Tuesday, October 14, 2008

A Brief History of Stock Crashes, Part 2

Let's move on to the 4 stock crashes in recent history.

4. The Asian Financial Crisis in 1997

The road to recovery was slow and painful, hit further by subsequent economic shocks. Perhaps one of the stock crashes most felt by Singaporeans as many saw their home prices turned south - previously almost unheard of.

Affecting largely Asian countries, the crisis was due to excessive speculative attacks to Asian currencies, particularly the Thai baht. The contagion spread swiftly and Asian economies went into recession.

Smartened by this crisis, Asia's banks are now fortified with huge reserves and are more able to face the current downturn.

5. The Dot.com Bust and 9/11 in 2001
Recovery took a short 2 years for this crash, with the market up and running again in 2003. This time round, those badly hit were the Western countries, especially US and the European Union.

What caused the crash was irrational exuberance towards the new on-line market. Here, a small history from the Great Depression repeated itself with stock prices of on-line businesses rocketed sky high. The bubble was pricked as newly listed start-ups folded one by one.

To investors, this re-inforces the importance of buying a stock for what it is - "its fundamentals", not what it will be - "with hope that some suckers will buy the stock for a yet higher price".

6. Sars and the Iraq War in 2003
Remembered the days when having a fever sent a chill down the spine of those on the road? These days not many people remembered the slight blip on the stock chart with fairly rapid recovery, but more of the days of quarantine during the SARS epidemic. However, in 2003, dark skies enveloped Asian economies which were just finding their feet after the 1997 Asian Financial Crisis. The breakout of the Iraq War added further gloom to the sky line.

7. The Credit Crisis in 2008
The credit crisis erupted more than a year ago due to the US subprime mortgage issue. It rapidly morphed into a financial Armagaddon due to today's very connected financial market. As many US and Europe investment banks, with even household name insurer AIG marred by the toxic subprime mortgage, fear and panic overwhelmed the global bourses.

Today, many stock bourses rallied finally. However, investors will need more confirmation that things are fine before treading gingerly into the market again. The road to recovery is nowhere in sight yet.

History has shown that while stock crashes are almost overnight, recovery is slow.

Lessons for Us
- Always invest with money you do not need.
- Buy a stock for what it is, not what it will be.
- While many analysts are recommending that it may be time to bottom fish, do your homework.
- No one can predict the market movement, the Great Depression lasted 12 years, the current crisis is only more than 1 year. Anything can happen, have a cut-loss mechanism and admit your mistakes early.

For me, the current crisis provided me with a lot more information about the financial market. I remembered how my heart sank when the value of my badly-beaten unit trusts fell more than 50% during the 1997 Asian Financial Crisis. But it crawled to register an annual return of more than 10% last Dec before this credit crunch set in.
With more information, I am less disturbed as I pored through the financial reports.

Another reason is that I do not have all my eggs in one basket. But, I will have to adopt a more conservative approach when I am closer to my retirement age. For now, I know that time is still on my side.

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