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Lessons from the Global Financial Crisis
Making sense of the Global Crisis
In this time of depression, psychiatrists should have no lack of depressed customers. Probably the gates of hell will see a influx with new members. It is depressing reading the newspaper these days. Good news are as rare as a gem. The stock market is plunging. Sales are slow. People are afraid of losing their jobs. Many cry and protest over the loss of their investment. A smog of pessimism is in the air.
How do we make sense of the current global financial crisis? What lesson can we draw from it?
1. Tough times will not last
Tough times will not last; it will come to pass. The financial storm will come and go. Let us examine the past crashes in the stock market: the Great Depression in 1922, the Oil Shock in 193, the Black Monday in 1987, the Asian Financial Crisis in 1977, the Dot.com Bust and the 9/11 Terrorist Attack in 2001, the SRS epdemic and IRAQ War in 2003, and the Credit Crisis in 2008.
In my lifetime, I have seen 5 major crisis. That works out to an average of one in every eight years. It will eventually recover and the world will survive.
2. Understanding the Way We Make Decision
One of the reasons why some investors are stuck in the financial quick sand is that they did not exit from their investment in time. We are taught to draw an exit line. This line could be anything from 10% to 20% below or arose the buying price. When the current price hit the line, we are supposed to exit. However, our emotion comes into play and affects our decision making. When the price rises above the line at its peak in Oct 2007, some investors are still hanging on to their stocks, hoping it will go higher. That's greed. When the stock prices plummet below the line early this year, many are holding on their stock, hoping for a recovery, but it went further south.
The lesson we can learn here is to take the emotion out of decision making.
The recession is going to be long and deep. The worst is yet to come. We have not hit the bottom yet. what can we do with our current investment? If the company that you have invested in does not seem to be able to survive the downturn, sell it (at the next rally?) and cut your loss before it get worst. But if the company's fundamental is strong, hold on it for the next few years.
3. Change the way we Spend
Our parents who had been through the depression live on a cash economy. They don't live on credit. They live on cash. Their philosophy is simple: "If you don't have cash, you don't buy". Whatever they want to buy, they save enough cash and then buy it. They practice delay gratification.
Our generation lives on credit. The credit crisis comes about because we buy what we cannot afford. We want instant gratification. We want it now. This is a time to reflect on the way we spend.
4. There are Opportunities in a Crisis
The bear market is a time to make money too. You can find good deals in bad time. This is a good time to acquire quality stocks at bargain prices. This is a good time to acquire and to build. But do not borrow money to invest. Do not use money that you will need in the next five years. Look for sectors that prosper in difficult times. For example, when people cannot afford to buy, they rent. You could find opportunities in rental business. What investment to look at? Gold is a good bet as gold is limited in supply and it will retain its value.
Take the disadvantages into your advantage. Make the most of the difficult time and emerge a stronger person. Tough time will not last, but tough people will.
Sam Choo is an internet marketing coach at http://conversationwithsam.com