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Are You Taking Advantage of The Market Madness and Crisis Right Now?

September 28th, 2008 by Wai Loong (Add Your Comment)

Wow!  The past 2 weeks have been a real disaster for many!  Not only do we see large financial institutes going belly up, we see consumers worldwide panicking on the China diary industry!

I have been finding the sagas extremely dramatic while struggling with my heavy work load, and keeping an eye on the markets and scooping up bargains!  I know you can call me mad, but the Chinese has a great saying – Great Opportunities Within Great Crisis.  I am merely pointing out the blind spots that you should be snapping on while everyone’s mind are preoccupied with all the bad news and hoohars – US Financial Crisis, Diary Crisis and the over-hyped Formula One racing.

For the purpose of this article, I shall not drill into the news, but rather take a step back and examine how one can take advantage of the madness of the human minds.  You can read all about the recent happenings on Google or Yahoo News.

For now, let’s take a step back and examine for potential opportunities…

The China Dairy industry Crisis:

Let’s recap a bit:

The Chinese authorities have analysed products from all players in the Chinese dairy industry following last week’s announcement that melamine was found in products from the Chinese dairy company, Sanlu.  One or more products from 22 companies – including Mengniu Dairy, Arla Foods’ partner in the joint venture company, Mengniu Arla – have tested positive for melamine, a chemical that can cause kidney stones.

This unfortunate incidence has indeed put off most if not all milk consumptions after the death of 4 young children and over 6,000 taking illness in China.

Indeed, unethical farmers have taken the bet to increase protein content with deadly consequences in exchange for substantial profits.  In fact, the Japanese have long detected such abnormalities in their diary imports about 8 months ago and they have since switch to alternatives like New Zealand and Australia.

Nobody wants to die after consuming diary products.  Coupled with a massive withdrawal of diary products from the shelves of your local supermarkets or hypermarkets as advised by AVA, this can send a Tsunami wave of panic into the market!

I recalled a recent conversation that my good friend:

Me: “What’s up?”

TW: “My mother was asking me if the ice-cream contains melamine.  She asked me to throw away all of them, which I did!”

Me: “You know what?  It’s such a waste!  If you will die after eating those ice-cream which you’ve been doing all these while, then you would have died long time ago!”

Huh???

What do I mean?

You see, we have been consuming diary products all the while!  How many folks around these days can really avoid milk and related products?  Unless you haven’t been consuming any stain of milk or diary product of the last 8 months, chances are you are pretty safe from the diary crisis.

If you consider the facts, we have all been already poisoned by melamine months ago.  That leaves me with no exception.  Perhaps, we’re pretty blessed, that you and I are still kicking alive now – that I’m writing this blog post and you’re reading it.  🙂

In fact, I ignored the herd madness and consume more ice-cream at home, taking advantage of the low price at Shing Song and NTUC.

Am I mad?!

In fact no.  I am very rational and I am a value buyer.  I believe that many savvy housewives would have agree with me!  What I’m doing is merely to take advantage of market inefficiencies in pricing valuable products which I love.

You see, the AVA of Singapore would not be dumb enough to allow importers to flood the market with poisoned diary products.  Since fear increased substantially and demand was beaten down, it does not require one to be a PhD to understand that it’s time to scoop up ice-creams selling at great bargains!

If you aren’t scooping up ice-creams now, then I think you are really mad (unless you’re not an ice-cream lover of course!).  🙂

The US Financial Melt-Down and Crisis:

NEW YORK - SEPTEMBER 16:  A trader sits outside of the New York Stock Exchange September 16, 2008 in New York City. In trading yesterday the Dow Jones Industrial Average fell 4.4% or 500 points, its worst single day loss since the terrorist attacks in September 2001. Today the Federal Reserve is scheduled to announce the target interest rates for the federal funds. It's not clear how the central bank will respond to recent turmoil in the world's financial markets. This comes after news of Merrill Lynch & Co. Inc selling itself to Bank of America Corp, the financial firm Lehman Brothers Holdings Inc. filing for Chapter 11 bankruptcy protection, and insurance giant American International Group Inc. (AIG) attempting to raise capital to stay afloat.

Image by Getty Images via Daylife

Did you queue up at AIA Tower last week to withdraw your insurance policies?

Did you scoop up AIG shares when it falls to $1.60 last week before the US Fed takes over 80% stake to the group?

If you’ve done any of the above, I would consider that madness too!

Imagine AIG going belly up… a lot of financial institutes and businesses will likely face liquidity problems.  All your insurance will become empty promises and a ton of work are required to clean up this mess.  And I haven’t even mention the record number of people worldwide who will join the unemployment gang.

Emanuel and Mayer Lehman

Image via Wikipedia

It’s horrible as everyone worldwide witnessed the collapsed of Lehman Brothers.  A massive number of employees suddenly found themselves carrying boxes of personal belongings wondering on the streets of New York.  Here in Singapore, 170 Lehman employees stood fearfully outside their office at Suntec City.

Frankly speaking, my brother who is an AIA insurance and financial planner, suggested buying AIG shares when it was about 2 months back.  Just imagine if I have not done my studies on the management of AIG and bought it at $20 two months back!  As of today, AIG is trading at around $3.

Sadly speaking, my brother has been following the crowd maddness and bought more at around $2.

Lehman Brothers Times Square by David Shankbone

Image via Wikipedia

I wouldn’t touch this one for a long time.  The reason is very simple.  I don’t understand how the Group operates.  The business sector is currently outside my area of competency and hence I am taking a lot of risk if I invest.  I suspect that many people now may get killed or burnt speculating or going along with the crowd.

Now, I’m not suggesting that you must stay away from AIG.  AIG has been a great business until some mismanagement.  If you have been financially competent like Warren Buffett in figuring out or analyzing the after-effects of the new take over, then it’s probably less risky.

Investors Are Irrational:

Countless of researchers have uncovered that investors are in general not rational.  Bear markets are a test of skills for both traders and value investors.  Since majority of investors are really speculators, it is no wonder so many people loose money in the stock market!

I came across an article by local Business Times financial journalist, Tay Hooi Ling of Singapore Press Holdings.  She mentioned about a remarkable behavior in finance from Daniel Kahneman and Amos Tversky.  Kahneman and Tversky found that people are much more distressed by prospective lossers than they are happy by equivalent gains.  They also found that faced with sure gain, most investors are risk-averse, but faced with sure loss, investors become risk-takers.

She went on to quote an example:

Given a choice:
(A) A sure gain of $240 or
(B) A 25% chance of gaining $1,000,

most people would opt for (A).

However, given a choice of:
(C) Sure loss of $750 and
(D) an 80% chance of $1,000 loss,

most people would go for a gamble and opt for (D).

In reality, people are reluctant to cut loss in the face of falling knifes.  Humans have the tendency of avoiding realized losses to avoid the pain and regret of having made a bad investment decision.  This is one big obstacles that I fear that I too, am vulnerable because I took the answers (A) and (C) in the test.  In reality, I could have taken (A) and (D).

Does that rings a bell?

This coming week will be the final week for the Citibank Stock Challenge and I guess this is a perfect chance for me to give option (B) a go, betting on the fact that the US $700b bailout bill will be passed and the stock market madness will push stock prices up by a bit.

Of course, I do not suggest that you plunge down your real money!  I’m stating the fact that since the Citibank Stock Challenge is betting virtual money for real money, there is no harm to give it a show hand!  🙂

Finally, will the US Government bailout works?

I don’t know and I suggest that you do not speculate too.

The market is really chaotic right now and there is now way to know how many shocks will come after Washington Mutual last Friday.  One thing I’m quite sure is, as long as naked short selling is not lifted off the markets, hedge funds and many small banks will be wiped out, thereafter causing many small businesses to go belly up.

As for me, I believe in sticking on to value investing and having a longer time horizon for the market to realize and correct from all these madness.  For now, I am well positioned to sniping and scooping up outstanding businesses that have taken a substantial beatings from the market madness.

Since I can’t time the market anyway, I will be really mad if I don’t take advantage of the situations right now.  🙂

Stay hungry, stay foolish, and live a life with passion!

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About Insights, Inspirations, Tranquility, Peace and Harmony

Ng Wai Loong

Wai Loong is an electronics engineer by profession. He currently resides in Singapore, a thriving hub at the heart of South-East Asia. When he is not so stress out on the computers or laboratory, he enjoys value reading, jogging at his own pace and blogging in his spare time. Other times, he likes to catch up with some close friends over a cup of latte or teh tarik. As a gift from this friend, you are invited to interact freely with him on his personal blog.

PS: May the person reading this blog transforms his/her businesses, finances, relationships and life for ALL to WIN!