Surviving a crash in the market #investments
Sometimes it is the whole market that crashes and sometimes it is one or two share prices. To limit the damage, we need to diversify and have some investments not associated with the market. Then a big drop in the part of your portfolio that is invested in the stock market isn’t quite so damaging. I have an investment in peer-to-peer lending through Zopa. Surviving a crash emotionally is a different matter. People get excited about making money and upset when they lose money but you can get used to seeing it as numbers on paper or on a computer screen. There has been a lot of excitement on the forums recently about Solo Oil and the price soared from around 0.3 up to 0.8 more than doubling the value of my investment and then this week the news from NT2 wasn’t quite what some investors expected and the market makers slashed the price.
The market overreacted to the prospect of good news and so the share price soared and then when it turned out to be not quite as good as expected they over-reacted again. That reaction was fuelled even more by people taking their profit anyway. The price dropped from 0.8 on Monday to 0.5 yesterday. So today, people saw that it was an over-reaction and thought about the implications of the NT2 discovery and started buying again. The price has gone up over 15% so far this morning. The market makers have dumped a lot of shares at a low price and so need to restock hence the higher price and now they are short of stock they have increased the spread to slow down volumes. Hopefully, they will increase the price again later and let volumes increase with the demand for shares.
Another share price that has tanked for me this morning is immupharma because they are doing another share issue. I think that could be an over-reaction too but it wipes 10% of the value of my holding. I think I might be able to buy more shares at a discount on that share issue so that is something to consider.
The share price often reflects what the short-term value is but then the day traders sell and the market calms down and the price settles at a level that reflects long-term value. I hope Solo settles at 0.6 later today as that is probably fair value and gives me a 100% return. It also gives other investors an opportunity to buy before the next surge upwards. I’m surviving a crash in the share price to 0.57 but I hope to get 0.60 when the spread normalises.
Surviving a crash with cash
Yes, cash is always useful. It might be a good idea to profit-take now and so if the triggering of article 50 panics the market we have cash in our accounts to take advantage of falling prices. I’ve already sold a few and have plans to generate even more cash in the next week. What to buy if prices crash? It looks like we will see an interest rate rise from the Federal Reserve soon and central banks around the world will follow. That will benefit insurance companies and banks. In the short-term, the pound could fall to an all time low and so pharmaceuticals and other companies who make their money in dollars and foreign currency could be a wise choice. Surviving a crash caused by the triggering of article 50 will be much easier with cash in the bank.
I think watching the market this Spring will be interesting. We will have volatility and so we will have an opportunity. What do people buy in Spring? New clothing for the summer? Maybe even a new car? The share price of the AA is appreciating and so maybe they get breakdown cover ready for the summer. With the pound so low, holiday companies don’t seem like a good bet but what about tourism? We can also look at possible takeovers. Even Unilever has been approached recently. Premier Foods with its iconic brands could be a target or maybe a pharma company?