While just sticking to my own preaching of asset allocation would have saved me from the carnage, I fell victim to the global financial crisis simply because I did not practice what I preached. At least it would have lessened my present loss. A neat loss of 60 -70 % of the capital is what I have to put up with at this stage in March 2009. I have begun my trading in December 2006 and seen the Sensex peak the mighty 21,000.
A brief chronology as of end March 2009 will be like this:
2007 August – News started braking in the US that all is not well in the economy due to Subprime Crisis.
2008 January – Indian market falls and continues to fall throughout the year with no end in sight.
2009 March – World over there is recession and fear of depression.
2009 March – Stock markets stage a brief rally last two weeks; there is debate over whether it is a bear market rally or a new bull market beginning.
‘In hindsight everyone is wise’:
So I know where I went wrong in my efforts at wealth building. Two things hit me! The first one being bad luck, that I got caught in one of the worst downturns in history; the 1930’s only being one parallel. Second, my ideas on ‘long term investing’ – I have been a long term investor with time not on my side. It seems the real ‘long term’ is 15 years and more. A market expert once said, “in long term, we are all dead”.
How I could have saved the situation:
Often we do the mistake of not acting on facts. The first reports that I have been reading about Subprime Crisis in the US in American media in August 2007 were not acted up on. Reports clearly said that this could bring down the economy and cause widespread mayhem.
If I prepared to book profit at that news and continued to do so until January 2008 when Indian market begun their crash, I would have been well profited and saved from the loss I am in today.
However, i simply waited ignoring the fact that markets could go down and stay down. Which it did during the past several months. Today, i know what i could have done in Jan 2008. But it is no use knowing that today. However, may be those of you who are new beginners could learn to understand the signals and act upon the hints.
Also, unfortunately due to the difference in timing between Indian and American market crash (Indian markets started crashing only in Jan 2008 while American happened around August 2007), I believed the reports of decoupling theory which suggested that emerging markets are headed in a different direction and countries like India will remain unaffected from the global turmoil due to the difference in economic fundamentals.
What I am Suggesting:
I am not suggesting you buy now and sell tomorrow or in other words, start trading. I am with long term, believe in power of compounding, but understand that long term can be a significant period of time depending upon during which time you are beginning your investment.
A slightly different approach is what I have in mind for the future.
I might have seen at least four minor crashes and corrections during the first two years (2007 and 2008). But every time the market returned to its previous levels. Maximum it took for the market to return to previous levels were about six months. Throughout the crash and corrections, I had only one strategy to follow. Do nothing! and now I believe it was not the best strategy. Every time there was crash, it happened after a fairly sustained uptrend over several months. I could have understood those up trends and their peak to an extend and chosen to book profit on my holding (at least a major part of it) before the crash start or at least after a crash had just begun. After the crash was perceived to be fairly complete over several weeks, months, I could have reentered and again followed the same pattern.
Timing and understanding the price levels.
It is easy to make an observation you can see in the previous paragraph. However, it is one of the toughest thing to get straight. But I think that it is at least better than frequently buying and selling to make a profit.
There are definitely price levels. You have to understand that the present price of the share is reflecting the expected performance of a company twelve months later. You have to keep a watch on the index levels. It was at the peak of 21,000 not long before and now it is languishing at 10,000. You have to understand the economy can suddenly take a reverse course and bring the market down. You have to understand that every time market reach a peak, it will descend back to the base camp sooner or later.
But today analysts are saying that there is as much upside risk as downside risk. It is assumed by many that the market has bottomed. However none shall say it in a definite sense and no one can. You have to make your own assumptions here.
Making money in the stock markets is not tension free. However you have to understand that it is not a difficult task considering you keep your eyes open, show patience, and understand the price levels. I am at a big loss right now. But I appreciate the education about money I received the hard way and I am sure i have become wiser.
To be caught in one of the worst financial crisis world has seen, is simply bad luck! I am sure, soon things will turn around for the markets and that we are headed for better times. Understand the price is in the perception in the short term and in the fundamentals over the long term. Believe in the latter and keep watching the former and do act as advised.