Let’s imagine you can predict the market with 101% accuracy. Let’s also imagine that you are the epitome of bravery and invested exactly at the lowest point of the stock market during the financial crisis recently. Even though Warren Buffett, Peter Lynch and Benjamin Graham combined cannot achieve such a wonderful feat, you have done so! Congrats! Would you like to see how such a portfolio will look like? Here you go:
I’ve put together a portfolio of 16 stocks that I like and feel have wide moat/good margins/good cash flow. I have not thoroughly analysed all of the stocks. The portfolio shows an ROI of 159.6% (as of 3rd June 2011) over around two years. If you were extremely greedy (Gordon Gekko’s “Greed is good” phrase rings true) and invested in the gloomiest of days in end 2008/early 2009 when the whole market was in trepidation, that would have been the ROI you would have achieved. However, we all know and agree that we cannot know when the exact bottom will be. What we can do is that we can invest around the bottom by using some simple technical analysis. We don’t have to be exact but a rough estimate of the bottom would suffice. If we had invested around the bottom, instead of getting ROI of 159.17% (this is the best case scenario), we would have achieved at least an ROI of 100%. That’s average of 50% per year returns over two years! This is the wonder of investing when Mr Market is throwing up a huge tantrum and when the whole world is in panic!
The aim of this post is to demonstrate why we need to invest in a downturn and be net buyers instead of net sellers. Many millionaires are made during a downturn. In a recent report few days ago, it was revealed that about 15.5% of the households in Singapore have more than US$1 million of investable assets in 2010, the highest proportion in the world. One of the person interviewed by Straits Times said most of his money was made during the financial crisis. I’m sure many millionaires in Singapore would attest to the same thing. So, during the next downturn, are you going to panic and sell or be extremely excited and load up on stocks? You decide!