Why Market Downturns Are Not All Bad

By: DanielXX

Yes yes, we are in a market downturn and it’s depressing to see Mr Market’s valuations of your stock portfolio (and your own valuation of your stockpicking abilities) going down and seemingly bad news all round with seemingly no hope of recovery in the next five years, but things are not all bad. No, this is not an article encouraging short-selling (think you’ll be an idiot to short-sell the Singapore market at current levels) nor is it a tongue-in-cheek writeup where I don’t mean what I say nor is it a shining example of ah-Qism (I hope not). It’s not even meant to be chicken soup for the investor’s soul because if one just sips it without acting on it, it’s simply no use — conviction is worthless unless it is converted into conduct. Here are my views:

(1) You can’t have a market rally without a market downturn. Translating to something more intimate to our hearts, you can’t have big profits without tolerating substantial drawdowns. Why does this always work? For one, the valuation goes from overvalued to undervalued, and valuations always regress to the mean. For another, in downturns the scrip moves from weak holders (margin, contra, institutions with investor mandate that could face redemptions etc) to the strong holders (pension funds, investors managing with no heavy liability considerations, wealthy people, other cash-rich fund managers) and setting the stage for a compressed spring effect. Read more…

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