How to take advantage of an impending crash- Part 3: ultra-conservative approach

June 23rd, 2007

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In our previous article, How to take advantage of an impending crash- Part 2: understanding a subtlety, we mentioned about understanding the crucial subtlety in today?s current market conditions. Now that you are armed with this understanding, let us consider some strategies. Please note that we are not in the business of giving financial advice. Therefore, the strategies that we are going to mention are neither endorsements nor recommendations?please consult your financial advisers before making any financial decisions.

Today, we will examine an ultra-conservative strategy?Liquidate and Wait. We will not judge this strategy to be ?good? or ?bad? because whether it is the former or latter will depend on your personal circumstances, personality, risk-tolerance and temperament. But if you are the sort who is particularly risk-adverse, perhaps this strategy may be suitable for you.

For this strategy, the first step is to ask yourself what you think the aftermath of the Great Crash III will be. The answer to this question will affect your investment decisions (more on that later). We can think of three models for the aftermath?1929, 1987 and Germany-1920s. Since we cannot foretell the future, our guess is that the aftermath may not follow exactly on any one of these models. In fact, it may be a hybrid of these models (and something else), or perhaps something no one in this world can see today. But these models serve as a useful tool to help us understand what may come in the future.

  1. The main idea behind the 1929 model is deflation. In the Great Depression (that began with The Great Crash of 1929), there was asset deflation and economic hardship among the populace. It was said that it took a year for the effects of the great stock market crash of 1929 to be felt by the average person on the street.
  2. For the 1987 model, the magnitude of the stock market crash of 1987 greatly surpassed that of 1929. It was the greatest one-day decline since 1929 in stock market history. There is an air of mystery with regards to the 1987 crash. Up till today, no one really knows why it happened. Fortunately, a global economic depression did not ensure, and by 1989, stock markets had recovered.
  3. The main idea behind the Germany-1920s model is hyperinflation, which is also what Zimbabwe is experiencing right now.

The next step for this strategy is to identify assets that you would like to own at the right price. Your choice of assets will be affected by what you believe the aftermath of the Great Crash III will be. If you believe that hyperinflation will occur, then it is a priority to accumulate gold. If you follow the 1929 model, then strong businesses that can thrive in tough economic environment will be your priority. Our article, Inflation or deflation first? holds some of our thoughts in this matter.

The third step of this strategy is to liquidate a portion of your assets and wait for the crash.

The final step is to buy up the assets that you had identified in the second step after the Great Crash III.

What is the main weakness of this strategy?

The Great Crash III may take quite a long while to arrive. Keeping your assets in the form of fiat money (while you wait for it) will mean that they will lose their value through the ravages of monetary inflation (see Epic, unprecedented inflation) in the meantime.

Is there yet another strategy to take advantage of an impending crash? Keep in tune! It will be interest!