I have been busy since last week trying to answer this multiple choice question:
The answer to which I'm sure will have enormous repercussions to my financial health in the next 6 months. It has been a long time (1.3 years) since I bought stocks, I made the awful mistake of thinking they were too high early this year and bought puts to protect my portforlio, the puts expired end of Jan 2007 just before a correction in Feb 2007...otherwise it would protected me against that down turn....ah..timing is everything.
Everything looked good until 2 weeks ago. Then suddenly this thing about subprime loans started to spook the market. New words and phrases such as "subprime", CDOs, "credit crunch" has been added to my vocabulary in the past week. I spoke to my broker and a few people who would know something, they told me to "sell first, think later". I took sometime to study the subprime loan problems - basically American lenders took some bad loans mixed it up with good ones and sold it to the financial markets. ...now no one can figure out how much this stuff is worth and the uncertainty has escalated into a panic. To understand the economic implications of subprime loans is beyond me, my guess it as bad as anyone can imagine. Some call it a contagion similar to the Asian Crisis, many say it will get worse as liquidity dries up, others say it will eventually lead to a severe recession. There seems to be NO SILVER LINING in this saga.
All my life investing a I abide by several rules when buying stocks:
1. Buy when they are inexpensive relative to earnings & interest rates.
2. Buy when there is panic and when there is consensus things will get worse.
3. Buy when there is an enormous amount of fear and uncertainty.
4. Buy when everyone is selling and nobody dares to buy.
Applying these 4 simple (almost simplistic) rules, on Friday I purchased a whole basket of stocks about 15 - this time chinese companies listed on the SGX as the Chinese economy is insulated from the subprime problems. I believe there are also good Singapore stocks worth buying given the selldown but didn't have time to look through them.
It is strange that jsut 3-4 weeks ago, everyone wanted to enter the market when stocks are far more expensive and nobody wants to buy them now when they are cheap....perhaps they are so smart to figure out that stocks will plunge lower and prove me totally wrong....lets see. The subprime problems have resulted in central banks flooding the market with liquidity and rate cuts will come in the coming months.
"A speculator's job is to demand the supply and supply the demand", ALBERT PACELLI, The Speculator's Edge