Monday, August 28, 2006

My Investing Journey: War and SARS 0 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)
When the year 2003 came the market was in its doldrums. The mini-rally that the market attempted in mid-2002 had died out and the market kept sinking over the second half of the year.

Lesson No. 1: It is the anticipation of a war that will kill a market.

Uncertainty is the worst element in a market, because another word for uncertainty is risk. In late 2002 the uncertainty of war with Iraq drained the market of its energy, because the stalemate dragged into 2003 as George Bush searched around for an excuse to fix Iraq with an accusation of WMD possession.

It is a historical lesson that wars do not cause the stock market to crash, indeed the end of wars often bring about bull markets. The swiftness in which the war in Iraq reached a resolution in early April 2003 might have brought about a rally, only that it was followed by the spectre of SARS that hit Asia badly, in April-May 2003.

Lesson No. 2: When the market doesn't react badly to a looming crisis, it might have bottomed.

In retrospect, the SARS crisis marked the best time for buying (and I show no disrespect for those who suffered). With the exception of certain sectors which were badly hit (travel-related, such as SIA and Star Cruises, for example) the market seemed to have bottomed as it remained relatively stable over the crisis. The STI had fallen below the post Sep-11 levels in Mar-03 (~1200) but never went below that level during the SARS crisis, and the SESDAQ never sank below 50. The liquidity was like steam in a pressure cooker; once the worries over the SARS episode started to ebb away, the lid was popped open for a bull that has arguably sustained itself all the way till today.

Lesson No. 3: Keep your cool and keep buying.

It helps to have a regular income which is like a tap from which you regularly collect water and use it to water your withered plants. It is one of the reasons why I always believe one should not consider full-time investment without assuring himself that he either has considerable capital or has an alternative source of income (see "Full-time investing/trading"). Continually investing funds in the stock market is a form of averaging down, which might be dangerous when one applies them to individual stocks that have plunged while the market is generally bustling, yet if the stock is down as a result of a generally weak market tide, then it may well be a worthwhile thing to do. One just needs to have faith in the ability of the market to spring back, while making sure that the particular stocks he chooses to buy do not have faulty "springs". Those who practise market-timing and try to sell during periods of weakness and then buy when the market strengthens would have sold during SARS at the bottom and then struggled to get back into the market as the market bid itself up aggressively from May 2006, rather suddenly. The bull rally post-SARS has reinforced my conviction not to try to time the market. Anyway, I never practised that; I held on to my stock portfolio that had gone ~20-30% below capital cost through the Iraqi stalemate and SARS crisis, adding new promising stocks with new investible funds, and the market rewarded me for my faith when it recovered in May.




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