Lessons from the Bear Market (1)
By SmartProInvesting.com Stock Investing Team.
August 16, 2008
That the Nigerian stock market has been in a decline is no longer news. That has been so since early March 2008, and that puts it at over five months of sustained price losses. Yes, there have been a few spans of momentary recovery, but each time, the market has slipped again, driving even further down. To date, the NSE All-share index has shed some 18% of its year-start position, that's in spite of the significant gains made in the first two months of the year. In Naira terms, that has meant a lot of losses for investors, with the risk of frightening them totally off the market.
Seasoned market players know that this development is part of the cyclical profile of markets. All markets rise and fall, as the factors that underpin performance and indeed the dominant moods of inv esters sway them one way or another. In fact, it's almost appropriate to say that the current development was needed, if only to bring investors home to reality. Finally when it is over, as we expect will happen sometime, lessons would have been learnt that will help investors position more strategically to withstand market vicissitudes, even while aiming to make money. Probing for those lessons is the objective of this article, hoping that some useful survival strategies will be highlighted to make for a more robust future approach to investing in the market. In this first installment, we list five simple lessons we think every investor should learn:
- Prices Can and Do Go Down
Sounds obvious, but this is not always borne out by the perspective and approach of many investors. It's natural to get optimistic when market conditions support it, but the wisdom is never to get carried away. In effect, it should be at the investors back of mind that even the strongest bull market will one day run out of steam, And that could come quite suddenly. What that says is that the preparation for the reversal of fortune should start from day-one. If it doesn't happen in the investment horizon you have worked with, great. But if things do reverse, you shouldn't be caught too exposed. Taking this approach will possibly have its price, but that will be a price deliberately paid for a purpose, more like your insurance premium.
- Profit is Not the Sole Objective
You are in the market to make money, no doubt, but if you focus solely on maximizing profit, it may hurt.
That led many investors into pouring money into unknown and unproven companies, whose prices were galloping up and obviously making money for some investors. Ultimately, though, not everyone has gained and some have taken massive hits. Think of buying a stock at over N20 and seeing the price crash to as low as N5 or less. If you bought a large chunk, that's enough to spell bankruptcy.
If you realise that there are always thorns where money is to be made (otherwise everybody would have moved in and amassed billions), you will see the need to balance your returns expectations with the risk outlook. Otherwise, it should be more attractive to go for money-doubling schemes.
- Different Stocks are Affected Differently
Market aggregates are often stated, but as you know, individual stocks are affected differently. Some stocks rise when others are falling, even in the declining market. Some will fall marginally, while others will be substantially eroded. That is because the underlying companies have different
kinds of businesses, different strengths and weaknesses and other different attributes. These determine how investors perceive their value, especially in difficult market situations. It's good to think of how the stock you want to buy is likely to fare in a troubled market. If it won't withstand pressure, then you should be aware of what you are bargaining for..
- You Need Protection Tools, Even Before the Disaster Comes
When to put protective measures in place is when the crises has not come. That applies to every area of life and should be the approach when you invest, especially in the stock market. Deciding what kinds of stock to buy should be informed by a strategy that incorporates the protection of your investment. Your exit strategy should be in place, based on a protection mechanism. If you can't pinpoint the protection you have put in place to safeguard your investment, you have to realise that something is wrong.
- Stocks Are Not the Only Asset
You know the noise is much about stocks, but that tends to make investors overlook other financial assets, especially the ones that can help buffer their investments. If any diversification is achieved at all, it's within the stock portfolio. Yet, a more thorough approach looks at other financial assets to incorporate them and achieve a more robust investment portfolio.
As you move forward, you probably want to look at the issues raised here and see how they have played out in your own investment matrix. Certainly, what is most important know is to resolve to cope better, if and when the market turns another tough page, sometime in the future. That's, hopefully, after it has risen from the current trauma and done what investors want most - helping them make money.
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