Crisis situations almost always provide an opportunity

Don't buy into falling markets. The occasional successes will not pay for the more numerous failures. The falling markets can surprise many of us by how far they move. Recall the recent 2007 -2009 severe bear market and those who bought big and get caught in the falling market. Among them, Temasek, Oei Hong Leong, the German industrialist who committed suicide for betting on a auto stock, and others.

Panics can lead to an imbalance in supply and demand

Nevertheless, there is an exception: crisis situations. In crisis situations almost anything can happen because there is panic in the markets. You see the most controlled and sensible people completely lose all their judgement when they are under intense pressure. Sometimes the whole market is awash with nail-biting investors and traders, feeling nervous and confused. With the volatility we have experienced the last 25 years, there have been many such episodes. The share market crash of 1987, the emerging market crisis of the late 1990s, the tech wreck, and 9/11 are just a few that come to mind. And, undoubtedly, there will be many more.

The reason that there are opportunities on these occasions is simple: a falling price triggers more panic selling than it does bargain-based buying.

During these crises, many players will be forced to cut their positions regardless of the price. Some funds will have lost so much money on many different investments, that their very survival would be threatened if they lost more. They may reason that by selling, they take a dreadful loss, but at least it does not put them out of business. Even though holding on may be a great trade, they simply cannot take the risk. There have been many instances of a senior manager ordering a fund manager to cut, and ignoring their heartfelt plea not to do so.

At this point fresh buyers could come into the market looking for value. However, at times like these, potential buyers may be too distracted with their own problems to do anything. This particularly affects smaller markets since fewer people are watching them anyway.

Suffering from this lack of buying, the market could paradoxically be struck by new selling. Some hedge funds and other momentum players may ignore fundamental valuations and see selling as an opportunity, as they look for the price to go even lower.

While all of this is going on, you may be able to step in. Hopefully, you will have followed good risk management so that you yourself are not facing a crisis, and you can keep a cool head even as others panic. You should be extremely choosy over how you get involved in the market - try to consider many different opportunities and don't necessarily jump at the first one you see. In a genuine crisis, there will be no shortage of ideas.


Ref: 100 Secret Strategies for Successful Investing by Richard Farleigh