Taking Advantage of a Crisis

While most of the investors are panicking as asset prices plummet, the cool-headed ones are able to see the resulting low prices as a buying opportunity. Purchasing assets from those restless fear driven individuals is like buying them on sale. Often, fear drives asset prices well below their fundamental or intrinsic values, rewarding patient investors who allow prices to revert to their expected levels.

Profiting from investing in a crisis demands discipline, patience, and, of course wealth in liquid resources available to produce purchases.

When calamity strikes (current Balance of Payments crisis in Pakistan), markets fear the worst and stocks are punished accordingly. But as witnessed in history once the dust clears, prices and optimism returns bounce back to where they were, with markets responding once more to fundamental signals rather than to perceived turmoil.

A study by Ned Davis Research group looked at 28 global crises over the past hundred years, from the German invasion of France in World War II to terrorist attacks such as that on 9/11. Each time, markets overreacted and fell too far only to recover shortly thereafter. Those investors who sold on the fear found themselves having to buy back their portfolios at higher prices, while patient investors were rewarded. By recognizing the fact that markets tend to overreact, a smart investor can purchase stocks and other assets at bargain prices.

Right now, the Pakistani Stock Market is into its second year of the bear market. The companies are cheaper on a relative bases and prices have fallen to considerably low levels. The key in these times is to not panic, historically, those who chose to or were forced to sell in these bad times, and waited until the bull market was in full swing to re-enter, are still licking their wounds.