Profiting from the latest sharemarket crash


The Motley Fool offers 4 investing lessons from the last GFC.

We’ve been saying for a while now this sharemarket is a buy. At times, our bullishness has made us look silly, unrealistic or in complete denial.

The pessimists will say we’ve got nothing and that this recession is different. Because it involves deleveraging on a massive scale, as companies and individuals are forced to pay back huge amounts of debt, it will be a long and deep recession.

Some might say it will last for five years or more. Some might point to Japan, where low interest rates haven’t stopped its economy from seemingly being in a permanent recession since 1990.

The pessimists will also point to how on earth the governments of the world, and particularly the U.S. and U.K., will be able to service their current debt levels.

If the oil-rich Middle East and the just plain rich Chinese stopped investing in our companies and our bonds, who else would prop us up? Tibet?

Call us optimists, but we just think things will work out. When it comes to sharemarket investing, the best time to invest is in times of pessimism, and there’s clearly no shortage of that at the moment.

We think sharemarket investors, sometime over the next two years, will look back on these days and think to themselves: “what on earth was I doing not buying shares at these absolute bargain prices?”

The depths of the GFC

Those four paragraphs were written by us during November 2008, at the depths of the GFC.

Back then, like now, the sharemarket had slumped. Back then, like now, the news was grim. And back then, like now, investors were fearful.

At the time, some people were leaving their cash on deposit, happy earning 3% in interest.

Some were panic-selling, worried about sustaining even further losses. And some were in a deep freeze, doing nothing.

But as those earlier paragraphs indicated, we could see beyond the pessimism and were bullish on shares.

Although markets have since plunged again, we’re confident they’ll again recover. We just don’t know when. Investing is definitely not for wimps.

4 crucial investing lessons

Looking back, we can draw four crucial lessons:

1. Times of overwhelming pessimism can create super buying opportunities.

2. You had to suffer short-term pain to enjoy longer-term gain. In November 2008 the S&P/ASX 200 index was trading around 3,800. Yet within the next four months, it would drop a further 17%.

3. In times of pessimism, you can still be too late: Even though the market might fall further, some shares may already have passed their low point.

4. Now, like then, is the time to buying, not selling. Yes, the pessimists still say this time is different – the Eurozone crisis and threat of a U.S double-dip recession debts putting us into unchartered territory. But those smart enough to take advantage of gloom and doom can in time collect large rewards.

The Foolish bottom line

There are no guarantees in investing, but over a 3 to 5 year perspective, we reckon there’s a pretty good chance someone buying shares today should earn you more than leaving your money in the bank.

We have three provisos.

1. You must be able to handle volatility.

2. You must be an optimist.

3. Do your own research and make your own investing decisions.

Good luck.

For more on coping with the current investing climate, don’t miss the Motley Fool’s latest special free report — What To Do When The Market Plunges. Click here to access your free copy.

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