I'll talk about "opportunities" a little later ......Seah Chiang Nee has an interesting perspective on the recent market plunge[Link] in his weekend article. He wrote about how materialistic Singapore has become and how happiness is linked to wealth and money.. Because of this materialistic nature of our society, losses from the stock the market plunge affects Singaporeans more painfully than say people in Malaysia. After reading the article, I told myself, the real misery for most people come not when the stock market plunges but when the property prices falls from the peak as so many Singaporeans have their wealth tied to property. While poverty brings absolute misery, due to lack of basic needs, if you go above that, money is not really a factor - the person making $10K a month is not necessarily happier than a person making $5K a month. But in Singapore why do people believe wealth is linked to happiness? Why do so many graduates believe that they should "go for the money" above everything else? There are more students today trying to become "wealth managers" than those who trying to be engineers to create something that will improve the world or becoming teachers and so on. 30 years ago, teaching was seen as a noble profession - it still is but young people are not attracted to it because they think teachers today have a tough life.
The reason for this new materialism in our society is linked to the degraded quality of life for the middle class. Today we see struggling teachers, struggling engineers, struggling chemists. If you go right down to delivery man, technicians and kindergarten teachers, it is about not making the ends meet. Many of my friends with engineering PHDs (those who got in in the past 2 years) still take the bus/MRT because they are financially prudent and the mathematics of those large home loans mean that they will take some time to escape the risk associated with those large debts. The top earner among NTU students this year starts off with a salary of about $10,000 because he found a job at an investment bank - so the inequality begins right upon graduation! Warren Buffett's partner Charlie Munger once wrote about the dangers of financializing an economy in which large income gap starts to draw talents out of jobs that will bring great benefits to society to a sector to one that merely moves money around without creating any tangible value to society. Of course, some of you may be clever enough to point out that Charlie and his more famous partner, Buffett, are the greatest speculators (value investors?) the world has ever known. At least they are donating their vast wealth to charity to benefit the rest of society ...also when they choose their careers as money managers the world was a very different place and the were very few young men going into this business. They, better than anyone else, know that a little greed helps to grease the wheels of capitalism but too much greed and you can burn the house down.
Now back to the markets. Roll back to Jan 2011 when everything was hunky-dory. Then came the Japanese Tsunami, re-emergence of the Greek Crisis, followed by fears of a European contagion spreading to Italy and Germany + French banks....to make matters worse, US debt was downgraded to AA....and now there is talk of another recession coming our way. So if you talk about fear, the is plenty to go around. The question is whether opportunities exist. I would like to bring your attention to this little piece of news that you could have missed if you have been too busy [ Warren Buffett explains why fear overshadows greed] :
"Be fearful when others are greedy, and be greedy when others are fearful." - Warren Buffett.
Warren Buffett has been buying stocks in the past few weeks. His timing is a bit off as he was buying before the sharp selloff following the US debt downgrade by S&;P. The lower prices makes it even more attractive for a value investor like himself to accumulate stocks. However, I caution you not to follow Buffett blindly as hims time horizon might be 2-3 years vs your own time horizon. The fact that he is buying means that stock valuation has reached a value threshold with sufficient safety margin to be considered great buys for value investors. Some of you may ask - isn't a recession coming? What if there is another crisis? Won't stocks go lower? If there is a catastrophic collapse of financial system stocks would definitely go lower. My take is Buffett probably has taken into account slowing growth or perhaps a mild recession in his valuation. According to an interview done last week, Buffett said that he sees the economy slowing but not sliding into recession. If you look at the latest corporate results, US companies performed very well in the already slowing economy - due in part to the weak US$, extensive cost cutting and rising productivity in US companies. If the US economy just splutters along without sinking into a deep recession, US stocks are not a bad place to put your money. But the assumption that the economy "splutters along", is a risky one so I would advice you keep some dry powder "just in case".
In the shorter term, I believe the picture is clearer. Investors dump their stocks in a panic driving prices down causing even more panic. All it takes for a short term rebound in stock is for investors to calm down from their "chicken licken sky is falling" state....courageous value investors will find it hard not to return to the market given valuations have reach near compelling levels. In the longer term, I'm not as optimistic as Buffett who thinks the great American system can eventually overcome the difficulties it is facing - I believe the system has to be drastically changed and this change must come for the system to move on and progress.