do. Do yourself a favor, if you’re going bargain hunting why no hunt the professionals? If you’re risking already risk it on a good holdings company.
We’re reading news these days about investments made by princes and government funds in crumbling banks like Wallid Ben Talal’s investment in Citi. Do not forget these are made under very favourable conditions with much more to gain then just good returns.
#4 Some comforting news – the writing was on the wall this time
The crash we are experiencing didn’t come out of the blue. Is it possible financial markets are actually reaching maturity? If you’re exposed to financial media you are probably not surprised by what is going on. This is a very good sign of a healthy global financial system. I believe this is actually comforting in many ways for the future to come.
#5 Opportunities aplenty
I have written just last week on my dilemma on what to do with money I’ve managed to save up. I was very troubled by the lack of potentially good investments. Market crashes and especially continuous decline in prices offer more and more investment opportunities.