Learning lessons from the Great Arabian stock market bubble

Braver souls immediately think 'straight back into the market'. Picking a market bottom is a nice idea, but it seldom works. Ask those people who bought the Nasdaq hoping that it would bounce back - six years later and this market still remains around 60% down from its all-time high.

Indeed, commentators such as AME Info columnist Dr. Marc Faber's seminal work 'Tomorrow's Gold' has examined investment history and concluded that booms are almost never repeated immediately in an asset class. Instead formerly favored asset classes tend to have a long period of hibernation, and it is almost always best to move to another asset class entirely, and possibly another geographical area.

In the Arabian case we can see that the previous stock market bust of 1998 was followed by five years of sub-par performance until the current boom erupted on the back of higher oil prices. It could be different this time but historical precedent is dead against it.

Nowhere to hide

That leaves investors who have not lost all their fortune in the Great Arabian stock market bubble - sure to join the long list of famous investment cycles - with a dilemma: where to invest with at least some hope of recapturing lost wealth, confidence and prestige?

If we refer again to Dr. Marc Faber - a celebrated contrarian analyst whose track record for predictions in the early 21st century is uncanny - his view is that all major investment classes are overvalued at present, and awaiting a major correction.

For Western investors this is hard to understand. With US equities at a six-year high they have seen nothing but blue sky for a long time. For battle-scared Arabian investors this contrarian view of the future should ring more true. Did they not feel invincible last year, only to find hubris unraveled this year?

Gold overbought?

Yet even staying in cash can seem risky with the US dollar presently in decline. Those sitting on serious cash piles might diversify into the Swiss franc or Singaporean dollar, says Dr. Faber who is even gloomy about the immediate outlook for gold - which he also sees as overvalued and heading for a correction.

Perhaps there are times for investors when it is best to sit on your hands and do nothing. Deposit account interest rates are attractive for the first time in years.

What is quite obvious when you stop to think about it is that interest rates have gone up while asset prices have stayed the same. This can not last for long, asset prices are only high because of previously low interest rates; now that low interest rates have gone, asset prices will fall.

So hold on to your cash, and wait for buying opportunities in the not so distant future!