Guerilla tactics fitting rules of engagement
Since its bitter defeat in the Vietnam war, the United States has wised up. In Vietnam, the US sent in a huge army of occupation and watched it get mauled by tip-and-run guerilla raids. The boot has been on the other foot in Afghanistan with US special forces playing a key role in the collapse of the Taleban, which was trying to defend fixed positions.
Investors too have got used to marching in with their dollars and taking up fixed positions for the long term. They have held their ground in the face of bear charges and taken heavy losses in the hope there will be another long period of peace and prosperity to make it all worthwhile.
Investors have to question whether this outlook is realistic or just a habit they have got into. Should they decide that we may be in for a bumpier ride for many months, if not years, to come, it would be sensible to adopt guerilla investing tactics. This involves holding your fire until you see real weakness in markets and even blood on the streets.
It can be psychologically tough to dive in where others are dumping securities wholesale but those who do can buy assets with panic built into prices.
The classic example recently was of course September 11. In hindsight, those who could play the situation the smartest were those unfettered by equity fund guidelines of having 90 per cent or more invested.
Just like the Gulf War, the quality of the opposition to the US was way overrated. That, plus the predictable flood of liquidity from central banks, saw the Dow Jones Industrial Average rebound 22.62 per cent between September 21 and December 6, while the Hang Seng Index rose 31.9 per cent from trough to peak. Given some spillage at either end, that kind of gain would have most fund managers green with envy as they ruefully look at their annual performance figures, which almost without exception will be in the red for a second year in a row.
Of course Asia, with its volatile politics, has thrown up plenty of opportunities for guerilla investors prepared to wait for a decent panic to take hold. Every time Beijing has rattled its sabre at Taiwan it proved to be a massive buying opportunity. For those with nerves of steel so was Indonesia in 1998 with the violent end to President Suharto's three decades in power.
Stocks rose 168.89 per cent between October 1998 and June 1999 and there was the kicker of a 31.92 per cent rise in the value of the rupiah over that period.
It is almost inevitable that next year will throw up more opportunities for guerillas. Overvalued US stocks are riding for a fall and we have not heard the last of the economic problems in the US economy. With the global recession exposing its lack of reforms, Japan is also brewing up for a crisis.
And although it is back to business as usual with Osama bin Laden on the run, his terrorist cells in the West are still capable of springing a nasty surprise.