Stock market de-rating

Economy go through cycle. So does the stock market. When the economy is bad, the company profit shrink together with the share price. At this time, there's no investor interest and that contribute to the cheap stock price. A single digit PE is not uncommon.

When the economy begin the turn around and go into boom time, company profit would increase. This would attract investor to come in and buy the stock. At the same time, profit also grow accordingly. As the profit increases, investor would bid up the share price. Then, we have the valuation re-rating, because investor is willing to take more risk to exchange for return.

If we understand the economy and market cycle, the logical thing to do while in the recession is to load up fundamental strong stock. Everyone has their own preference. Generally, a company with good brand name, stable business and strong cashflow can be purchased at a discounted price. Once the economy is back on fire again, the share price would zoom north. Although the principal seems simple, many investor failed to do so.

Therefore, a strong investment framework has to be established. One should access the individual risk taking appetite, financial situation and investment goal to decide which style is best for himself/herself.

During the financial market turmoil or weaker economy outlook, fear overtake investor's greed. The general market would experience de-rating. This can be judged from the PE contraction. Individual stock PE could fall from double digit to single digit. This coupled with the panic selling would make the process happen very fast.

At this time, investor is too fearful to buy stock, afraid that it would drop further. Ironically, if the valuation is not excessive, this could be a good opportunity to buy stock with reduced risk. All you need is the holding power till the good time comes back.