[Viewpoint]Cool financial heads prevail

The unprecedented upheaval on New York’s Wall Street, the center of international finance, has crossed the Atlantic and Pacific oceans and is sweeping away financial markets around the world like a tsunami.

Countries are writing drastic prescriptions to save their economies from collapse, from rescue packages to unlimited savings guarantees. The merciless tsunami scored a direct hit on Korea’s financial market, which once seemed relatively safe from the American financial crisis. Exchange rates and interest rates are soaring, and stock prices are plummeting.

Government authorities promised there would not be a crisis as bad as the one 11 years ago, but the assurance has been buried by the market’s frantic clamor. How high will the exchange rate rise, and where’s the bottom of the falling stock market? Smart-talking financial analysts and investment experts are nowhere to be found, and the market is descending into chaos with no promise for tomorrow.

No one can guarantee the future and no one knows when the crisis will end. I can not even trust my judgment, so how can I trust other people? We are all caught in a sense of insecurity and struggle to survive, but we can see nothing in the darkness. We cannot tell which way leads to life and which way to death. If you stand still and observe, you will become even more scared. No one knows what to do and how to get through this apocalyptic age of chaos.

At this point, we can find help in the advice of Robert Menschel, a legendary American investor who predicted madness in the market has long. In his book, “Markets, Mobs and Mayhem: A Modern Look at the Madness of Crowds,” he wrote that the only way to survive in an age of chaos is to not be overwhelmed by mob psychology and maintain one’s rationality. He has survived many stormy days on Wall Street, and his investment principle is a hands-on survival guide. I’d like to share some of his advice.

*Remember that stock markets are always shifting between greed and fear. At the extreme of greed, great buys simply disappear, no matter how hard we might try to wish them into reality. At the extreme of fear, when all the excess has been wrung out of the market, great buys are all over the place.

*Remember, too, that the stock market always comes back, no matter how shocking the events that drive it down. Fear subsides; intrinsic value wins out.

*Stick with what you know. Stick with who you are. Everyone has a different stomach. When personality and portfolio get out of whack, bad decisions follow as day follows dawn.

*Buy for the long term. If you were to die tomorrow, would this be a stock you want your heirs to hold? It sounds morbid, but it’s not a bad test to apply. Stocks should be for the ages, even if we won’t survive them.

In fact, these investment tips are so commonsense that you might think you know them already. However, it is not so easy to practice them at moments of chaos and crisis. It is hardly easy to overcome fear that the financial world might end tomorrow and go against the rapid flow of the crowd.

However, you have a greater chance of survival by sticking to your principles than being swept away by crowd psychology and going the way of mutual destruction.

Let’s review today’s financial crisis based on Menschel’s principles. The crisis originated when the bubble burst at the extreme of greed. As fear spreads like an epidemic, financial markets around the world are collapsing.

However, if the bubbles clear away and fear subsides, true values will be revealed. And we will find new opportunities to invest everywhere. The world will not end with this financial crisis. If we get through the difficulties, chances will come again. However, the longer the market is swayed by fear and mayhem, the longer it will take to recover from injury. Fear begets more fear, and madness is bound to amplify itself.

It is a truly hard time for individual investors, policy makers and ordinary citizens alike. However, if we lose our composure now, a greater crisis might be waiting for us in the future.

*The writer is an editorial writer of the JoongAng Ilbo.

by Kim Jong-soo