What Lessons Did You Learn Or Relearn From The Recent Market Crash?

The recent market correction has taught (again) every investor a thing or two. Although the recovery in the past weeks has given investors some relief, but some of the losses might as well be permanent loss of capital. We started a thread, ask our users to share the lessons he/she learned in the market crash. Hopefully all of us can learn from each other’s lessons and do better next time.

These are the summary of the lessons shared by our users. If you have something more, please feel free to add at the end of the article.

1. Only invest in what you understand

One of the key factors in investment decision making is how much confidence you have to your investment idea. Warren Buffett has taught us many times that we should only invests in simple businesses. If investors stays in their circle of competence, it is easier for them to build the higher level of confidence in the investment ideas. They will know better what to do if this idea declines another 30%.

2. Don’t settle for less

“I learned that if there aren't any good deals, there aren't any good deals. Don't try to convince yourself and change your standards if there is nothing that meets your criteria (undervalued, good business, good prospects, etc.).” Wrote user sleepyhungry.

One of reasons that our Guru Robert Rodriguez avoided the recent market crash is that he has an absolute value approach. In March 2006, he wrote: “As an example, the value screen that I have used for many years recently identified only 73 names, close to the record low of 47, out of a universe of 9,440 in the Compustat database. This screen included stocks with market capitalizations between $150 million and $3 billion. Of the 73 names, 53 were between $150 million and $1 billion. When I expanded the screen to include stocks with market capitalizations up to $20 billion, only 20 additional companies were identified.”

Considering that, Robert Rodriguez has been very cautious with market valuations. He and his fund did not buy any stocks since Nov. 2007.


3. Don’t Buy on Margin

Buy on margin helps you generate better returns when market is at your favor. However, market will never be in one direction. It can quickly erase your returns if things don’t work out. Worse yet, you may be forced to sell on margin calls, when it is the time that you should be buying.

4. Buy slowly and average down

Don’t be concerned that you will miss the opportunity and buy too quickly. Buy slowly. If you miss it, don’t try to catch up by paying a higher price. Buy slowly; Mr. Market will always give you another opportunity.

5. Mr. Market can also kill businesses

We have always learned that business valuation is independent of Mr. Market. But for companies that are highly dependent on capital market, Mr. Market’s sentiment can break the chain of operations of some business. Avoid companies that are highly leveraged and susceptible to Mr. Market’s sentiment.

Do not forget the lesson of Bear Stearns.

6. Always keep some cash

Staying fully invested helps your returns when the market is going up. But the benefits of holding some cash and buy on better opportunities may help even more. Bruce Berkowitz is willing to hold cash. He fund always holds about 20% of cash. Holding cash may hurt the overall performance if the market goes up, but he is willing to hold cash because he believes that a certain amount of liquidity in the Fund’s portfolio is desirable to take advantage of new investment opportunities. “No. 1, we don't have to sell that which is cheap [in order to] to buy that which is cheaper, especially companies that we have gotten to know and love. And No. 2, where there are special situations, we can act quickly.” He wrote.

Please add the lessons you have learned in the comment area. We may give an update on this article if users contribute better ideas.

source:-GuruFocus News