NOT too long ago, the stock market once again saw great volatility. It had been lacking in action and drama for the whole year, and it needed something to live up to its notoriety. So once again, we started seeing markets swing hundreds of points for several consecutive days. Yes, it was nerve-wracking. I then remembered reading about a Chinese proverb that we can all learn from during moments like this. It is “Old man loses horse.”
The proverb traces its origin from the tale of an old man living in the boarders of China. One day, he lost his horse after it ran away. His friends, fearing that he might be depressed because it was indeed a fine stallion, went to his home, hoping to comfort him. However, they were surprised when the old man nonchalantly replied, “I lost my horse, and this may not even be a bad thing.”
His words were prophetic because a few days later, his horse returned and even brought an equally fine stallion along. Once again, his friends came to him and congratulated him on his fortune. Just like the first time, they were surprised when the old man told them, “I gained another horse. This may not even be a good thing.”
This time, his words were ominous. When the son took the new stallion for a ride, he met an accident and broke his leg. The old man still maintained an indifferent attitude, not believing it to be a curse. Several years later, when the Huns threatened to invade China, an edict was passed to have all able-bodied men join the army. His son, having been crippled by the accident years earlier, was spared from the war that left several hundreds of thousands dead. If his son joined the army, it was in all likelihood he would have died from the war as well.
This proverb teaches us to maintain an impartial judgement over a particular incident. A seemingly pleasant incident might turn sour at the end; and vice versa. The old man did not grieve when his horse ran away nor when his son broke his leg. Likewise, he did not celebrate when his horse came back with another horse. He took everything at face value: his horse ran away and his son was crippled.
An impartial judgement is what we need to be successful in investing. After all, prices and values of assets swing like a pendulum. If we cannot maintain emotional stability during these swings, then our money is most likely doomed. Renowned stock trader Alexander Elder wrote in his book, Trading for a Living, that when he was just starting out, a professional trader from Texas told him, “If you sit across the table from me while I day-trade, you won’t be able to tell whether I am $2,000 ahead or $2,000 behind on that day.” The trader is emotionless.
Question is, how many of us can be emotionless when investing?
In 2007 when the local stock market was already losing steam, some investment houses were still betting that the Philippine Stock Exchange Index would hit the 4,000 level the following year. At that time, the highest level the index reached was close to 3,800 so accomplishing that would mean another positive return for the index. Everyone became excited, and despite the tell-tale signs of an imminent catastrophe, funds kept pouring in.
I should know. I was one of those who invested at near highs. I abandoned all what-not-to-do investment tips. We all know what happened after 2007. Global markets tanked including our own index, and it took three years for the market to recover. Remember the old man’s horse? It came back with another. He had two handsome horses. A supposedly joyous moment but he did not see it as such. The stock market hitting a record high looked exactly the same. But only a few dared to question, “What if this may not be a good thing?” What happened afterward is something a lot of people would like to forget.
On the flip side, the market crashing was not something totally dreadful. In fact, the old man’s son was crippled because he was riding a horse. But that accident saved his life.
If we were emotionless during that time and did not let our fear got hold of us (for indeed, it was a fearful experience for all), we would have realized there was money to be made during the six months to be exact from the last quarter of 2007 to the first quarter of 2008. But most of us were like the old man’s friends and found the circumstances too appalling to do anything. The Chinese even came up with another saying, “There is opportunity in every danger.” Those who did see the opportunity in such danger saw their investment rise as much as a 100 percent after a year or so.
Going back to the recent volatility, the market rose as fast as it fell. Amid the jitters and panics, there is once again opportunity to be made.
If we could be just like the old man.
****
Kendrick Chua is a Registered Financial Planner (RFP) designation and a Certified Investment Solicitor (CIS). He is a financial advisor for one of the leading financial institutions in the country. He is also a TV host, violinist and Chinese language instructor. His other business and finance articles can be read at his blog, http://thewealthwarrior.net. To learn more about RFP program, visit www.rfp.ph or inquire at info@ rfp.ph or call 634-2204.
