What Have You Learn from The Economy Crisis? – Prepare for the Next

Are we in the economy crisis? Is our global economy in the stage of recovering? What about Malaysian market in particular?

This is not a market analysis report in anyway. I meant to just briefly describe how the market looked like for the pass 5 years and my personal opinion from the INVESTMENT point of view. What we have learn from the market for a better investment strategy for the future.

I am not old enough to go through multiple market crisis. From 1987, I was still in primary school. 1997, it was time when I studied high school. Indeed, the first time I feel suffer of market collapse was during year 2003 when dot com bubble burst – I graduated with a Computer Science Degree but it was very tough for me to get a job at that moment.

However, what I try to express here is, without knowing much the detail the market index (KLCI) actually goes slowly from year prior to 2005 at sub-800 points all the way up to more than 1500 points in year 2008. Based on the long term chart movement, I suspect that the behavior of fellow investor was like this:

1. At the beginning, most investors was felling fear about putting money into the stock market. That why during the early stage of market boom, it was not much improvement in terms of stock index for a period. It was time for big players slowly accumulate their stocks and cultivate positive market sentiment to encourage market followers.

2. After while, fellow investors start to feel comfortable with the observation and become impatient to invest. They see the market has bee moving up trend for quite much a margin, and they don’t want to miss the opportunity. Therefore they willing to keep buying the stocks even at higher and higher price. Therefore the stocks index climb up at a very fast rate. Without knowing, what this group of people buying was stocks that some other person bought at the low price.

3. Due to the global market crisis where sub-prime credit market collapse, people lost confident on the stocks that they bought. A lot of them just want to sell of the stocks no matter what is the price, therefore the market index dropped as fast as how it climbed up. The whole process happen in just a very short period of nearly 2 years.

The above is brief about sub-prime crisis cycle. Without knowing, the stock market actually touch the bottom at 800 points and re-bounced at a good speed since early of 2009. I don’t know whether the growth is organic or man-made at this point of time. It is no way to be told for small and ordinary investor like me. However, if we had ever ACCUMULATE slowly during the period when the market drop around 30-40%, we should start to have real profit now.

This is just assumption that you have done it. But how to do it correctly, I mean with the minimal risk?

1. Market research – during the turbulence time, companies became relatively instable. We might not able to see it from out side. But it just like turbulence under the sea surface. What we could do is to gather as much as possible the information related to a company, or the industry and try to build some assumption to judge if the stock worth buying.

2. Diversification – again, the companies are instable, which means operated at higher risk levels. Therefore we just could not rely on 1 single company to wish that it will not hit a great challenge and collapse just like that. Diversification is the method that applies here, where we proportion our investment into different companies from various sectors. The basic rules applies, make sure the research is done as thorough as possible.

3. Dollar cost averaging – we could see the trend from the long term chart. But if you zoom into a shorter period, are you still able to realize whether it is uptrend or downtrend? We may try to spot a range when it is good opportunity for earning, but we just can figure out when is the exact timing we should pump in all our capital. Therefore, why not minimize the risk by splitting the capital to few batches and buy at different time, so that we have higher chance to grab stocks at lower price? Again, the basic still applies, make sure the research is done as thorough as possible even though you are buying at average cost over multiple transactions.

Above is my opinion on doing INVESTMENT when you are not in the position of being a professional trader. The fundamental still is, knowing what you are doing. Be greedy when people are fear, be fear while people are greedy – but make sure you are doing it the smart way.

Wish to receive your comments and we could have an organic discussion here to grow each other. I can be reach at erchongyee@hotmail.com, and I am on MSN as well.