In the wake of all the recent market volatility, I am now officially in information overload! I have read articles from the media, mutual fund companies, industry publications, mutual fund managers, economists and if I was not confused before, I sure am now.
Rather than dwell on the past and tell you 100 reasons why this market meltdown occurred, consider looking forward. There are a few reasons why this night be the best time to be optimistic rather than pessimistic.
The Chinese symbol for “crisis” is made up of two symbols: danger and opportunity. Events like the recent correction can either be looked at negatively or positively.
Markets are irrational and have been driven by that fact. Today investors sell because of fear. And only months ago, this market was being bought out of greed. There was little rational justification – just the pure speculation that stock prices would go up if there were any indications of a product breakthrough or upcoming innovation. Every tech stock benefited from this crazy euphoria. One of the best (technology) examples came from Richard Croft talking about Research in Motion (RIM), “RIM was the next PALM Pilot. People thought that superior product and technology would take consumer loyalty away from PALM who had 80% of the market share for handheld devices. Yes they had a superior product but investors forgot that it would not be easy to penetrate a company who had cost efficiencies, product depth, accessories, brand recognition and loyalty. It takes more than a good product to run a business and make profits (something many of these tech funds have not proven)”.
Sir John Templeton said it best “Buy into pessimism and sell out of the height of optimism.” If you don't think it is pessimistic, just grab last weeks newspaper and have a read.
If we go backwards through time, we know for sure that markets go up and down and typically go up 3 to 4 years for every down year. Today's downturn will follow with some upside. That I do say with certainty. When this will happen? This is where certainty fails!
So I went back to a study done by a mutual fund company a couple of years ago that looked at periods of correction since 1950. In each example, the company looked at these market downturns as a “buying opportunity” to test what the result would be 6 months and 1 year after the correction. The results are amazing: It is so easy to get caught up in all of the negativity of the markets but remember investors who think and act with logic as opposed to emotion will be the big winners of the future. If that's not enough, remember the old investment saying “BUY LOW, SELL HIGH!”
Send questions or comments to Jim at Suite 890, 4445 Calgary Trail South, Edmonton, Alberta, T6H 5R7 or email [email protected]
|DATE||CRISIS||Drop||6 months later||1 year later|
|April-62||Steel Price Rollback||-20%||11%||24%|
|October-73||Arab Oil Embargo||-17%||-1%||-28%|
|March-80||Hunt Silver Debacle||-12%||26%||29%|
|September-81||Interest Rate Rise||-13%||8%||12%|
|August-90||Iraq invades Kuwait||-20%||28%||30%|
|May-98||World Currency Crisis||-19%||11%||17%|