How You Can Take Advantage of The Market’s Short-Term Memory

memory loss

Here’s a quick question: Do you even remember that the USA Federal Reserve had spooked the investing world last year with talk about it wanting to taper its Quantitative Easing programme? Markets around the world reacted violently, especially in India and Indonesia; both countries also saw their currencies fall like bowling pins.

For instance, the Indian rupee fell by more than a quarter against the US dollar from May 2013 to August 2013 while the Indonesian rupiah depreciated by a similar amount against the US dollar from last May till the end of 2013.

Simply put, investors were running away from Indonesia and India faster than how kids would run away from their cane-brandishing parents.

But today, you’d be hard pressed to find investors running away from the two countries; in fact, investors have been running towards them. The Jakarta Stock Exchange Composite Index (Indonesia’s market barometer) is up 19.2% year-to-date. Meanwhile, the S&P BSE SENSEX (INDEXBOM: SENSEX), India’s answer to the Jakarta SEC Index, is up 21.2% in the same period. 

Singapore’s market, as represented by  the Straits Times Index (SGX: ^STI), is only up 4.8% in comparison.

The fascination with India and Indonesia

Come to think of it, what’s behind this phenomenon? Why had last year’s weeds turned into this year’s flowers so easily?

The main reason, in my opinion, is because investor sentiment swings wildly from one euphoric high to another depressive extreme; this is in stark contrast to the much slower pace in how the fundamentals of a country’s economy, or that of a company, changes. The issue is exacerbated by the tendency for investors as a whole to have short-term memories.

Although we tend to learn from past experiences, the memory of events that happened sometime back quickly disappear in the face of the “next big thing” that surfaces in the market. In my eyes, this has happened again and again in history – think about how investors were interested in the BRIC (Brazil, Russia, India, and China) nations in the past and how investors are so fearful of the Chinese and Russian share markets now as shown by the very low valuations found in both.

It’s no wonder that investor Jeremy Grantham once said:

“We will learn an enormous amount in the very short term, quite a bit in the medium term and absolutely nothing in the long term. That would be the historical precedent.”

The lesson to be gleaned

As investors, since we already know about such a phenomenon, it thus pays to always remember past bubbles and crises. More importantly, we have to observe the current situation in the market and cross-check with what we know about history. As the American author Mark Twain once put it:

“History doesn’t repeat itself, but it does rhyme.”

Foolish Summary

The markets are in a constant state of fluctuation and we as investors have to be aggressive when everyone around us feel that a certain group of investments are just weeds.

The inimitable Warren Buffett put it best when he said that as investors, we ought to “be fearful when others are greedy and greedy when others are fearful.” If we can control our emotions and investigate objectively investments which have been branded as weeds, we might well find legitimate flowers hiding in the corners.

Click here now for your FREE subscription to Take Stock Singapore, The Motley Fool’s free investing newsletter. Written by David Kuo, Take Stock Singapore tells you exactly what’s happening in today’s markets, and shows how you can GROW your wealth in the years ahead.  

The Motley Fool’s purpose is to help the world invest, better. Like us on Facebook  to keep up-to-date with our latest news and articles.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn't own any shares of companies mention above.