During the past weeks, there has been many theories on the stock market.
- Some say that the market is going to crash, do not buy the dip. You will look like a fool as your portfolio will be bleeding in the red for the next few months or maybe years.
- Some say that these prices are the life-changing prices, and you will be a fool not to take advantage of them.
What if I told that both of these statement are correct.
Hmm...why so?
Well, it all depends on the time perspective which you are looking at.
If you are a short term investor, then yes, perhaps during this period, it will not be wise for you to go long on your positions. Heck, you may even want to short the stock market.
If you are a long term investor, then the opposite applies. It is crazy not to take advantage of these prices. Personally, I am setting aside $1,700 every single month just to buy into quality companies.
(Yes, and I emphasize. Quality companies which are already making profits and STILL making profits despite all the turmoil going in the markets.)
Share Prices Do Not Reflect Underlying Business
One key concept which we must always bear in mind is that price is not quite the same as value.
Let me give you an example.
A year ago, you have a house that is giving you $3,000 of monthly rental income every single month. A property valuator came in and estimated your house to be worth $900,000.
Fast forward till today, due to rising interest rates, and people unable to afford houses - your rental income increased to $5,000.
How much do you think your house is now worth?
For sure, it will be worth more than $900,000.
But here's is what people are going to try, when they want to buy your house.
"Look at all the war around us, the pandemic is still ongoing - with no signs of recovery. I am going to offer to buy your house at $700,000."
You must be crazy if you ever took that deal.
Remember - your house is still bringing you rental income of $5,000.
Can you see now that people are going to throw ridiculous prices at quality assets, and take advantage of the chaos around us? And those who don't even know how to interpret the financial statements of the companies (i.e. stocks) that they own are going to suffer.
Do a health check throughout the companies which you hold in your portfolio. Are their financial statements still healthy? Because, I checked my companies on a monthly basis and calculate the intrinsic value of the company based on their earnings. I will be a fool not to take advantage of these market downturn.
Should You Short The Market?
Market recovery can happen very quickly - much quicker than you expect, especially from news.
"The war has declared to have ended between Russian and Ukarine."
What do you think will happen to the stock market? It will probably shoot up considerably, due to the optimistic nature of people.
"I will short the market and close my positions before the recovery happens. I know how to use technical analysis".
I really hope that that is possible. Unfortunately, when news of such abrupt nature is released, technical analysis usually lags behind market movements. This was what a 7-figures trader told me - which is why risk management is so important.
My advise? If you choose to short the market, always manage your risks.
There is no one-size-fits-all strategy
There is no one single medication which can cure all illnesses.
Similarly, there is no one strategy which can suit all individuals.
Some individual have lower tolerance for market drawdowns, and they find the need to do something.
Some individual have higher tolerance, and are comfortable just holding or even adding more every single month.
It really depends on you - which is why, you need to understand yourself. Are you a trader or an investor? Are you conservative or aggressive?
Personally, I pride myself as a long term investor, simply because it is simple to do and quite frankly lesser stress. It all boils down to having a longer time perspective.