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Crisis Market Investing

Pop1396 views  2012-05-07 15:52   Tagsdiv  investor  question  article 

According to general consensus, a bear market is defined as a broad market decline of at least 20%. Conversely a bull market is defined as a broad market incline of at least 20%. Since 1974 there have been many bull and bear markets, but the question is this: who cares?

Long term investor does not care if his holdings go up or down - the best long term investor is non-feeling. This is a somewhat curious statement as most people believe that stocks going up should induce good feelings and stocks going down should induce bad feelings. Again, who cares? It should be known by now that the feelings of humanity do not concern investment returns.

The investor who achieves the best returns in stocks is he who buys not in the trough of a bear market, but in the trough of a crisis market. I define crisis market as any broad market decline of at least 30%.  Crisis market is the same concept as bear market; the difference being simply a matter of degree.

I was born in 1974 when the Dow was at 854. At that point, Dow had already fallen -18% from a peak of 1047 in Jan. 1973 (it would go on to fall another -27% before bottoming). Since it was physically impossible for me to invest my (as yet nonexistent) life savings in the trough of the 1974 crisis market, there is nothing to forgive for my lack of initiative. Fast forward 35 years to the trough of the crisis market in 2009 and there is much to forgive!  You see, even though I had been studying the stock market part-time on evenings and weekends since Dec. 2005, I was still not mentally and emotionally prepared to invest my life savings at that time. I did invest a small amount, but it was inconsequential and not based on any sort of comprehensive system of investment, so I don't congratulate myself for it.

I read recently an article on Gurufocus entitled Lauren Templeton: Methods Sir John Templeton Used to Take Advantage of Crisis Events. In this excellent piece, Gurufocus shares insights by Lauren Templeton, the great grand niece of Sir John Templeton, on the success of her great grand uncle. As well as laying out the 15 personal attributes essential for successful investing, she lays out 14 crisis events that investors could have taken advantage of. While it would be an interesting study to look at market valuation levels during each of those crises, I am mostly impressed by a short statement on how to take advantage of them.  Quoting her great grand uncle, she says "How to take advantage of these events? Preparation, Preparation, Preparation."

Preparation, preparation, preparation - is this not the mother of all winning mantras? In fact, it was my lack of preparation that caused me to miss in large part investment gains post March 2009. The one redeeming quality that I must congratulate myself for however is the fact that I have learned from this experience, delved even harder into my stock market research and have finally found a way that I can make systematic investment gains in a career that, God-willing, stretches ahead of me for at least another forty years. I have not yet looked into Lauren Templeton's list of crises to see how at what Dow point the market fell from previous highs, but I do know that, including Dow 577 of '74, there have only been four Crisis Markets in my lifetime as defined by my -30% benchmark.

Over the next several months, I will spend my spare time examining company valuations during these market declines and share them here on GuruFocus. From this analysis I expect to gain further mental ammunition that will enhance my level of preparation for investing during the next Crisis Market.

Comments Comments (2 )

  • gurufocus 2012-05-07 16:22
    Good writing!

    Howard Marks' book of "The Most Important Thing" should help you along this line of thinking.
    Reply
  • Cornelius Chan 2012-05-07 17:07
    I thank you for your kind words and your book recommendation!  
    I will get this book right away.  
    Thanks again!
    Reply


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