There are three criteria for successful investing during times of crisis.  First, you need to own good companies.  If you have bad companies, it is precisely this time when they implode, as evident by the recent collapse of several financial institutions.  Thus, owning good companies is highly critical.

Second, you need to have sustainability.  If you are highly leveraged, short term downswings may wipe you out altogether and force you out of the game.  So even if you are holding onto good companies, you may be forced to let go when they hit their bottoms and have to watch empty-handed as they eventually rise again.  You also do not want to lose big during this time.  Losses are expected during difficult times, but stay away from huge losses that can obliterate most of your assets.  Recovering from huge losses is difficult and painful.

Finally, and also of high importance, you need to put emotions aside and invest for the long term.  Investing during times of crisis is not easy and can be painful in the short- or even medium- term, because you may continue to lose during this time.  On the other hand, making bad investments can be enjoyable in the short-term because you are going with the herd and the herd is pushing prices up with their irrational buying behavior.  But when the last follower has jumped onto the bandwagon, you will be staring at a free fall soon.  For instance, many people rushed to investing in technology stocks in the late 90s and real estate in the last few years as they saw everyone making fortunes from these investments.  While they made money in the short-term, as you can see the huge losses that followed were catastrophic and oftentimes they more than wiped out many investors’ original investments.

I have always stressed to investors even during the good years that they should only invest their long term money.  Everyone who has invested with us has confirmed that they do not need to use the money and have the discipline to invest for at least 3 to 5 years.  Good investments do not go up in a straight line and there will always be bumps on the road, just like life itself.