Thursday, June 18, 2009

Market turmoil and picking Survivors

Global markets showed weakness again today. Over the past few days global markets have weakened about 2% per day. There are theories that point to a three week correction before a pick up in prices.

Picking survivors
A popular anecdote highlights importance of holding stocks for long term. So people often tell me - so what if price is too high - just "sit on it" for XX years and you will be fine. Unfortunately that is a wrong strategy. Current situation is more about picking winners.

Winners change and lot of companies fall by the way-side during times such as these. In a smaller crisis, bigger companies are typically better off. But not so for structural crisis such as we are seeing now. A long term investment strategy is more about picking survivors. Survivors will loose less value when market falls and will rise higher when it gains.

Airline example - British Airways and Singapore Airlines
Airline operators were part of massive industry slowdown after 9/11. These two companies used this opportunity to replace their fleet with young more fuel efficient planes at reduced prices thus building tactical advantage for years to follow.