Buy high, sell low --- the most common strategy?

I chanced upon a the following chart depicting the common problem plaguing the herd mentality amongst most retail investors:

(src: http://www.retro.ms11.net/InvestorMind.gif)

Looking at the chart made me recall the mistakes I've made when I started out, being toyed by Mr. Market and yet don't know why. Chasing the surging volume and ever pricier stock price was easy money until the correction came. Instead of buying high and hope to sell higher, most of the time, its buying high and liquidating at a lost at a much lower price, whatever price. Even though it is common sense to buy low sell high, but the most common strategy became buy high sell low.

New insight

I had already put that behind me long ago after discovering value investing. Fortunately I only took up the buy high sell low strategy for a few months. Otherwise, I could have burnt myself severely enough not to touch investment at all.

Test of resolve

The subprime crisis in the US (brought about by the bursting of US housing bubble) led to massive write down in assets by many gigantic banks across US to Europe who held CDO (collateralized debt obligations) containing sub quality bank loans. The ensuing liquidity crunch these banks cut back on their loans spark a global credit crunch.

The threat of credit crunch had already impacted both consumers and firms, especially those depending heavily on leverage (i.e. US consumers and many 'growing' firms). The eventual result is a plummeting demand from US and Europe in general. Unless domestic demand in huge emerging markets like China and India could keep up, their export oriented economy will take a beating.

(The only region spared from this trouble is the Middle East. The torrent flow of oil money is driving the local inflation sky high and their economies continue to steam ahead in break neck pace. Even when current oil price had came down from $140++ to $120--, its still more than double compared to just a few years ago)

The global slow down is beginning to take shape. After hitting record profits quarter after quarter in 2007 last year, many firms are beginning to report lower profits this year, (some even went into the red).

In Singapore, my portfolio is not spared. This year, 2008, only 3 out of 13 reported growing profits. 2 even reported loss. Not only is the market going through a sentimental bear, the business fundamentals are also going through a bear. However, according to the boom-bust model, if my portfolio can survive this storm, they will emerge stronger to make me proud.


Opportunities amongst crisis

With each boom-bust cycle, economies generates excesses. i.e. over supply, growing at sustainable pace on leverage etc. It is during the crunch time, the ensuing recession that excesses are trimmed, cut back and removed from the system. Most of the time, the cutting is overdone and supply again falls short of demand. Production began and supply picks up, eventually exceeding demand. The cycle repeats.

At the onset of recession or its vicinity, trimming of economic excesses resulted in exiting of less competitive businesses and consolidation of those that remains. The resultant is businesses that can rise from the ash emerge stronger and better.

Almost all businesses' share price are affected by any recession or similar crisis. Purchasing those with storm weathering credentials during the crisis and holding them until the sun comes out again (the next boom) should yield lucrative returns.

The key question then centered on how to identify any business with storm weathering credentials. I have no answer to this, but one good place to start looking is management, balance sheet and their core business.

Dilemma

While the business fundamentals are clearly deteriorating, their market price are punished more than the drop in their fundamentals. In value investment's context, it still make sense for me to average into them.

However, as the spectre of recession looms ahead, more opportunities in other firms could arise at a price almost impossible to find during 'normal' times. Unfortunately, resource is not something I had readily available and going forward, decision is tough. Walking through a durian plantation with only one small basket and so many to pick from, so many seemingly good... it is really difficult to make a choice.

Conclusion

Recession brings both troubles and opportunities. I once heard (can't find the source) one need to go through a few recessions to become rich, I might start to believe it. But that' only provided one can keep his/her job during such difficult times.