Thoughts on the current uncertainty

by Manshu on August 9, 2011

in Opinion

The American markets crashed badly today, and the past few days have seen stock markets fall globally. The talks of another recession are gaining currency, and I think this atmosphere of uncertainty gives a good context to revisit some things that I have written here earlier, and will be easier to relate to now than they were when I originally wrote them.

In July last year – I wrote if you remember the crash of 2008.

People were talking about when a new high will be made, and not if a new high will be made. The constant up move had lulled people into thinking that markets move in only one direction, and they were ignoring the volatility and ups and downs that are inherent in the market.

This is what I wrote then:

Now, the market is doing well, and people are getting back in the game. There is nothing wrong with investing in equities, but you need to be aware of the fact that the market can be really volatile in the short run, and can give you extreme heart-ache with very little warning.

A lot of retail investors who trade talk about getting out when the tide turns, but that’s seldom possible because the market changes direction very fast and without warning. I’ve seen an unbearably large number of people lament the downturn of the past few days. The truth is — it was a known – unknown, and if you thought it was an unknown – unknown, then just learn your lesson and get on with it.

Then in September last year on the day when the market rose by 400 points, I wrote how are you preparing for the crash?

That post was prompted by a lot of people getting interested in penny stocks, IPO listing gains, buying recommendations to sell in month or so etc. Essentially, everything that goes against the principles of long term investing and diversification.

This is what I wrote then:

During the peak of the recession, and much afterwards there was a lot of talk about protecting your portfolio from a crash, looking out for the next bubble, the Greek crisis,  and generally stuffing your money in your pillows, but all that is slowly receding now.

As the tide turns people are looking to get more adventurous, looking for that penny stock that will rise 10 times, the IPO that will scorch on listing, and the gold bar that’ll surely triple in three months.

The market moves in cycles, so don’t let its positive momentum numb your senses and make you throw caution out of the window.

What goes up eventually comes down. Of course, I don’t know when the crash will come, but I do know that a lot of people will be blinded by it when it eventually does.

I think the events of the past few days have shown how fast and ferocious market turns can be, and the only way to protect yourself from these downturns is to prepare in advance because when they happen they don’t give you any opportunity at all.

How can you be prepared in advance?

Diversification is an excellent way to do it, and investing in the share market systematically and staying invested for the long term is another. There is nothing new or complicated about this, and if short term trading, betting on penny stocks, and going after hot IPOs have not worked for you – you might want to give it a shot.

{ 6 comments… read them below or add one }

Furqan August 9, 2011 at 10:53 am

Thanks for reminding us of your two excellent posts that were done at the apprpriate times. These posts still hold water and investor should keep referring to them from time to time.
As you have pointed out diversification & consistentcy is the key to success. Keep investing systematically and keep some cash ready for investing at dips.

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Manshu August 9, 2011 at 9:45 pm

Thanks for your comment Furqan – the next few months might just turn out to be the best for those who have cash to put in the markets.

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Seshu August 9, 2011 at 5:21 pm

Going a bit away from investing to economics…
From what I am reading with some of the big economists suggesting US to borrow more and spend more to revive economy, it is so tempting at this time to say… can we start from zero again, all the countries? Would any shift away from USD as global reserve currency mean that we almost start at zero, perhaps if it moves towards Japanese Yen?

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Manshu August 9, 2011 at 9:44 pm

I’ve been thinking about this myself for some time now, and I wonder if the world really even needs just a single reserve currency.

As trade develops between multiple countries and economic blocs, its possible to settle that in a few currencies. USD for North America, Euro for European Countries, Yen or Yuan for Asian countries. I don’t know what the Arabs will prefer but a combination of these and say Swiss Francs should be okay for them as well.

I don’t see how we can go back to the gold standard, and given the current situation there is no single currency that can replace the USD. Yesterday only proved that, it is perhaps time to look at a system a few years from now in which bilateral trade can be settled in currencies other than the USD. China has already started taking such steps, and its time for other countries to follow suit.

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krish August 9, 2011 at 8:48 pm

Stop thinking about SENSEX nose diving, it will only give heart-aches… think only of the last 3 letters of SEN[SEX] for now!!

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Manshu August 9, 2011 at 9:40 pm

hahaha – someone on Twitter said that when they hear about the Sensex all they can think of is a Bengali couple 😉

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