Why you should invest during a market downturn?

The stock markets have once again gone into panic mode. Investors are fearful of a Greece exit from the Euro and are dreading the repercussions it will bring. With such fear in the markets and dropping prices, opportunities are once again presented to those who have a long-term view of the stock market. Below is something I did up in Excel to show how much one can gain by buying stocks at depressed prices. Please be reminded that this only works if you buy fundamentally strong companies with good cash flow, low debts and good industry prospects. If a stock is down 10%, a gain back to break-even point is a 11.1% gain bagged. For example, a stock drops from $1 to $0.90 (a decrease of 10% from purchase price). For it to gain the $0.10 and back to break-even point, it has to gain ($0.10/$0.90)  x 100% = 11.1% gain. The more the stock drops, the more you should rejoice as you can buy your favourite company at a cheaper price. When it goes back to break-even point, you make much more depending on how much the price drops. When stocks become cheap, valuations are low and the risk is low. When you invest during a market euphoria, the risk is much higher when compared to a market downturn. Therefore, one should always invest when prices are depressed instead of running away from the stock market. Warren Buffett has said that we should be greedy when others are fearful. The market is fearful now. Are you greedy enough?

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12 thoughts on “Why you should invest during a market downturn?

  1. Not enough fear and panic. Compare this to 2008-2009 period and it’s still pretty mild. So I guess patient investors can afford to wait till valuations get really attractive.

    Then you got to ask yourself – do you have enough cash? Hahaha.

    • Also must ask —
      Do you have the guts (psyche)? Do you need the money invested in 2 years time or 3 years time or you can choose the time? Can this valued company survives the Bear’s paw and prosper too?

      • Hi temperament,

        The questions you asked are very relevant. An investor must look at things that you have mentioned too.

        If you like a company and they are below your valuations, you can put a bit of money into the company and average down if things get cheaper. One must always remember that when the fundamentally strong company recovers, it will make much more than the paper losses incurred during averaging down. The emphasis is on strong companies and not those penny stocks laden with huge debt which can go out of business anytime.

    • indeed not enough panic yet. but then again, it is quite unrealistic to expect the market to fall to 2008-2009 since the bull is not very strong in the first place. I will be very happy if STI can fall to 2500, by then the gems should be priced fairly

  2. Right now, for those who wants to speculate with their money, commodity sector (anyway is most of the time a speculative sector) seems to be good bet (long-term). Ha! Ha! Have not touched before but i think better than S-Chips, anytime.

  3. Your title… invest in a downturn? In other words, are you suggesting we don’t invest in a market upturn? That’s a trick question!
    Let me try to give a penny worth of advise.
    Did you see the correction coming? Why?
    Was it Europe? Only Europe? Are we sure? What else?
    What’s next?
    Where are we techically? Are there economic data that are favorable? Or both?
    Are there or would there be any EU summit coming? G3? G8? G20 FM meeting? FOMC, MPM, Geo political?
    Are you suggesting too buy because the market got beaten? Why should the market rally? When? What could be the catalyst?
    Is there inflation? Asian currency falls? Global growth concerns?
    How are ACB or government reacting to inflation and falling growth?
    Would market rally with inflation and global growth concerns?
    If you can answer all the above, the market would not rally for the above reasons!!!
    Good luck

    • That’s a lot of macro-economic questions that you have highlighted and it connotes a degree of market timing and speculation. My opinion is that generally value investors look from bottom-up … placing more emphasis on the fundamentals and financials of each company and less on the overall macro-economic picture (e.g. interest rates, inflation, growth etc.) The point highlighted here is more of taking advantage of the overly pessimistic view that so-called “investors” or traders to invest in fundamentally strong businesses at much lower prices. This translates to reduced risk (permanent loss of capital) and a greater upside potential when the irrational market eventually recognizes underlying business values.

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