ARE WE SCARED YET?
June 25th 2008 00:00
Should we be scared?
So, the DJIA sank another 3.8 percent last week. Dang, in terms of NYSE investments, that means one helluva lot of money! The last time China’s SSEC fell by 4 percent in one day, the whole investing world went epileptic. Now, following all those months of bad news, are we supposed to be scared yet?
Okay, hang on. I know I asked the question and I know that people from different investing persuasions will have their own unassailable answer to that question. And many, if not all, will be right depending on the circumstances surrounding their investments but, somehow, I believe that they will only be right as far as their own circumstances are concerned.
I mean, even the investment experts cannot agree among themselves on many things. And this, I attribute to the fact that each and every investor is unique in terms of his risk tolerance, needs and trading systems (strategies). And it is with that uniqueness in mind that I ask the question which is directed to those who cannot make up their minds yet.
But the question is just a discussion point. Everyone is welcome to supply his/her own conclusion.
That query actually comes from an argument that says that the true value of a thing depends on what one is willing to pay for it. I am actually inclined to believe this argument, but for purposes of discussion, let’s toss this idea around.
Now, because everybody is talking about all the bad things that can happen in the world markets these days, not very many will be willing to risk their resources (capital) and therefore the markets will continue to be depressed.
A depressed market will have very few takers, and therefore, very few who are willing to pay a high price on anything. Those who got scared early have left the market early and all those that remain either have the nerve of steel or are just too scared to go anywhere. Well, okay, I am very open minded so I would agree that some of the hold outs actually know what they are doing and they are playing the market the way they want to play it.
The markets however are continuously going down and the question remains: Is it about time we get scared? Let’s try to answer that question with another question. If we buy a perfectly cut diamond stone worth Fifty Thousand US Dollars (US$50,000.00) before the market crashed and nobody wanted to buy it from us after the market crashed for the same amount of money, does that mean the stone is no longer worth Fifty Thousand US Dollars?
A true story might also help us find the answer: Back in 1990 a very strong earthquake hit the Philippines. Among the hardest hit was the City of Baguio.
Panoramic view of Baguio City. Source: Wikipedia
Many of the city's landmarks and buildings collapsed, including Hyatt Hotel and the famous Pines Hotel. Big boulders and hundreds of tons of dirt fell on all the roads leading to the city and the place once considered the Summer Capital of the Philippines became famous as the disaster capital of the country.
With dwindling food supply, safe drinking water drying up, the place isolated and the smell of death coming from everywhere, there was very little that gave people hope indeed.
Baguio residents needed medicines, clothes and shelter but the only thing piling up were dead cadavers being excavated from everywhere. Inside private homes, hotels, school buildings, business establishments… Everywhere!
The surrounding areas of the city had been mined for gold, far and deep, for years and years and there were talks that whatever structures were preventing the old mine shafts from caving in have now probably weakened and could collapse at any moment. These talks were not very helpful considering the frequency and the magnitude of the aftershocks that followed the catastrophe.
The stories that came out of that place for months after that devastating earthquake were all sob stories. Nobody, at that time, believed the place will ever recover its old glory days. Never mind that the place had been eventually reconstructed, the roads were not only cleared of those boulders and dirt but also widened. The tourists that used to swamp the hotels during summer months, Holy Weeks, and even Christmas seasons practically disappeared.
There weren’t that many hotel rooms that were left after the disaster, but even those were empty twelve months after it all happened. But the hotel rates remained. Just like the way it was before the worst tremor shook the place. You might consider that illogical - considering that there was hardly any visitor, but anywhere you go in the city, those hotel rates were the same.
Amidst the gloomy business forecast for the city, talks went around that the value of real estate in the area will tumble down like those boulders did during the earthquake. Lowland dwellers who did not experience how to lose their loved ones, their fortunes and who did not experience the hardships during those trying times speculated and waited for the real estate prices to go down. But they waited in vain.
Like the hotel rates, the real estate prices stayed where they were before the earthquake – until they begin to rise again…and rise they did.
To better appreciate the conditions that prevailed in the city immediately following the July 16, 1990 earthquake, I searched the net and found an account and pictures of what exactly happened (as I have seen it in person then) in this link…
I suppose a good businessman would be less of a good businessman if he cannot keep his wits in the face of disasters (specially if he has not been there personally) so I would expect an argument on lost time value of money, etc after hearing of this harrowing experience.
Still, somehow, I feel that an answer to our question can be found somewhere in this story.
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Comment by Fobzy
Fobz
Well done, Punk, there is hope for you yet, those big bucks are just around the corner, keep looking.
Comment by Market Newbie
Gizmo Peek
Stock Market Punk
But thanks, man!
Comment by Chris the phil foreignerinvestor
The US is ahead of the curve on economic problems, but still has to raise rates again to stop inflation and so I expect it to be only safe to invest there some time in early 2009 but at the moment I'm short the US ( or making money as stocks come down).
My advice then is to not invest in the US until early 2009, Europe 6 months later, and Asia 6 months after that. As for a truly bull market for equties I reckon it will be 2011 before we see again the big gains we saw in emerging market in recent years.
For those looking for future tips, banks and brokers have been hammered by the credit crunch and sub prime melt downs and so around the world they are nearly all sitting at 50% of their price 18 months ago. This has to be a good long term investment bet as you'll double your money just by getting to the previous high and banks often pay good dividends too. But don't expect that to happen very fast. If you buy a bank in 2009 you'll likely double your money by around 2103, rather than in 18-24 months.
I hope this cautious advice helps all who read it and faced with tough decisions on what rto do with their money right now.
Comment by Louie
Climate Red
randomthoughts
Phil's Wellness Tips
Comment by Market Newbie
Gizmo Peek
Stock Market Punk
Right you are, again, Louie. Hanging on tough, by the thread. Well, a very thin thread