Saturday, June 03, 2006

My Investing Journey - The Months After A Disaster 0 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)
My previous writeups had covered the years from my introduction to investing in early 2000 till the emerging bear market post-dotcom bust in 2001. I post the series of blog links below, in chronological order, for continuity, given that it's been a while since I last added an article to this series.

Previous articles
My Investing Journey-Opening The Account
My Investing Journey-My Virgin Trade
My Investing Journey-Reading Up
My Investing Journey-Caution In A Bear Market
My Investing Journey-Sembcorp and NOL
My Investing Journey-Going With The Crowd
My Investing Journey-The Construction Stocks
My Investing Journey- My Experience With Multi-Baggers
My Investing Journey- Bottom Fishing
My Investing Journey: A conservative approach towards small caps
My Investing Journey: 2001 A Stock Odyssey
My Investing Journey: The Bear Years of 2001-02

A long-term historian would probably term the period from 2001 through 2003 as a global bear market, as the world reeled from a situation of over-supply particularly in technology and IT whose investment had been driving growth to the last years of the old millenium. To the average man-in-the-street one event marks out the beginning years of the new millenium without which they would just have been a blurry mass of gloom and corporate scandals: that event is of course 9/11.

I remember that event really well too because of the images broadcast across all forms of media --- it was probably the first major catastrophe that was carried by the newest form of media, the Internet. Yahoo! went black-and-white on its portal for days after the disaster, and footage of Ground Zero and horrific images of people jumping from the top of the Twin Towers haunted surfers worldwide. I was just settling into my new job then, and the scarcely believable TV footage of planes crashing into the commercial heart of the world's sole existing superpower left me thinking that the markets were going to crash similarly the following day (in fact, I felt guilty for that thought, for it showed me I had my priorities wrong --- we're talking human lives here!).

The STI did indeed crash the next day, down about 350-400 points to 1300+, as did other markets around the world. That reflected the instinctive reaction of traders to rush for the exits as they expected other peers to do so after watching the horrific images. This was the "greater fool" theory in reverse: sell in anticipation of the next greater fool selling even lower. But rationally, what had changed? Security would be tightened, the US might launch retaliation moves, but business was still going to continue.

What I learnt from about the market after a disaster was that it pays off to be contrarian when there is a sharp market collapse. The STI was trending downwards before the tragedy but its bottoming process was accelerated by 9/11, which triggered a selling climax, as technical analysts would put it. Within 3 months after the disaster (end-2001) the index had recovered to above 1700. In the aftermath of a market crisis, everybody starts to do reality checks and negate the effects of the abovementioned "reverse greater-fool" selldown when they find it is overly done. The period after the crash was actually a mini-bull market, in particular for the SESDAQ, all the way through mid-2002 when the incessant US warmongering started to grate on the nerves of investors.

The other lesson was to always be aware of what Nicholas Nassim Taleb calls the "black swan event" in his book "Fooled by Randomness": the rare occurrence or singularity event that one should try to factor into his asset allocation strategies, not just as a risk management strategy but also as a means of achieving huge returns, for the simple reason that people have the tendency to under-price these rare occurrences and yet panic and over-react to them when they do happen. I did have some cash on hand to snap up bargains during the ensuing post-911 panic, but it was not much; the returns was great, for I bought Asiapower at 13 cents and disposed of the line at 19.5 cents barely two months later --- a 50% return arising from a market rebound to a market panic.




Post a Comment

<< Home