1) Market fluctuations present opportunities“Be fearful when others are greedy and greedy when others are fearful,” says Buffett.
Buffett’s advice is simple enough: buy when pessimism reigns and don’t buy (or sell to take profits) when investors are exuberant.
Sure, it is important to find if a market is plummeting because of some drastic deterioration in its economic fundamentals; if that is the case, a lower price earnings (PE) ratio, a widely-used indicator of valuation, does not spell good news.
But in a market downturn, investments may be oversold because of poor sentiment or other factors which are unrelated to their actual fundamentals. There is indiscriminate selling, as investors seek safety in low-risk instruments.
Take, for example, the Asian economies. Their foreign exchange reserves have grown to over US$3 trillion, enough for most of the governments to fall back on if they need to boost their economies.
Corporate transparency has improved since the bleak days of the Asian Financial Crisis. Most fund managers continue to find companies which show strong balance sheets and healthy cash flows. On a more individual level, Asians, unlike the Americans, save a lot more too.
Despite all these positives, Asian markets have fallen even more than US markets – and we know the economic situation in the US is bleak.
This shows that the markets go through times of irrationality. It happens during a bull run when markets skyrocket, and it also happens during a bear run when they plummet.
So, clearly we find good opportunities among Asian equities now. Our research team has been saying it for a while and we continue to advocate investing regularly to benefit from dollar cost averaging. Check out a recent article by our analyst Wong Weiyi on its benefits.
2) Long-term and short-term goalsBuffett advocates long-term investing. He admits he has no clue on whether the market will rise or fall in the next one month or next one year.
So in the short term, markets may continue to fall, but that has not stopped Buffett to invest in US equities. He may not be buying them at their bottom, but then again, who can? Timing the markets is out of Buffett’s league, so what makes us think we can do it confidently?
If you believe in the prospects of a company or economy to do well in the next few years, you will not be as worried over its outlook for the next few quarters.
It is also crucial to distinguish between how we use our short-term and long-term monies.
The short-term pot will take care of our daily expenses, potential emergencies and the big ticket items we intend to splash on within the next two to three years. These could include the exotic holiday to Machu Picchu or the downpayment for the home you have been eyeing. To meet our short-term financial needs, leaving the money in safe, low-risk vehicles such as a savings account or a fixed deposit makes sense.
The next pot of money is really meant for our long-term goals. We can afford to give more time for our long-term investments to perform as we do not intend to touch that money for the next three years or more.
So, the point is, each one of us will have a different definition of short term and long term. Make sure we know our goals and divide the money into the different pots accordingly.
For our long-term pot, don’t panic and sell out when our investments fall. Don’t stay on the sidelines either, waiting for the markets to bottom. By the time the market really bottoms and starts rising, you may still be holding cash because you assume the bottom is not over yet.
3) Beware of inflationMarkets are plummeting and we are worried about our portfolios, our year-end bonuses or salary increments; for some of us, our jobs could very well be on the chopping board. But there is one big risk that has taken a backseat lately: inflation.
Buffett has also mentioned inflation as a key risk. "The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our (United States) legislature," he wrote in a Fortune article titled "How Inflation Swindles the Investor".
Inflation may be seen as a lesser concern, with commodity prices dropping sharply in the last few weeks. But it remains at a high level: Singapore’s Consumer Price Index rose by 6.7% year-on-year in September. While this is lower than the CPI increase of 7.5% for a period of three months from April to June, the CPI numbers show that the interest rate from our savings account and fixed deposits is way too measly to be able to generate a positive real return.
We need our investments in the long-term pot to deliver a return higher that the inflation rate. Inflation has been hovering at relatively higher levels in the last few months. This makes our long-term investment decisions even more crucial – and cash is clearly not king when it comes to our long-term pot of money.
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