The whole world went red during the period of 10-11 October, sending investors and traders alike panicking. Fear and anxiety gripped the financial markets as almost all major indices took a nosedive during those two days.
While I shall not dwell on what really happened and will this happen again next week (short answer: I don’t know), but we can learn a few quick lessons from this tumultuous session.
Lesson #1 – Do Not Panic
When news buzzed around about the fall of share prices and indices sometime on the morning of 10 October, some investors around me began to panic. The panic I saw was on a scale, ranging from ‘I am now at a loss from my entry position’ to ‘Oh no! The crash is coming!’. If one is experiencing such panic, it is normal, but if one starts to act on this panic, then it is worrisome. Panic selling not only results in losses incurred, but also clouds your judgment.
Take a step back and observe. A sound investor see things in a calm manner, even if the sky is rising or falling around.
Lesson #2 – Look For Opportunities
"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." – Warren Buffett
"The way to make money is to buy when blood is running in the streets." - John D. Rockefeller / Nathan M. Rothschild
The above two quotes are quite self-explanatory. When crisis hits, first is to follow lesson #1. Then look out for fundamentally sound companies whose prices had fallen just for the sake of it without any valid reason. Thinking about this and putting it bluntly, we are capitalising on the panic of others; a panic sell will drive the price down, since supply will be more than demand, and we would be happy to be on the demand side for this round. Well, this is business.
Lesson #3 – Correlation Is Observed
In that two-day period, the price of gold spiked from United States Dollar (US$) 1190 to about US$1220, a 2.5% increase, as investors tried to preserve their capital by moving away from equities to gold, typically seen as a safe haven. With the demand for gold goes up, so does its price. This is an example of correlation between asset classes at work.
I had run a correlation test between the iShares MSCI World ETF (URTH), representing the world’s equity asset class, and the SPDR Gold ETF (GLD) for the period of 7 – 12 Oct 2018 using tools from the Portfolio Visualizer site. The correlation score between URTH and GLD is -0.581, meaning there is negative correlation between these two during that time.
I hope the above (very) short lessons will better prepare you for the coming weeks ahead should the markets turn south. Meanwhile enjoy the weekend!
1 – www.portfoliovisualizer.com. Asset Correlations for the period 7 – 12 October 2018, with daily returns for correlation basis. The period is selected as it is the shortest possible one for the site to generate the correlation data as at 13 October 2018.