MANILA, Philippines – In just one day, August 24, the Philippine Stock Exchange Index (PSEi) dropped 6.7%, causing fear and panic among retail investors. This is especially true for those who have been investing only recently and have not experienced a massive sell down in the market.
Such times are characterized by a lot of investors selling based on emotions because of the uncertainty that their stocks might go lower.
If there’s one thing that I want you to get from this article, it’s that you need to pause and wait for your emotions to subside before doing anything. You need to base your buying and selling on what’s happening to the fundamentals (value of the company) and technicals (market direction) of the company and not just on what you see on the ticket.
Here are 4 things to consider before you start buying or selling in the midst of all this price action:
1. Markets cannot go up forever.
As investors, we have to realize that people are in the stock market to make money and there will come a time when people who bought early on will want to lock in their gains. The stock market is just supply and demand; buyers and sellers.
When sellers overpower the buyers, markets drop no matter how big the company is or how spectacular their earnings have been.
2. Global fears are fueling the sell down.
If you look at global markets, you will see that a majority of the markets around the world have been down massively. No, this not a product of Greece and its bankruptcy – what is looming on the horizon is China’s slowdown and its stock market’s massive drop over the past 8 weeks.
Add slumping crude oil prices which have hit another all time low at $39 per barrel (West Texas Intermediate), and the fears of more money moving out of the stock market should the US Federal Reserve raise interest rates later this year.
3. Fear not, it has no direct impact on us.
Similar to 2008 and 2013, when stock prices dropped in a span of days, we are now seeing almost the same movement, also triggered by global fears and has no direct impact on what is happening to local companies.
At the end of the day, we are a consumption driven economy, with a strong, young, and vibrant middle class with a lot of cash from OFW remittances and BPO companies. As our stocks are being sold down, I do not think local companies like Ayala, Jollibee, Max’s, Puregold, and SM, would lose clients just because stock prices are down.
If the company is doing well and nothing bad is really happening to the company, isn’t that a great opportunity to buy stocks at a cheaper price? Isn’t that a great deal to position well, especially if you are investing excess money and your other funds outside the market are all intact?
Cash is created in the midst of crisis. The greater the crisis, the greater the ability to create more cash and for markets to bounce back.
4. The PSEi has been on a downtrend since April 2015.
Another significant thing to consider is even before all of these news about China, Greece, the US Federal Reserve interest rate hike, the Malaysian ringgit drop, etc, the PSEI has already been on a downtrend for the past 4 months.
What we are seeing over the past few weeks are effects of what a downtrend is:
Basically, a downtrend is characterized by the presence of sellers overwhelming the market. This is also the time when people who have positioned earlier are locking in their gains, and people who bought at the top are also selling out of panic.
A market that is on a downtrend will continue to be on a downtrend until proven otherwise. During this market phase, expect prices to drop further until significant buying is evident. This normally happens when prices become too cheap to ignore and smart buyers come in.
Our goal as investors is to buy smart and not catch the market while everyone else is selling and tossing their shares at us. While it is great to buy stocks cheap and to buy when everyone else is fearful, it would be better to buy when we see that the market has reversed and is starting to move up.
This means though that we do not try to look for stocks at the bottom, because I believe no one can accurately determine where the bottom is. This means we start buying when majority of the people who want to sell have stopped selling. This is when we see the market reverse from a downtrend into an uptrend.
I hope this helps you in your investing! As one of my deepest desires is to see more Filipinos be financially free by investing in the stock market! – Rappler.com
Marvin Germo is a registered financial planner, an author, personal finance consultant, and a stock market trader and investor. He has around 8 years of experience in the Philippine financial industry. He specializes in technical analysis and position trading. Read his blog. Follow him on Twitter: @marvingermo