If we see higher risk assets further over-valued, do not chase the move, but rather sell into price ...
Common Sense for a Wild Market
10/23/2008 10:48 am EST
Robert Hsu, editor of China Strategy, has some basic tips on how to survive the market meltdown.
While the last eight months have been extremely volatile for the markets, due to the [seasonally weak period] combined with the credit crisis and other economic issues, Chinese stocks are definitely feeling the pain, too.
I have experienced a lot of market volatility in my career as a professional investor. The bear market of 1990, the Asian financial crisis of 1997, and the technology crash of 2000 to 2002 were all pretty rough for investors. But the events of the past weeks and months are definitely ones for the record books.
In fact, the dramatic collapse of Lehman Brothers and Bear Stearns this year certainly has been the most shocking bear market event next to the dramatic bear market that followed the September 11th terrorist attack seven years ago. The failure of 158-year-old investment bank Lehman Brothers struck fear into financial firms around the world. And without government interference, it appears that even much bigger firms such as global insurance giant AIG are now vulnerable to a complete and sudden collapse.
If huge financial firms are concerned about failure, I know that individual investors are fearful about their personal investments as well. So, what are investors to do in a situation like this?
Well, as I've already discussed, I think that investors should keep their portfolios focused on only top-quality companies and diversified across different industries to maximize profits and minimize losses. I also think that investors should avoid using leverage in these tough markets, which will limit losses if the market sells off.
And investors should sell positions with excessive loss and keep stocks that are holding up well. Selling into a down market is sometimes painful and difficult to do, but it is necessary in a bear market to avoid a more dramatic loss. Again, I know this can be hard, but even when I have conviction that a poorly performing stock should go up, I still usually lighten up because it is too risky to hold on to it.
To survive a rough market like the one we are currently in, I think that the most important thing is to remember that successful investing involves the smart handling of risk. As an investor, make sure to manage your risk so that even in tough markets, you have enough capital left to stay in business.
As a friend of mine once said, "If you don't bet, you can't win. But if you lose all your chips, you can't bet." So be defensive in your investments so that you survive the volatility and are able to invest in the market when it turns for the better.
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