Crisis equals opportunity?

PERSONAL INVESTING
By OOI KOK HWA

As a result of the recent market crashes, a lot of retailer players have been staying away from the stock market. Although the present market may be showing some uptrend, not many retailers are confident about investing.

ACCORDING to Stephen Vines in his book titled Market Panic, there are four types of market panic – phoney panic, end-of-cycle panic, contagious panic and real panic.

Phoney panic refers to that caused by some negative events which have no impact on the fundamentals of companies or the overall economy. For example, even though such panic causes heavy selling, it is short-lived and will recover within a short time, as the crash does not cause changes to the economic fundamentals.

End-of-cycle panic refers to panic selling as a result of the end of a market rally. This is a healthy pullback, as the market needs to consolidate before it can resume its upward momentum. However, such panic normally takes time to recover.

Nevertheless, if the crash is confined to the local market, it will be less severe compared with contagious panic.

Contagious panic usually refers to cross-border and international contagion.

For example, the terrorist attacks on World Trade Centre on Sept 11, 2001 led to the crash in the US market spreading throughout the world markets, including Malaysia.

The KL Composite Index (KLCI) tumbled more than 100 points within four days of the attacks. Nevertheless, it recovered to the pre-crash level three months after the crash.

The last type of panic – also the most dangerous – is real panic, which is triggered by the possibility of an economic recession, corporate failures or financial crisis.

The market will take longer to recover from these crashes as they are due to worries over economic recession and company fundamentals.

For instance, if the Fed did not cut interest rates on Jan 22 (before the market opened), we might have ended up with a global market crash, as the Asia-Pacific as well as European markets had already experienced big crashes before the US market opened.

Even though this crash relates more to real panic, it was also the result of end-of-cycle panic plus contagious panic, combining all three types of panic.

Buying panic

James L. “RevShark” DePorre, in his book Invest Like A Shark, introduced a new investing approach called “shark investing”. He says we need to invest like sharks because sharks have certain characteristics that can keep them away from danger and yet they are highly efficient eating machines.

Sharks are patient while they wait for opportunities. Given that the recent market panic may take longer to recover, we need to wait for opportunities. Unless we encounter strong buying opportunities that enable us to buy good quality stocks at very cheap prices, we need to be patient in waiting for the right timing.

Sometimes, the best buying opportunities arise when the outlook is at its worst. Unfortunately, except for institutional investors, most retailers will shy away from the market.

For example, not many investors would dare to buy when our market tumbled more than 100 points after the recent general election results. Most of them believed then that shares could get cheaper in the following few days.

Sharks plan their attacks. We should consider buying stocks when certain companies are selling far below their intrinsic value or their businesses are temporarily facing business difficulties and should correct them over time. Capital gains mean buy low, sell high.

For good quality stocks, we can only buy low when there is a lot of bad news. Unfortunately, most analysts focus on the bad news and seldom look at long-term prospects.

Lastly, sharks are risk-averse and do not hesitate to swim away when danger lurks. If our economy falls into recession (although most experts say it is quite unlikely), we need to hold more cash than stocks and wait until the worst is over.

However, we should hold on to good quality stocks that pay good dividends. We should not liquidate all stocks while waiting for the market to crash further as we will never know whether we have seen the worst.