When the next crash comes, will you really be able to buy? What is needed to become a shrewd investor
Why does the stock market rise even when the economy is deteriorating
The Economy Watchers’ Report (for August) released by the Cabinet Office on October 7 shows a deterioration for the fourth consecutive month since April.It is a downward revision from the prior period, transitioning from what had been a “decrease” in May–July.
【Reference】Economy Watchers’ Statistics Results (Cabinet Office)
Overall trend still indicates deterioration, andthere are no signs of a recoveryyet.
Meanwhile, despite such surveys,stock prices have been relatively firm. The Nikkei Stock Average reversed its decline last week in an attempt to rebound.
Turning to the United States, reports indicate some progress in U.S.-China trade negotiations, which has also driven up prices.The “Trump rally” continues as beforeit seems.
China’s economy is clearly slowing, and Japan is also showing a deceleration as reflected in the above survey. Even the United States, which had been relatively resilient, is seeing manufacturing slow down, and it remains to be seen whether the non-manufacturing sector will be affected. There are no bright signs.
Nevertheless, why do stock prices rise? It is because market participants are short-term minded. Ironically, as the economy’s slowdown becomes more evident, expectations for government stimulus come into play and are priced in as factors.Many short-term investors rush to push prices higher to avoid missing the current rise. Therefore, stock prices are pushed up further.
Hence, I think stock prices will continue to rise in the near term. Money that can drive the rise already floods the market.
That said, such gains are unlikely to last long. If the economy worsens seriously, corporate earnings will deteriorate. When that happens, market participants’ sense of crisis will rise, and even if they have money, they will hesitate to take risks.Once a shock occurs, capital is likely to be withdrawn all at once.
In such a fashion,the moment most people become pessimistic is exactly when value investors like us should act. Below are Buffett’s words.
We buy when other investors are flocking to sell like lemmings.
If a bear market arrives, can you really buy?
However, one practical point to be careful about is thatonce stock prices start to fall decisively, they do not stop quickly.
If there is a large drop once, and it continues downward without stopping, market participants become increasingly anxious. This is how selling feeds more selling.
During the Lehman Brothers collapse as well,the downtrend took nearly two years from its start to truly bottom out.
If you exhaust your funds on the first drop, you won’t be able to buy when prices fall further, and you will suffer from unrealized losses for a long time.
That said, waiting for a market bottom forever means you’ll never buy. No one knows where the bottom is.Before you know it, the bottom is struck, and a big rebound begins without you realizing it.
In such a context, what we must value iscapital management andfocusing on individual stocks.
When facing a down market, you should not buy too much at the first drop, but if you don’t buy, you’ll miss the opportunity. Therefore,you should buy cautiously and hesitantly.
At that time, it is important to constantly know your available funds. If you buy too frequently, you will run out of money quickly. That is why I say,“the real buying opportunities occur only 2–3 times a year”.
Next is selecting the stocks to buy.
Here, regardless of market conditions, you must adhere to the principle ofbuying good stocks cheaply. Stay alert for good stocks in advance and buy when they are cheap.
For example, when a top-tier stock normally trading at a price-earnings ratio (PER) of 30 drops to PER 15, that is an excellent buying opportunity.
When a shock actually occurs, you may be shocked by how cheap a stock is: “Is this stock really this cheap?!”During the Lehman shock, even growth stocks had PERs below 10. For such stocks, you should not try to forecast price movement but buy gradually as the price falls.
If you don’t regularly monitor stocks, you won’t notice these opportunities. Therefore,constant stock monitoring is essential.
Did you get a sense of how to approach buying in a down market?“Many say they are waiting for a crash, but when faced with it, only a very few actually buy”.
Constantly imagine “what if” and practice mental rehearsals for how you would act in such a scenario; this is extremely important in investing.div>★ Tsubame Investment Advisory’s YouTube channel has been launched. Please subscribe to the channel! ★
