US President George W. Bush made a dramatic plea to lawmakers to act in order to avoid a looming economic disaster and push through the plan for US$700bil bailout of the US financial system. A cost that is said to be more than the Iraq war. Federal Reserve chairman Ben Bernanke and Treasury Secretary Henry Paulson are not saying it will be a return of the Great Depression of the 1930s if the government does not pass the bailout bill, but their views are decidedly on the gloomy side. Unemployment will rise and the overall economy will shrink, a sign of recession. However, private economists do not all share that assessment and wants the market force to determine the recovery.
One point lesson: Why is this chain re-action hitting the US? In the 21st century, we could see many new financial products (I quote: "hybrid") been developed "to suit" the market (e.g: structured product). One could never be certain of the potential financial disaster when some event took place in our economy when this "hybrid" financial product collapses. I would like to quote Datuk Seri Anwar Ibrahim keynote address on US financial turmoil and the future prospects for Asean economies at the CLSA Investor Forum in Hong Kong on Friday 26th September, 2008:
What do you do when a financial behemoth implodes?
What can you say about free market capitalism when the world’s leading liberal democracy dumps nearly a trillion dollars in private debt onto taxpayers? Are Freddie Mac and Fannie May along with Lehman Brothers, Merrill Lynch, and AIG totally unforeseen victims of systemic once in a lifetime financial meltdowns or are they not really victims of their own greed? When you allow the “mushrooming of weapons of financial mass destruction,” to borrow a phrase from Warren Buffet then isn’t it written that you shall reap what you sow?
So it is best sometime to keep things simple. Invest in financial products that are straight forward and has already been tested (by market volatility) to avoid the un-expected. For example if you're planning to invest in stocks; According to Lauren C. Templeton and Scoot Phillips in their book on "Investing The Templeton Way", investors need to buy stocks whenever the market experiences "panic selling". We should take advantage of problems that are "exaggerated" in the minds of sellers because of the sellers' near term focus. Even though they agree that buying into crisis may effect your portfolio performance, you will gain in the long term. With regards to this statement, one may understand on why the richest man in the world, Warren Buffett's are busy making news head-line now. The recent one is when he decided to purchase a US$5bil stake in Goldman Sachs Group Inc.
Warrant Buffet investment principles: (read "The Intelligent Investor" by Benjamin Graham)
1. to look a stock as if you're the owner (value of a business) rather than a trader (stock price driven).
2. treating Mr. Market (virtual partner) as servant instead of a master. Meaning, buy stocks when Mr. Market is in destress when he wants to sell his share of the business for half of what it worth. Do the opposite when Mr.Market is in manic.
3. understand the margin of safety (value - share price). The lower the price of a stock from your valuation, the more margin of safety you have.
However, Templeton added that you need to make sure that you have enough cash to average down your purchases. The cheapest way to average down a stock is also through managed fund.
Note: Read also Matthias Chang's blog on "How-close-are-we-to-a-financial-collapse". and Tun Mahathir's blog: US financial-turmoil
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