What you are seeing now in the market is a PANIC!!!! People who have seen their stock value drop by 50% or more cannot take it and are just selling at whatever price they can.
Hedge funds, institutions and people who have borrowed heavily to buy stocks in the last few months, are not able to meet margin calls and are forced to sell. As individuals run to the banks and withdraw whatever money they have left, mutual funds are forced to sell their stock and raise cash to meet this withdrawls. So everyone is SELLING SELLING SELLING at whatever price they can get.
On the other hand, many people with cash are sitting on the sidelines not daring to buy anything for fear that it can go lower.So what happens when you have got millions of sellers and no buyers? Stock prices plunge like a stone! The Dow (8579 pts) is down almost 40% from its highs and the S&P 500 is down 42% to 909 points. This has happened in the last 12 months since the crisis erupted.
When fear and panic happens and people sell irrationally, fundamentals and intrinsic value are thrown out the window. This is exactly what we talked about during Wealth Academy. This is when good companies get dumped together with the bad. (metaphor: This is when people sell 20,000 square foot bungalows on Holland road for $1m). This happened in the 1920s, 1973, 1987, 2002 and now, it is happening again.
Even stocks that are NOT directly related to the financial crisis are being sold at ridiculous prices. Look at Health Care: UNH (intrinsic value (IV) $53) selling @$17.80 , WLP (IV: $95) selling @$36.50 Technology: AAPL (IV: $189) selling@$88.74 Agriculture: MOS (IV:$81)@$36.52 , POT (IV:$184) selling @$92.85, Consumer Staples: KFT (IV:$40) selling@$27.70.
We all know from history and common sense that the market will eventually recover and go to even higher highs. So, why do people still sell when the market is down? Well, because EMOTIONS always overcomes LOGIC in life, even in the markets.
People always fear that THIS IS THE END!!! It will NEVER COME BACK. Also, sometimes it is because people are forced to sell because they have borrowed money to invest or because they need to raise the cash to pay their expenses. This is why you should NEVER borrow to invest or invest with funds that you need for your daily expenses.
So, if you want to emerge a winner, then stay calm, keep your logic and hold and pick up SOUND COMPANIES which are NOT DIRECTLY AFFECTED BY THE CRISIS, have strong balance sheets (low debt, high cash), consistent earnings and a wide economic moat with a high future growth prospects ahead. Here is where you put all your learning s from Wealth Academy to the ultimate test.
If you can do this, you will be one of the very few (like me) who will PROFIT FROM THE PANIC. However, do BEAR in mind (no pun intended), that I personally donâ€™t think this is the lowest point. There is still lots of possibility that the market will still GO LOWER. After breaking the 9000 support, the next support on the Dow is 7500. Meaning it can still go down another 17% from here. Plus, more banks are probably going to fail in the US and in the UK. The UK crisis has just begun and I see that taking a further toll on the market.
This is however, not going to stop me from accumulating strong stocks at discounted prices and accumulating more as it reaches the bottom in a few months. The most important thing is to focus on fundamentally strong stocks that got hit by the collateral damage and avoid the ones that really got hit i.e. Financials. The market will probably not rebound very fast immediately, it will take months or even years for it to climb back up so no rush.
For those of you who have attending my Wealth Academy Program, I will soon email a list of stocks that I am accumulating right now