Managing fear and greed with your investments

Volatility is the name of the game
The recent two weeks have seen extreme volatility in the equity market world-wide. The NYSE Dow Jones gyrated violently for the last couple of weeks due to the sub-prime issues in the USA and this sub-prime slime as the CNBC analysts refer to it has tarred even the Singapore Exchange. Our shares, especially the banking shares and penny stocks have been battered beyond all recognition despite most analysts saying that fundamentally, the Singapore economy is on very sound footing.

Fear and greed strikes us
It is during times like this that fear and greed rapidly takes hold of our emotions. We are in fear of losing our gains in our portfolio and seeing double digit percentage paper losses in our equity investments. Some weak retail sellers who bought into the rumour that the sub-prime slime was affecting our local big banks DBS, UOB and OCBC were caught by the onslaught and many sold off their holdings only for them to see that the big players (institutional buyers) are mopping up the floor of the SGX by buying the bank stocks on the cheap.

This episode has reinforced my view that you need to be extremely focussed, have a clear investment objective and invest within your means when approaching the equity market. Volatility is something you have to stomach because you are buying and selling to another human being. Your counterparty who buys or sells from you is also affected by the twin terrors of fear and greed that strike especially when the market reacts to good or bad news.

On this occasion, the bad news from the USA should not have fundamentally affected sentiment to the extent that it did in Singapore because our housing market is vastly different from US. There is hardly sub-prime lending unless you count the illegal money lenders or loansharks. Hence, in terms of rational analysis and later clarified by our local banks, the sub-prime does not materially affect their investment portfolios or funds under management. Thus, it is really the irrational bearishness that descended as opposed to the irrational exuberance that has seen our market climb up so fast since the beginning of 2007.

Back to basics
If you manage your own money and some of it is in the SGX. Remember your investment basics:

1) Invest what you can afford to lose
2) Have a clear investment objective
- Are you able to articulate your reasons for holding the stock for the medium to long term
3) What is your investment horizon
4) Have diversified asset classes
- E.g. treasury bills/fixed deposits

Above all, remember that investing is for the long term while speculating is for the short-term. If you want to speculate, by all means do it within your means and with prior knowledge that you can make a lot of money and you can lose a lot of money and sometimes all in the same day.

Be well and prosper.