Firstly, I'm happy to resume my writing here with lesser time I have these days. There's concept of chefs in France which states they "cook for themselves", meaning putting up a perfect dish is more important for their satisfaction than their customers. Does it apply to me? Maybe. I have seen some people, who have so much to do in life with so little time, and still being able to dedicate some time to share some of their thoughts and knowledge. I admire these people and I think they have set a good example.
Risk and Uncertainty. These two words appear the most often when the economy is weak or when markets are performing poorly. When things are better, most us ignore these two words. Understanding the significance of these two words can help investors manage risk and limit losses.
Today in the beginning of 2012, we’re approaching 4 years since the collapse of Lehman Brothers, the catalyst which transformed what it seemed just a US subprime mortgage crisis into a full blown global financial crisis. As I mentioned in one of my earlier posts, we are no longer speaking about problems on a corporate scale like the failures of financial institutions, we are now speaking on a national scale involving governments with unsustainable debt and trillions of dollars. 4 years on, wouldn’t the problem be solved or at least is going to be? The ugly truth, it has worsened.
Globalisation and capitalism opened up countries and people like never before, the world is now more connected than ever. International trade, travelling, technology and cooperation between countries have made the world “smaller”. An email gets sent to anywhere in the world in same amount of time, people know as much of what goes on in another country as their own and people are travelling outside their country seamlessly these days.
Many years ago, people quoted “When the US sneezes, Asia catches a cold”, showing Asia’s dependence on the world’s largest economy. With even closer economic ties today and having US and Europe “falling sick” at the same time, shouldn’t be Asia be on a prolonged illness leave? The ongoing problems in US and Europe today are not ideal, Asia is definitely better off with them dong well. But something has changed dramatically over the years, the emergence of Asia as the new economy. The demand, growth and money in Asian and has propelled Asia forward in the midst of this global financial crisis. Jim Rogers said France dominated the 1800s, UK dominated the 1900s and Asia is going to do the same in the current century and beyond.
All the uncertainty present, is it still a good time for investing? The answer is simple, investing never ends, ever. I’m probably not as bullish as I was a few years back but that doesn’t mean investing stops even for a day. For people like Warren Buffett, a down market just means buying more. For people like Robert Kiyosaki, it doesn't matter as long as there is cash flow.For investors and potential investors, what is the next step to take now? Just a brief recap before that.
Another year of extreme volatility hit the markets over the last year, especially during August/September where the EU was struggling to come up with a plan with many countries needing a bailout. Debt ratings were slashed and yields were hitting record highs. And if that wasn’t enough, US lost their coveted AAA rating. You don’t even have to go very far back, that was good investment opportunity then, the panic caused excessive selling and prices took a huge dive. If you would have bought some then, you’d probably be looking at a return of at least 20%, not bad for a 4-month return. Periods as such have repeated on numerous occasions and it really presents good buying opportunities. You don’t have to be an expert to know it will continue to happen again in the future.
One of the greatest strategies ever was popularized by Warren Buffett and Benjamin Graham. The buy and hold strategy has worked tremendously well for Buffett because holding stocks for a long period allows the market to appreciate the value Buffett identifies. What if the market tanks? Buffett seldom sells, and when he sells, it is not because he thinks the market is going to tank. Buffett only sells when a stock no longer fulfills his strict selection criteria like his famous 'margin of safety' and comparative advantage. And when the market really tanked like it did in 2008, Buffett bought even more. Berkshire might not give the best returns in the market today, but the lessons are relevant and this approach has been successfully carried out for more than 60 years (Buffett’s career).A lot of people think Buffett has lost it. Read THIS. Technology stocks outperformed Buffett in the decade ended 2000, but who had the last laugh? Buffett called for a 'buy' even before the financial crisis bottomed out, was he right, you bet he was.
Dealing with the current economic climate is very challenging, periods of high volatility can even shake the seasoned investor. Hence, managing portfolio risk is very important. In simple terms, you don’t want to be caught out by unexpected events. Regardless whether the market is going much higher or is heading to another recession, you must be prepared for it.And yes it means you have to always be ready to respond the changes.
One of the most important ways is to view your portfolio as a whole, rather than focusing on each item. Your portfolio works as one and thus it is very important to adjust asset allocations and diversify it to suit your risk. This might take a few books to explain so it’s really up to you to enhance your understanding of this. A typical finance graduate might have learned this, but would have probably underestimated the importance of asset allocation and diversification. I have to be honest I never quite paid attention in class and now comes the time I am catching up on it as well. The few important words to take note; systematic risk, idiosyncratic risk, correlations and diversification.
Following the changes in the world economy, financial markets, political scene etc is quite a handful to do. Constantly learning and adapting on the go is pretty tough but there’s very little excuse because these are the inputs you need to improve yourself to make decisions. Investing is a skill, much like a game of tennis or golf. It’s the hours you put in, the effort you make and of course the motivation to succeed that takes you further. The way Nadal, Federer or Djokovic hits the tennis ball solidly with the highest level of precision and accuracy, didn’t just take a year or two to accomplish. Malcolm Gladwell wrote you can be an expert in anything if you put in 10,000 hours. If you’re still young, that might seem possible to achieve a lot more in life. If you’re not-so young, you’ll value your time even more.
There’s not many things in life as important as managing your finances. Like a garden or a pet, the extra care makes a difference. The world is moving really quickly these days, last week’s news is old news already. Like I wrote in my earlier posts, the rules of the game has changed whether you like or not. My boss told the division recently, change or be forced to change, and it’s not pleasant when you’re forced to change. It really sums up the world we live in today, it's changing very rapidly and you don't want to be left behind. Thanks for reading.
If you don’t like change, you’re going to like irrelevance even less - Eric Shinseki
~deyao~
