5th August 2011, Friday. This date will be etched in the minds of many investors worldwide. It was the day when the DOW crashed 512 points and the STI market plummeted 112 points. Many indices worldwide saw huge losses as well. The VIX index (a measurement of fear) spiked up to 32 points from 23 points the previous day. The main reason for the massive carnage is debt problem in US. The US credit rating was cut by S&P from top-tier AAA by a notch to AA-plus even though the debt ceiling was raised before August 2nd. My view is that the US is just plainly delaying the debt problem to a later date by raising the debt limit. They are digging a deeper hole to bury themselves. The deeper they dig, the worst it will become in the future. I feel the plunge on Friday is just the tip of the iceberg and worst things are waiting to happen. The party is over and US has to face reality. I think the best solution now would be to let the US economy crash to the bottom and start afresh. It’s a stark solution but I can’t see any other sane way out of this. Jim Rogers, the commodity guru, has also said in a recent CNBC interview that “the market should be allowed to bottom out as more money printing will make matters worse”. Meanwhile, China has told US openly that the “good old days” of borrowing are over. The article can be read here. It seems like there more problems ahead for US. If China stops buying US debt, who else in the world can?
As an investor, this is the first time I have seen such a massive bloodshed. Back in 2008/2009 during the financial crisis, I wasn’t an investor yet and was just watching the markets from the sidelines. Of course, some of my holdings are currently down and I’m actually looking forward to prices dropping more so that I can buy assets on the cheap (I know this sounds sadistic). As an investor, one should be greedy when others are fearful.
I’m currently holding on to some stocks that are still undervalued. I sold off my overvalued stocks including Super Group around June to pave way for some cash. I’m looking to average down on my holdings should my holdings go down significantly. At this moment, accumulating cash is important so as to take advantage of any opportunities the market presents. Remember that what goes down, can go down further so don’t attempt to catch a falling knife as you will only end up hurting yourself. Invest when you think the dust has settled.
2 thoughts on “Sorry, the party has ended!”
Nah, nothing sadistic about it haha. It is, in fact, the proper way to invest – when valuations are low and everyone is pessimistic. However, doing so requires the greatest fortitude and strength of character because you have to do what everyone else is NOT doing. This may sound kind of easy in theory but in reality it’s hard to execute. After going through the 2008-2009 bear market I can tell you that the feeling of utter despair and hopelessness during the time was quite real and no one expected the sharp rise in valuations in May 2009.
The problem with investing when the dust settles is that you never know when it really has settled. This makes it very tough and you usually run out of cash before the market actually bottoms (from my own personal experience). This usually means that you should purchase in stages and phases instead of exhausting all your “ammo” at one go. Base it on valuations, future prospects and operating history and you should not go too far wrong.
All the best!
Thanks for your helpful insights, MW!