Friday, 31 August 2012
The Investor Sentiment Wheel
In the 1993 bull run the youngest office boys gave out stock tips, a classic telltale sign that share prices were very rich. Malaysia looked to be on a roll, but structural problems were ignored. In 1994 prices softened somewhat, but the real reckoning came in 1997/98, when it turned out that the economy was not that good, after all. It looked like the world was coming to an end (at least for Malaysia) and the KLCI index reached a low of 250. For those who had cash and a lot of guts there was an excellent buying opportunity. Prices recovered in the next decade, with moderate crashes during the Dotcom bubble and SARS. In 2007 it looked like the global economy was going very well, but again structural problems were overlooked and in 2008/9 the house came down. Not so much in Malaysia (my guess is through artificial support by government linked funds), but there were tremendous buying opportunities in other Asian countries, for instance in Hong Kong.
With hindsight, everything is easy. The difficulty lies in having the right mentality, to invest when all the news is bad, and to sell when all the news appears to be good. A decent way to deal with this problem is dollar cost averaging, invest the same amount of money each month.