Thursday, February 24, 2011

A Test of Testicular Fortitude

We've heard it over and over again, in this blog and in other venues, from both struggling amateurs and tried and tested professionals: buy low and sell high. With what has been happening in the middle east since this past weekend, now is the perfect time to test whether we have what it takes to stay true to this deceptively straightforward investment advice.

Unless you've been hiding under a rock these past few weeks, you should know that parts of Northern Africa and the Middle East have been ravaged by protests that eventually turned into full-blown revolutions. The ending of decades-long rule in Tunisia and Egypt seemed to have inspired similar populist mass actions in Libya, Bahrain, Yemen, and reportedly other countries in the region. But Libya's case is turning out to be a cause for more concern, and not only because of the government's violent and ruthless handling of the unrest: the political instability in the country, one of the world's biggest producers of oil, threatens the global supply, and this fear has almost instantaneously cascaded into financial markets around the world.

Since Friday's close, the PSEi benchmark has been down 3.13 %; other global equity benchmarks like the Hang Seng Index in Hong Kong and the S&P500 in the US are down 4.21% and 2.65%, respectively. Even if you just own what are widely considered "reliable" and "stable" stocks, most likely you're down at least 5% this week, and that's excluding fees and taxes. A case in point: San Miguel Pure Foods is down 10% just in today's trading. If you have taken such a loss in the past four days, most probably you're seriously considering selling your shares to "cut your losses," if you haven't already. And that's something you should not do if you believe that "buy low, sell high" advice.

Why should you not sell your stocks when everybody else is selling his or hers? That's precisely the reason: everyone reacting to something the same way is "mob mentality," an overreaction caused primarily by panic and fear. In fact, not only should you not sell, but if you have enough cojones, you should actually buy. Even if there's some truth to the concerns over the supply of oil, it's not enough reason to change the  fundamentals of a business. That Gaddafi is a complete douchebag doesn't make Purefoods hotdogs any less tasty, doesn't make the company worth 10% less in one day; even if Purefoods raises its prices in reaction to higher input costs brought about by the higher price of oil, people will keep on buying their TJ's. In any case, I bet my bottom dollar that the powers-that-be will devise and implement newfangled strategies that will eventually bring back the stability of oil prices and financial markets.

A more straightforward reason why you should fight what your urges tell you to do is that whatever losses you have incurred now are only paper losses and will only turn into actual, realized losses when you do sell. You did not invest to lose, did you?

I know that to "buy low, sell high" is easier said than done, but do it we must, no matter how difficult or counterintuitive it may seem.

One caveat before we end. If you have information that the price of your stock will only go further down and never ever recover, then by all means, sell. If you have an inkling that what has been happening will eventually result in the utter ruin of your company, sell. But in most cases, what has been happening this week, and will probably continue to happen in the coming weeks, is something markets can and will recover from. If not, then a losing investment should be the least of our concerns.
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