Sunday, March 11, 2012

Investment Notebook: Every crisis is an investment opportunity

Have you ever paused to wonder why Singapore has one of the highest concentration of millionaires in the world? There are so many cash-rich Singaporeans out there that even during the recent downturn,  many of them were seen snapping up private properties like hot cakes, despite the sky-high prices. The reason is simple: many of them made big money from the stock market during previous financial crisis. It may sound odd, but every crisis is an opportunity for retail investors to make big money because that is the time when stock values dropped below their intrinsic values.

Most investors, especially the novice ones, tend to panic sell during stock market crashes because of the crisis in confidence. This is a typical "herd mentality" mistake that most investors tend to make and because of this, they tend to "buy high, sell low", instead of "buy low, sell high". The reason why most investors committed such mistake is because many of them are not fully aware of how the market works.

The stock market consist of three groups of players, namely Institutional Investors, Rich Investors and Retail Investors. Institutional Investors are players who invest on behalf of investment/insurance companies. They are the ones who usually flow huge amount of "hot money" in/out of the financial markets. Rich Investors are the "big boys" and Retail Investors refer to the small fries. Usually at the first sign of economic problem, the Institutional Investors would pull out funds from the financial markets, resulting in the first wave of wealth destruction in the stock market. Rich Investors would tend to offload their investment holdings to take in profits, because they had bought the stocks cheaply in the previous crisis. Retail Investors are normally the last to react to the unfolding crisis and seeing their investment value free fall, they tend to panic sell irrationally, resulting in huge losses.

Not many people realizes that no crisis lasts forever and that every stock market crash is an invaluable window opportunity to make money. There are more and more Singaporeans who are aware of this and hence made big money during the last crisis. But there are also novice investors who always bought at the wrong times. Are you one of them?

Magically yours.


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