How to Invest During a Credit Crunch

One of the most said phrases is "Keep it Simple, Stupid". It applies to all aspects of life. And even though everyone knows about the K.I.S.S. principle, they don't follow it. When things get too complicated, it's harder to unwind the chaos and make changes because you don't know where the mess begins.

We saw this happen in the "credit crunch" crisis of August 2008 but it began way before it hit the mainstream media. What happened was that a lot of investment banks and bankers thought they knew better because they had genius IQs; Guess what? Common sense trumps genius IQs any day. A case in point: how intelligent is it when any Joe Blow could come off the street and almost get instant approval for a loan? The interest rates are high and when he can't make his minimum payment, he defaults on his loan. This story is so common and yet, these types of loans were sliced and diced, packaged and repacked and bought and sold as new investment vehicles.

Money doesn't grow on trees and with the inappropriate lending by the banks, credit seized up. Now banks are making it more difficult to borrow money and the cost of borrowing are higher. This results in the slowdown of the economy as new business can't start and existing businesses can't expand. This is why the Federal Reserve Bank has been slashing the federal funds rate and the discount rate. If it costs less for banks and deposit taking institutions to borrow money from the Fed and each other, these savings would be passed onto the general public, consumers and business alike. This is also why the U.S. Treasury introduced a stimulus package to kick start the economy for which, by all intents and purposes is in a recession.

Now, how does one handle their personal finance in a recession? If you're an investor with some cash, this might be a great time to invest. A lot of strong companies with good fundamentals have stock prices at a discount. The important thing is to leave out the noise of the macroeconomics. Unless you're a day trader, you don't need to the everyday trends of the U.S. dollar, price of oil, etc. In fact, all this doom and gloom is what is helping you get a good company at a discount price. The "weak hands" are selling in a panic and not thinking long term. But you, as a long term investor can reap the rewards. Now of course, you don't want to buy and hold forever a losing stock, so how would you identify a good company from a bad company? What is amazing about buying stocks is that so many people would buy stocks without reseaching what the business is about on the basis of a "tip". But think about this in terms of owning a business which you are as a shareholder. If you didn't know the business would you invest in it a traditional brick and mortar enterprise? Most likely not. And we'd also be researching if the company has an advantage over its nearest competitors. Is the business easy to understand so it can be easily managed? If the answer is yes to all these questions, you just might be looking at a winning stock pick for your long term investment plans.

So once again, if you have the cash to spare, now might be the right time to go stock hunting. Keep that K.I.S.S. principle in the back of your mind and you might prove to be smarter than the average investment banker.

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