Investment wisdom in adversities

Investment
Interest rate hike
Interest rates
Inflation

Author: Mr Chin21/09/2022

Experience breeds wisdom, and investment wisdom is the accumulation of countless people’s investment experience and exposure, which can help us cope with different economic and financial environments and enhance our "resilience" and "flexibility" in investment.

A quote from Warren Buffett, “After all, you only find out who is swimming naked when the tide goes out”. When we are investing in the bear market, we should be more careful in our selection of investments such as stock selection, otherwise we are likely to suffer big losses.

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The economic downturn often reveals the operational and financial problems of a corporation, which can be a loss of market share, investment losses or even insolvency, to name but a few. When we look at our own investments or consider investing, we must examine the fundamentals. In the case of stocks, the company's results announcements and annual reports, which describe its operating environment and financial position, must be read carefully. We should also pay close attention to company announcements so that we are alert of important issues, such as profit warnings at an early stage.

Similar to making investments, it is difficult for companies to operate well in an economic downturn, even for blue chip companies. In recent months, several local blue chips have issued profit warnings. When a company’s results are not satisfactory, investors need to understand the reason behind it: Whether it is because of the macro environment or poor management of the company; whether it is only short-term or a change in long-term fundamentals.

“There is hope when there is dividend!” Such a quote of traditional wisdom may help you deal with investment adversity. Investment returns come from capital gain and dividends, and in a cycle of interest rate hikes, the stock price of a company generally face downward pressure, capital gain seems difficult to attain and dividends become the main source of investment returns. However, when the economy is in the downturn, corporate earnings will be affected and dividend payouts will be cut or even no dividend payment declared, the traditional dividend-paying stocks such as utilities and banking are of no exception.

Other traditional investment wisdom, such as diversification and investing in what you can afford to lose (using margin cautiously), need to be followed whether in good or bad times. After all, investment is a balance between risks and returns. Investment is like a long-distance race in which we may come across different scenario, and it will not always be a smooth journey. When you do not know what to do and are getting stuck, think about the investment wisdom of those who have gone before you, which should enhance your investment “resilience” and “flexibility”.

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