What we can learnt from this market downturn

Image via Wikipedia Hope everyone have taken a lesson from this market downturn.

The Key takeaway :-
1) Diversify your investment. Don't put all into 1 or 2 stocks. Why risk it all on 1 or 2 stocks you can't even control. The management can do stupid things and its beyond your control. Whoever tells you to concentrate your investment and get rich? Warren Buffett? But he did mentioned that when he buys into a company, the first objective is to gain control and if not, he will get a significant stake enough to exercise pressure on the management. So, he had eliminated the factor that we small investors can't - direct/indirect influence on the management thru' his significant holdings.

2) Don't speculate, don't do short-term trading... but do monitor your investment at least monthly and rebalance quarterly or less frequently as necessary. In effect, this forces you to sell stocks that have run very high and buy into companies or assets that are underperforming but with potential to gain.

3) Please go and attend a course on understanding financial statements and buy some management books to read. Try to understand the management considerations of CEOs and you will know whether the company is operating good or not. Also, read up on management strategy ... at least try to understand what makes up competitive advantage, whether it is sustainable.

4) Debt level - this one is a killer for all companies (big or small). It is leverage and when times are good, it will be performing. But when times are bad, it will be disastrous.. So, monitor this one... In good times, when u see debt level too high... u will have to start thinking about what happens if the company cannot service or refinance its debt. Look at its interest cover, debt to equity ratio. Look at the annual cashflow and see whether the company is expending a significant of it on debt.