30 Days ago, I posted a personal challenge to write a new book from scratch in 30 days. Well, I just completed it with my two authors Conrad Alvin Lim and Ryan Huang (one of my Wealth Academy students and a journalist with CNA). The book should hit bookstores in 2-3 weeks after printing and production. We have all decided to donate 100% of our royalties to help out the needy in this time of crisis.
Here are some updates about the market and excerpts from the book:
Those of you following the market and news will know that volatility is still extremely high and the market is still on a downtrend, following more bad news every week
* Japan, Europe, Germany and Singapore are officially in a recession. The US is unofficially in a recession
* Unemployment rates have hit new highs
* There are news of layoffs everyday, with Citigroup cutting 55,000 + 20,000 jobs worldwide.
* The Big 3 Automakers FORD, GENERAL MOTORS and CHRYSLER are on the verge of bankrupcty
* More and more banks are failing, the latest victim being CITIGROUP. CITIGROUPâ€™s share price plunged to a low of $3.80 and is now fighting for its survival (after the demise of Lehman brothers and the near collapse of AIG, Merrill Lynch etc…)
* Fear has thrown fundamental analysis and even technical analysis out the window, with US and Singapore stocks trading at such low levels no one could have imagined 12 months ago
* This has truly become the worst financial crisis since the great depression. Things like this happen ONLY ONCE in a 100 years. No one saw how bad this would get, including me!
Currently, The S&P 500 Index is at 828 points down 47% from its highs set in October 2007. Singapore is down 58% (at 1,600 points) and China is down 70%.
(STI chart screen captured from www.shareinvestor.com)
I think many people are asking questions like:
1. Will the market ever recover with everything looking so bad?
2. Which stocks will recover and which will not?
3. How long will the recovery take?
4. The FED is printing money like there is no tomorrow (investing $700 billion into the financial system. How will this effect the US economy?
5. How do I best take advantage of this to build my long term wealth
Let me answer these questions to the best of my ability:
1) No doubt, markets will always recover in time. Although this may seem really bad, it has happened many times before (quoted recently Buffett). IN fact, the US market dived close to 50% in 1974 and 2001 and even crashed 80% back during the great depression. The Singapore market dived close to 70% during the Asian financial crisis. At that time, people thought that things would NEVER recover, but they eventually did and the market went even higher than it ever did before. Economics tells us this will be no different. However VERY FEW people have that kind of foresight to dare to start buying LOW and making their fortune when the market sorts itself out.
So, where will the market go from here? Truthfully, NOBODY REALLY KNOWS in the short term (3-12 months). Some experts say that will be in for a major rally at the beginning of 2009 and the market will move sideways for 2-4 years before staging a new sustained uptrend. Some experts believe that for the market to truly hit a bottom (another 10-20% below where we are now), the market has to go through CAPITULATION.
Many past market bottoms have been created from CAPITULATION (it means â€˜surrenderâ€™ or â€˜give upâ€™). Capitulation is a situation where there is INTENSE MARKET PANIC and the masses sell AT ANY PRICE (frighteningly, this has NOT happened yet). This usually results in a HUGE GAP DOWN or a HUGE DOWN DAY. What this does is that is flushes out all the sellers ONCE AND FOR ALL. Only when this happens will a bottom be reached and a new uptrend can start.
Again, nobody can know when the bottom will be. The good news is that you DONâ€™T HAVE TO buy at the bottom to make money from this crisis. You just have to buy somewhere NEAR the bottom (where I believe we are at now) to position yourself for profits. What I am personally doing is to buy regularly (dollar cost averaging) every few weeks so that I get a low average price.
2) Many people I know are tempted to buy CITIGROUP that has hit a low price of $3.80 (now at $6) or even AIG at $1-$2, believing that eventually, this big brad names will survive and recover. While I was bullish on financials 12 months ago, I have come to realize that the DISCOUNTED CASH FLOW model of valuing companies CANNOT BE APPLIED to financial stocks because of what has happened in this crisis.
The Banks and financial companies WILL NEVER earn the kind of profits they did in the last 10 years. The profitable double digit growth investment banking model has been destroyed by this crisis and so, past earnings/cash flow mean nothing now. Goldman Sachs will never go back to $250 (it is now at $66), AIG will never go back to $70-$80 (now at $1.66) and CITI will never go back to $50 (now at $6). In fact, the truth is that these banks can never realistically pay back the BILLIONS Of dollars loaned to them by the government. They will take 1,000 years to pay it back with interest ( I am not exaggerating here).
So, in my opinion, there is no way to value any financial stocks intelligently right now and that any investment in them is a gamble. For example, a $6 investment in CITI may look great. Although I believe that the Govt will not allow CITI to go bankrupt, they may take over the whole company (in the case of Freddie Mac and Fannie Mae) and wipe out all the shareholders! This means stock price = $0!!!!
The only bank stocks I believe could possibly survive and benefit from this crisis are BANK OF AMERICA and JP Morgan. As for financials, VISA and American EXPRESS are also relatively good investments as they do not suffer from any writedowns.
I think that the best thing to do is to just buy the INDEXES: DIAMONDS (DIA), STI ETF and FXI (China ETF). They are the safest and already offer a huge enough upside. As for individual stocks, look for non-financial stocks that meet the 9 step value investing criteria. You will learn how to do all this from PROFIT FROM THE PANIC
3) How long will the recovery take? Nobody really knows but I believe Singapore and China will recover a lot faster than the US in this case. I am overweight on the first two markets more than the US right now. Check out the chart below and you can see that historically , markets took 3 years to get from the bottom back to their peak!
This DOES not mean you must wait 3 years to make money. If you were to keep buying and averaging down the price at low price levels, you will be profitable in a year or less.
4) The FED printing BILLIONS of dollars into the markets will only mean ONE THING => SUPER DUPER INFLATION and the FALL OF THE US DOLLAR in the years to come. A falling dollar will mean that commodity prices (priced in US dollars ) will go even higher. I believe that although oil prices have come down from their peak of $120+ a low of now $50 (because of recessionary fears), they will eventually go up and up maybe even to $300 a barrel in the next 5 years. You can take advantage of this by buying the OIL ETF, oil related companies or inflationary driven stocks
5) They key to make huge profits from this crisis is to buy the right INDEX ETFs and fundamentally strong stocks whose share prices have been bashed back to the stone age. Learn exactly how to do the right research from PROFIT FROM THE PANIC.