Liquidity

Perhaps another lesson is to always take some profit off the table. Today, the valuations of stocks are at levels unseen in years, if not decades. 'It is at times like these, when there is a lot of fear, that one can make three or four times return on your capital,' a friend said.

Yes, we all know that. But so far this year, every time one thinks that fear is at its maximum, it moves up another level. And another problem is that a lot of investors have run out of money to buy. A lot of the 'liquidity in the system' before the crisis was from loans; now, that has dried up.

In any case, whether a stock is cheap or not is still debatable. According to State Street Global Markets, its global Investor Confidence Index for November fell another 1.4 points to a historic low of 57 points. Commenting on the index, Andrew Capon of State Street said: 'Investors face a difficult dilemma. On the one hand, equities are cheap. Using earnings adjusted for leverage and cyclicality, the equity strategy team at State Street Global Markets estimates that the US price-earnings multiple is 26 per cent below its 147-year average.

'These are levels seen only in periods of extreme dislocation such as the Great Depression, World War II and the 1870s. On the other hand, nobody can be confident that this current economic slowdown will not turn out to be just such a period rather than a more typical recession. 'So far, during this crisis, it is the bleakest forecasters who have been proved right.'

Indeed, we are in unprecedented times now. The euro area and Japan are now officially in recession. Even without the US officially joining this unhappy club, countries representing close to 50 per cent of global GDP are now seeing growth contract, noted Mr Capon. Consensus economic forecasts for GDP growth in the developed world have been falling for 16 months and are at 20-year lows.

Growth in the last seven years or so was propped up by debt-financed consumption from the US. And Asia has built up tremendous capacities to cater to that growth. Now, that consumption has contracted because the enormous financial leverage has to be unwound. That deleveraging process and contraction of consumption will drag on for some time because income has also diminished - if not totally disappeared, given the waves of job losses.

In Asia, companies have to deal with all the excess capacities and the vanishing demand. Many companies will go bust. Jobs will be lost, pay cut. In China, the hardship could trigger social unrest. It could be apocalyptic. We just don't know what will happen in the future.

But the fact is that we are now in the throes of a crisis and that itself may colour our judgment. 'Last year, it felt like the sky was the limit; now, it's like we are sinking into a bottomless pit,' said a friend.