Have a clear plan so that at the darkest hour, you can overcome inertia and won't miss out on market recovery
By TEH HOOI LING
IN an article contributed recently to the monthly investment magazine Pulses, a relatively young man reflected on what he has learned in his four years as a financial planner.
He joined the industry at the right time - in 2004 - and rode the market all the way up. That is, until last year. He also gained more than a few insights into investing and financial planning in the past 12 months or so. 'For the longest time I have been a strong advocate of investing-for-the-long-term,' he said. 'However, I also realise that while it is not difficult to claw back a 20 per cent loss - you need a gain of 25 per cent) - it is an increasingly uphill and uneven task to claw back deeper losses.
'Table 1 below clearly illustrates that capital preservation is key. It makes sense to cap losses to the 20 to 30 per cent mark. After all, we can still get our foot out if we fall into a drain. But drop into a manhole, that's a different story. For example, if a stock you own has fallen 80 per cent, from that level it would have to climb 400 per cent for you to recoup your capital.'
The point is to cut the loss after 20 to 30 per cent. But for those who did not cut loss and watched in horror as their investment shrank by the day to, say, only 10 per cent of its original value, the tendency at that point was either to finally throw in the towel or to do nothing. By then, few would have the presence of mind to scoop up more shares at much reduced prices.
As Jeremy Grantham of GMO puts it in his letter in March: 'It was psychologically painful in 1999 to give up making money on the way up and expose yourself to the career risk that comes with looking like an old fuddy duddy. Similarly today, it is both painful and career risky to part with your increasingly beloved cash, particularly since cash has been so hard to raise in this market of unprecedented illiquidity. As this crisis climaxes, formerly reasonable people will start to predict the end of the world, armed with plenty of terrifying and accurate data that will serve to reinforce the wisdom of your caution.
'Every decline will enhance the beauty of cash until, as some of us experienced in 1974, 'terminal paralysis' sets in. Those who were over-invested will be catatonic and just sit and pray. Those few who look brilliant, oozing cash, will not want to easily give up their brilliance. So almost everyone is watching and waiting with their inertia beginning to set like concrete. Typically, those with a lot of cash will miss a very large chunk of the market recovery.'
Indeed, at the darkest hour of the crisis, when most people had become disillusioned, the market turned. And what a turn it has been so far. From their two-year lows - most of which were registered between October last year and March this year - Singapore-listed stocks have on average risen a whopping 110 per cent. The median increase is 91 per cent.
But wait, here's some perspective. From their two-year peaks - most of which were hit in 2007 - the stocks have fallen by an average of 78 per cent to their troughs. The median decline is 83 per cent. So the explosive rebound we've seen so far didn't even bring prices back to the halfway point between the peak and the trough. Had investors invested at peak prices, and done nothing since then, they would still be sitting on a 58 per cent loss.
As the financial planner noted, prices would have to jump by some 400 per cent before one can recoup one's losses after enduring an 80 per cent loss.
But what if, as Mr Grantham advised, we had a plan to cure our terminal paralysis in the darkest hours of the market? 'It is particularly important to have a clear definition of what it will take for you to be fully invested,' he said. So suppose you had that plan, and at the trough you recognised it as that, and you duly deployed new capital into the market. Where would you be today?
In Table 2, I listed where an initial portfolio of $5,000 would be after various levels of losses. Then I assumed an equal amount of new capital were injected into the assets at the significantly lower market price. And from that low level, I presented various scenarios of market rebounds and where that would take the entire portfolio to.
From the table, you can see that if the stock has fallen 80 per cent, you would need it to rebound by two-thirds or 67 per cent to recoup your losses if you inject new capital equivalent to the initial investment at exactly the lowest point. If your loss is deeper at 90 per cent, the rebound would have to be 82 per cent for you to make back your capital. And if the market, as it has done in the past three months, rebounded by more than 100 per cent, you would be sitting on some profits now.
Indeed, many stocks here did provide investors with opportunities to more than make back their capital had they stuck to a reinvestment plan. Table 3 are some of them. Take Ausgroup. Its peak in the past two years was $2.13 on July 27, 2007. Just over a year later, on Oct 23, 2008, it traded at only 11 cents - a plunge in value of some 95 per cent.
Yesterday, it last traded at 61 cents. That's 455 per cent above its low of 11 cents but still 71 per cent off its peak. Someone who invested $5,000 in Ausgroup at its peak needed to put in only an additional $1,550 at the low to make back all their losses. Had they put in the same amount as their initial capital - that is, $5,000 - they would have made a return of almost 200 per cent on their entire capital of $10,000. That should be incentive enough to try to fight your fear.
Other stocks that have staged spectacular rebounds in the past three months or so included Osim, Yongnam, Yanlord, Swiber, SC Global and Ezra.
Of course, we should only pick stocks whose fundamentals have not been permanently impaired to average down. If not, we might just be throwing good money after bad, and eventually suffer permanent loss of capital should the company go bankrupt.
As we have witnessed time and again, in a crisis exists opportunity. So always keep a clear head and try to fight the fear and seize the value when the doomsday scenario is the only view out there. Yes, prices may go lower. Nobody can ever catch the low. But again, as Mr Grantham puts it: 'Sensible value-based investors will always sell too early in bubbles and buy too early in busts. But in return, you may make some important extra money on the round trip as well as lowering the average risk exposure.'
Should I be investing in the right stock and hopefully I will increase my wealth through regular dividends and any unrealized gain as future capital appreciation? The downside of this approach is that my invested capital will be exposed to cyclical market risk.
or should I be making money in the right stock through series of profitable transactions and collecting some dividends, and then slowly accumulate enough realized profits to eventually own a certain number of shares of my desired stocks at a zero cost in terms of cash flow, and then let them run in the market as passive income from dividends and future capital appreciation or if necessary as future draw down by selling some.
At the end of this investing Game, it will look like this:
a) Only realized gains are reinvested in stocks and subjected to cyclical market risks and also participating in future capital appreciation to help offsetting some inflationary impacts.
b) Recovered investing capital will be parked in risk-free Fixed Deposits as draw down during retirement.
c) Don't see the need to make my capital works harder in later years to pass on the wealth to the next generation.
Be a creature of the Market. You eat, sleep, and dream with the Market. When the Market is jolly, you eat more. When the Market is sour, you eat less. There is no need to stay away from the Market - Creatwealth8888
Whatever course you decide upon, there is always someone to tell you that you are wrong. There are always difficulties arising which tempt you to believe that your critics are right. To map out a course of action and follow it to an end requires courage." - Ralph Waldo Emerson
Now many are expecting correction to come. Assuming if the high waves really hit the boat hard, have you planned to throw some luggages overboard like what we see in the movie on ship caught in sea storm, and sailors started throwing luggages overboard into the rough sea to keep the ship lighter.
Another PSC scholar breaking his five-year bond with the Singapore Civil Defence. Maybe it is time for those BIG SHOTS to re-think about bonding and follow SMU on scholarship without bond. I am very sure there are many scholars out there grinding their teeth on their jobs serving out their bonds.
I personally knew few of them. Really sad to see them wasting a few year of their prime time when their assigned jobs just didn't match their life values, and finally choose to leave; otherwise a well planned career development path for a scholar.
I have seen a few scholars went to the field of investing or financial planning, maybe this area is really interesting and you can totally drown your passion into it.
Said Knight Frank's director of research and consultancy, Mr Nicholas Mak: "There will be short-term adjustments, but long-term, yields tend to be stable at 2.5 to 3.5% percents on a net level.
For me, rental as passive income may not be a good strategy as a dividend yield of 3.5% from the top 20 SG blue stocks are not difficult to find and to accumulate for long term investment.
E.g. DBS currently caught in the "shit" is still giving me quarterly dividend yield of 1.8% or 7.2% per annum. At the moment, unlikely to consider the strategy of using rental as passive income. Cheers!
Investment of any kind by nature is risky, and can potentially cause you lose some or all your investing capital. Even if you get it right over several years, and somehow by over-staying in the market; and when market turns what was right becomes wrong.
There is a safe and risk-free investment in the market known as zero cost investment aka Pillow Stocks Strategy , where you can sleep peacefully at night regardless of market condition as your investing capital is not at risk. You can choose to believe it or not; but it works very well for me.
The Pillow Stocks Strategy
With active investing, riding on the number of profitable trades on the same stock over and over again, and then slowly accumulate enough realized profits to eventually own a certain number of shares of your desired stocks at a zero cost in terms of cash flow, and then let them run in the market as passive income from dividends or if necessary as future draw down by selling some.
Time and effort spent in Active Investing is no less than Value Investing, it is also very demanding as it is never easy to find that many pillows.
by Philippa Huckle
Sunday Morning Post, January 23rd, 2005
We all suffer from loss aversion - the psychology of giving more weight to losses than to gains. And we are hard-wired against danger in the form of a genetic phenomenon, otherwise known as the fight or flight response.
For investors, this survival instinct has important consequences. The investment universe operates entirely in the realm of uncertainty. To be a successful investor
you have to get a handle on risk. Webster's dictionary defines risk as "the possibility of loss or injury; peril". We've survived as a species because our ancestors were psychologically programmed to avoid risk. As a result, our emotional safety mechanism is wired to instinctively shy away from a potential loss.
In simple terms, this means we find it hard to remain invested for the long term. Given the chance, as investors we'd rather bolt for the exits in down markets.
Studies in Behavioral Finance reveal that we feel the pain of loss twice as much as the pleasure of a corresponding gain. For example, $10,000 will upset you about twice as much as gaining $10,000 will make you happy - but this isn't the end of the story. Loss aversion has some unexpected implications for investors. Imagine you owned a sound investment which delivered good long-term returns of 15 per cent per annum with a low volatility of 10 per cent standard deviation.
Using these figures we can calculate the probability of this investment delivering positive returns over various timeframes. There's a 54 per cent chance it will be up on any given day; a 67 per cent probability of positive returns over any one month; and a 93 per cent chance of positive returns in any one year. We can see that the longer we're invested, the more likely we are to get positive returns. We can also see that it's perfectly normal for investment returns to be negative for a certain percentage of the time.
In this case you can expect a positive return in about 67 months out of a 100, and a negative return in the other 33 months. These down periods are perfectly normal even while the investment is busy delivering its 15 percent annualised return over the course of time.
When we look at this on a daily timeframe, our calculations tell us to expect a positive result 54 days out of 100, or just over half the time. So we'll feel good half the time, when the investment is up. The problem is that, being loss averse human beings, we'll feel twice as bad the other half of the time, when the investment is down. So as a result of this, if you're checking the price daily, you will quickly become emotionally overwhelmed. You will feel twice as much pain as pleasure, and your survival instinct will scream at you to avoid this situation at all costs. You will be very tempted to end the pain by selling - even though the investment is behaving exactly as expected, and the long term returns are on track. Overwhelmed by the psychological pain of short term loss, we find it hard to remain invested for the long term.
In 1883 Chancellor Bismarck set 65 as the retirement age for the world's first government sponsored retirement scheme. Back then, before the discovery of antibiotics, and when life expectancy was far shorter than today, only a few percent of the population lived past this age.
So people received salaries that lasted for practically their whole lifetime. But thanks to advances in modern medicine and better living conditions, today's average life expectancy is 80 years - leaving us with about 20 plus years of retirement to finance. As a result, we are all forced to be long term investors.
Coping psychologically with investment risk is a bit like visiting the dentist: we do it because the consequences of not doing so are far more painful. We must face the pain and grudgingly accept risk, because if we don't, the consequences are far worse - like running out of money in our old age, being forced to downgrade our lifestyles, or being unable to finance our children's education.
A better understanding of our investor psychology will help us to manage our instinctive genetic response to risk. Each of us needs to set clear financial goals; diversify our capital into an asset allocation properly formulated across uncorrelated market cycles; and commit to a rebalancing strategy. We then need to overcome our inherited, knee-jerk reaction to temporary short-term loss. Lessen the pain; check your statements less frequently, and give long term market probabilities the opportunity to work to your advantage.
[From Creatwealth8888: Think like Property investor, do they evaluate the value of their property every day?]
Philippa Huckle is founder and CEO of The Philippa Huckle Group, an independent advisory firm.
The time-tested buy-and-hold investment mantra has become so unpopular that even those who advocate the strategy don't refer to it by that name anymore.
Now terms like "buy and harvest" and "buy and trade" have replaced the old "buy and forget" philosophy once so popular among active stock market investors.
The change reflects a spreading attitude that in an age of 24/7 financial news and information, which can mean tremendous volatility, it no longer makes sense to buy a stock and then check back on its performance five, seven or ten years later. [Hardcore Value Investors please reflect over it deeply]
"The buy-and-hold and passive investing approach works really well in certain environments and not so well in other environments. The '80s and the '90s were a good time for buy-and-hold," says Matt Havens, partner with Global Vision Advisors in Hingham, Mass. "There's benefit now to being more active in your management style."
Investors who held tight during the contagion of the credit crisis saw their portfolios decimated by the market's multiple gyrations that generated losses of more than 50 percent for the major indexes. Even the most bullish of investors acknowledge it will take years before the market returns to its record levels of October 2007.
At the same time, those who were nimble enough to get in and out of positions at least gave themselves a chance to mitigate losses.
Emily Sanders, president of Sanders Financial Management in Atlanta, uses General Electric (NYSE: ge) (CNBC.com's parent company) as an example of how its "buy- and-trade" strategy has worked.
At its worst, GE shares had lost 82 percent of their value, before investors became convinced the company could regain its footing and overcome losses sustained primarily at its GE Capital financing arm. Since the March low the stock has more than doubled in price
"When something like GE presents trading opportunities due to severe gyrations, then it really calls into question the whole buy-and-hold-and-forget-about-it strategy," Sanders says. "You can't forget about anything. Nothing can be taken for granted, not even in the soundest companies."
At the same time, though, trying to pin the tail on a stock that is in free fall may not be that feasible for a typical retail investor.
Most portfolio managers shudder at attempts to try to time the market as a whole and even particular stocks, choosing instead to find value levels or technical points - or sometimes a combination of both - to determine when to buy and sell.
Meanwhile, the individual investor has to decide whether to follow the strategy employed during the massive bull markets of the late 20th century and avoid even looking at daily stock quotes, or confront today's reality of volatility sometimes four and five times higher than historical norms.
"The definition of buy-and-hold tends to be a little fuzzy," says John Buckingham, chief investment officer at value-based Al Frank Asset Management in Laguna Beach, Calif. "A lot of people think that means you buy something and do nothing for years on end. That's not a strategy we've ever implemented."
Yet Buckingham would include himself in the buy-and-hold camp - sort of.
Buckingham describes his firm's strategy as "buy and harvest," a term that he says entails a long-term investment horizon but with the flexibility to be "following the money."
"The strategy is sound--buying undervalued stocks and selling overvalued stocks," he says. "Unfortunately, some people will confuse that with buy-and-forget as opposed to buy-and-continue-to-monitor."
"In this volatile environment, you can have financial stocks that appreciate 100 percent in a week," explains Buckingham. "To not try and take advantage of a move like that, you're not doing your job as an active manager."
But if "buy and harvest" with an active manager is still beyond one's appetite for risk, there's always the passive management strategy advocated by Charles Massimo of CJM Fiscal Management in Melville, N.J.
Even at CJM, though, "buy-and-hold is only part of the equation," admits Massimo.
Portfolio rebalancing that reflects investor priorities is the key, so the thinking goes. Maintaining a balanced and diverse investment outlook takes precedence over following market gyrations, so that goals are met and risk is minimized.
That means if bonds should do especially well during a particular period, that asset class naturally would take on greater weight in the portfolio. Subsequent rebalancing would shift the portfolio more towards equities, allowing investors to take profits from the growth in bonds while positioning for a gain in stocks - "buy and hold and rebalance" as it were.
"What that accomplishes is the client never takes on more risk than they agreed upon," Massimo says. "The second thing it forces us to do is to sell high and buy low, because we're selling that asset class that performed best and rebalancing towards the asset class that performed worst."
At the core of such a philosophy is a belief that what goes up eventually comes down and vice versa.
"Nobody was rethinking anything when the market was going up, and now that markets are doing what they often do - go down - all of a sudden everything is out the window, and I think that's ridiculous," says Matthew Kaufler, equity analyst and portfolio manager at Federated Clover Capital Advisors in Rochester, N.Y. "You don't shoot your favorite dog just because he's old."
To the contrary, says Kaufler, who believes that a market pullback is time to add to positions of good companies that get beaten down - "buy and hold and buy the dips," perhaps.
For some managers, though, what it all comes down to is finding the best way to make money without letting emotions interfere. So, if that is buy and hold or buy and harvest or buy and ask the computer, then so be it."Without a crystal ball, I think investors still need to have a more active approach, but with the caveat that it's going to be an approach that's systematic to the extent that your emotions do not factor into the decision of whether you buy and sell," says Matthew Tuttle, president of Tuttle Wealth Management in Stamford, Conn.
Tuttle relies on computer software to tell him what to do. "We take all of our creativity and all of our discretion and we design computer programs, and the computer programs tell us when to buy and when to sell," he says. "The queasier I am when the computer tells me to do something, that's usually when we're going to make the most money."
The childhood rhyme, Sticks and stones may break my bones, but words will never hurt me, has a long history of helping children deal with those silly words.
We Individually Control the Effect
Did your parent, or grand-parents or teachers told you about this rhyme? Or you are like me, I learned the rhyme when I was a child, and then taught it to my children.
Even now it reminds me that people's words can't hurt me unless I let them. I can't control people and what they say, but I can control the effect their words have upon me.
The childhood rhyme, Sticks and stones may break my bones, but words will never hurt me, teaches a valuable lesson everyone should remember. Words can't hurt us, unless we let them. If you ignore them long enough, then they become silly words.
Why do you bother to ever get defensive when someone doesn't agree with something you say or write?
As we connect via this Internet world you will realize there are cyber friends and others.
A cyber friend would understand why you say what you say, others might not.
A cyber friend might question why is it you phrase something a certain way while others might just blow up on you.
A cyber friend would want to take the time to understand what you really say while others would not have any clues.
There are many others. There are few cyber friends ... This is why a cyber community is so hard to build, it starts with mutual interests but thrives on deeper connections and have time for kopi-o.
So to my cyber friend, PiggyBank, don't waste your time on others.
Amazing Grace, how sweet the sound, That saved a wretch like me. I once was lost but now am found, Was blind, but now I see
As a trader/investor ... it could mean
Amazing Market, how sweet the sound, That saved a wretch like me. I once was lost but now am found, Was blind, but now I see
Have you been losing your fortune, and feeling like a wretch and really lost in the Market and don't know what to do. You need look inward to yourself and seek the amazing grace, so that you are not blind to the Market, and see the Market as your opportunity instead of misery.
T'was Grace that taught my heart to fear. And Grace, my fears relieved. How precious did that Grace appear The hour I first believed.
Once you can feel your strategy and money management is working in the Market, and you become believed and will not fear the Market.
Through many dangers, toils and snares I have already come; 'Tis Grace that brought me safe thus far and Grace will lead me home.
That is the nature of the Market and it is full of dangers, toils and snare and if you want to be in Market, you have to live with them; but, hopefully the amazing grace - your strategy and your money management will lead you safely to your goals.
Amazing Grace Lyrics
John Newton (1725-1807) Stanza 6 anon.
Amazing Grace, how sweet the sound, That saved a wretch like me. I once was lost but now am found, Was blind, but now I see.
T'was Grace that taught my heart to fear. And Grace, my fears relieved. How precious did that Grace appear The hour I first believed.
Through many dangers, toils and snares I have already come; 'Tis Grace that brought me safe thus far and Grace will lead me home.
The Lord has promised good to me. His word my hope secures. He will my shield and portion be, As long as life endures.
Yea, when this flesh and heart shall fail, And mortal life shall cease, I shall possess within the veil, A life of joy and peace.
When we've been here ten thousand years Bright shining as the sun. We've no less days to sing God's praise Than when we've first begun.
Amazing Grace, how sweet the sound, That saved a wretch like me. I once was lost but now am found, Was blind, but now I see.
The song “Amazing Grace” was written by a man named John Newton in the 1700s. His song has been sung in various forms ever since, and it is still sung today. The song has been a part of a great tradition in families who sing it together, and also in churches. John Newton had been a slave ship master during his early years, and later received criticism for it. After that, he became an Anglican priest on June 17, 1764. He worked with William Cowper writing hymns, and they ended up publishing a book of hymns entitled Olney Hymns. Newton wrote many hymns, including “Glorious Things of Thee are Spoken”, “ How Sweet the Name of Jesus Sounds!”, “Come, My Soul, Thy Suit Prepare”, “Approach, My Soul, the Mercy-seat” and, of course, “Amazing Grace”.
In 1750, Newton settled down and married Mary Catlett. She died several years later, in 1790, and Newton died Dec. 21, 1807. He is buried next to Mary in St. Mary Woolnoth cemetery. Although John Newton died many years ago, his song still lives on today. It is still as powerful as when he wrote it. Analysis
John Newton’s song begins:
Amazing grace, how sweet the sound, That saved a wretch like me. I once was lost but now I am found, Was blind, but now I see.
That was his first verse to his song, and it says so much about human beings. “I once was lost but now I am found” -- that is very true. Everyone has lost sight of the end goal and gone the wrong way instead of the right way. Newton was referring to God’s way as the right way. He was saying how we as humans follow our own instincts instead of trusting God’s grace. That was how we got lost. When we find God’s amazing grace, we will be found. God will show himself to us and let us see. We will no longer be “blinded,” but we will see the world in a different perspective. When Newton states, “that saved a wretch like me,” it refers to someone who is low, or evil. He is saying that God will save a person no matter what they have done in their past, as long as they find His grace.
“Amazing grace, how sweet the sound.” How true is that. Newton was trying to describe how wonderful it is to have found God’s grace and how it feels to be without it. Newton’s third verse says
Through many dangers, toils and snares, I have already come; ’Tis Grace that brought me safe thus far And Grace will lead me home.
It appeals to those who have encountered trouble and were ready to give up. It gives them hope and comfort knowing that God’s grace is with them and will continue to be with them. In the movie, the inmates chose this verse as their favorite just because it was the most similar to their lives. They had encountered trouble and luckily found this song, and the powerful lyrics saved them and now they have God’s grace. When the song says “Grace will lead me home,” it is not referring to your home here on Earth, it is referring to your eternal home. Newton was saying that Grace will save you eternally.
Someone was asking me whether it is too risky to go in the Market now? Aiyo, investment of any kinds by nature is risky and you may potentially lose some or all your invested capital. Putting money into Fixed Deposit is NOT investment; it is SAVING and carry nearly zero risk, and that is the reason why the return on Saving is very low; because the Bank takeover your risks to invest your money and definitely, the bank will expect some premium for taking your risk, and will never give you better return on your fixed deposit.
Since any investment by nature is risky, you need to mitigate or control that risk through your money management, and have at least 3-5 year short term financial planning to meet any unforeseen cash draw down. Be safe, think of RISKS before rewards. Fear not the Market, but fear what you have not plan for any unforeseen cash draw down as this may be a potential killer.
Received the annual policy statement from XXX Insurance Co that the previous projected maturity value has been revised to current projected maturity value reducing by -5.8%. It was revised last year and further revised this year. Really suck! And you only know the final outcome after years of trusting them. This is for my children Uni Fund maturing in this Oct 2009.
I am not quite sure how you people plan your children Uni fund?
Market crash -- 10/28-29/1929, the Dow fell 23.6% over the two days going from 301 to 230Presumed low -- 11/13/1929, the Dow closed at 198.69, a fall of 47.9% from the September high
Rally -- the Dow rallies to 294.07 or up 48% by April 17, 1930
BEAR TRAP -- the Dow proceeds to plummet to 41.22 (yes, you read it correctly) by 7/8/1932, down 86% from the rally high of 1930 and down 89% from its 1929 high Recovery -- it took until November 1954 for the Dow to get back to its 1929 highs
Sembcorp Marine, the world's number two builder of offshore oil rigs, said on Friday its first-quarter net profit climbed 34 per cent from a year ago.
The Singapore company, 61-per cent owned by conglomerate Sembcorp Industries, said its order book stood at S$8.42 billion at the end of the first quarter, versus S$9 billion at the end of the fourth quarter.
Will SML help to pull SCI higher? SCI announcing Q1 on Tuesday
The Money Managers are no different from these beasts crossing the Mara River - the STI way. They have been waiting for this day to stampede each other to cross the Mara River.
With STI recovering 49.6% from its low on 9 Mar 09, closing well above 200EMA for 2 consecutive days and supported by 5 consecutive white candles. It is obviously bullish. With GMMA fanning out nicely telling us that the downtrend is broken.
So what are you are doing now? Hmm.. you are damn worry about jumping into a market that has already risen over 49.6%, the question is where do you want to be when the economic recovery truly arrives? Would you want to still be in cash fully and bemoan that you did not have a chance to enter the market? Or would you already be fully invested by now, and just sitting back to see the recovery as it plays out? Everyone wants to buy in at the lowest price, but in practice, it is emotionally difficult.
Fearing of missing out and fear of losses is always playing out in our mind.
Anthony Bolton, who managed funds for US mutual funds giant Fidelity for almost 30 years, reckons a bull market has begun.
WITH all the bumps and disappointments en route to a bottom, most analysts and strategists fight shy of calling a turn in markets. But one veteran is sticking his neck out.
'I strongly feel this is a time not to be in government bonds, but to be in risk assets.'
Anthony Bolton, who managed funds for US mutual funds giant Fidelity for almost 30 years, reckons a bull market has begun. And that's despite the March rally seeming to have petered out in the past couple of weeks and the uncertainty now posed by the swine flu outbreak.
'Predicting markets is not easy,' says Mr Bolton. 'There have only been a few times when I have a strong view - and I have a strong view today.'
He cites three factors to back this view: the historical pattern of bull and bear markets, sentiment and valuations. The one factor he doesn't attach much weight to - which currently pre-occupies almost everyone else - is the economy.
'The economy generally looks bullish when the market is at a peak, and bearish when the market is at a low,' he says. 'I don't start with economic indicators. But I'm just starting to see the first economic news that's less bad, such as some of the purchasing managers' indices and manufacturing indices. In the next few months, we'll see more data confirming that the economy is less bad.'
First some background. Mr Bolton managed funds for Fidelity between 1979 and 2007, before he took a back seat to mentor younger managers and analysts. He is best known as a manager of European equities - and especially for managing the Special Situations Fund, where US$1,000 invested in 1979 would have grown to US$125,000 in 2007. This represents annual compound growth of over 20 per cent a year, beating the FTSE All-Share Index by seven percentage points a year.
Mr Bolton has also written two books. The second - Investing Against The Tide - has just been published by FT Prentice Hall. He was recently in Hong Kong, Taiwan and China, where he spoke to advisers and investors. A forum in Taiwan, for instance, was attended by more than 1,100 investors.
Meanwhile, the signs look right - as he sees things.
First, the pattern of bull and bear markets. The current bear market is the second worst in history after the 1930s. 'Current conditions are different from that,' he says. '(The 1930s bear) followed a huge bull market in the US. We didn't have a bull market quite like that before this downturn. The past 10 years were also the worst for US equities. In terms of patterns, I think we've done enough for the bear market to be finished.'
The second factor - sentiment - is at a low ebb and the amount of cash sidelined in money market funds is high. 'I see people more cautious now than at any other time in my career,' Mr Bolton says. 'Almost all broker circulars say March was a bear market rally. One statistic I find very compelling is the size of money market funds relative to the size of the stock market.'
In the trough of the bear market of the 1980s, money market funds comprised 25 per cent of the stock market. In the early 1990s trough, the ratio was 20 per cent; and 24 per cent in 2002. Today that ratio stands at 47 per cent. 'There is a huge amount on the sidelines and other sentiment indicators of extreme cautiousness,' Mr Bolton points out.
Third, valuations are at historic lows. 'If you look at book values, they're at a 40-year low,' he says. 'On PEs, we're very low relative to the average level that the market gets to in a bear market. One ratio I put weight on is free cashflow. That's at a 50-year high for US companies. Those three things say this could be a new bull market.'
But don't expect a raging bull, or economies to surge like they did before the sub-prime crisis exploded. 'I'm talking about a slow upturn because of the financial crisis and debt overhang,' says Mr Bolton. 'We'll be in a low-growth environment. In terms of the stock market, we can say we're already there. We've had the worst 10 years and a very disappointing time. That's why I'm less pessimistic for stocks.'
The current bear market has called into question active management and diversification, both of which seem to have failed. Mr Bolton says crisis conditions tend to cause assets to move in tandem, and government bonds were a haven. 'I strongly feel this is a time not to be in government bonds, but to be in risk assets,' he says. 'I still believe in diversification, but maybe it's protection, as it has been in the past.'
As for active management, he says: 'I passionately believe in the ability to get alpha if you have the resources and skills necessary for it. There is a cyclical element to active management. Alpha is at times easier to get; in a sharp downturn, it is difficult to get. If I'm right and markets are turning or have turned up, alpha will become easier to get.'
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He tells punters who invest directly in stocks to do their homework and monitor market sentiment. 'The best opportunity to buy is when everyone hates stocks. You need a contrarian ability. I've been in the industry so long. I think if you get it right 60 per cent of the time, you're doing great.'
The most common denominator of his mistakes is companies with weak balance sheets: 'The private investor needs to learn some accounting to understand whether companies are financially weak or strong from the balance sheet point of view. If they're buying stocks with weak balance sheets, the risks are significantly higher, particularly when conditions change for the company or industry.'
Rather than set a stop loss, investors should have an 'investment thesis' or a rationale to hold a stock, he says. Once that thesis is no longer valid, the stock should be sold - even at a loss. Mr Bolton is mainly a fundamentalist, but uses technical analysis which helps in timing and size decisions. 'If I'm looking at a stock that has done well for seven years, I look at it differently from one that hasn't done well,' he says. 'A stock that has done well has most of the good news in the price. If things change, there are lots of profits that people can take so investors are likely to suffer on the downside.'
As he writes in his latest book, investors should forget the price they paid for a share as it can become a psychological barrier when the price falls. 'The investment thesis is the key - check it regularly. If this changes for the worse and the share is no longer a buy and probably therefore a sell, you should take action regardless of the price being below what you paid. Trying to make money back in a share when you have lost money to date, just to prove your initial thesis was correct, is very dangerous. As a general rule in investment, it's not good practice to try and make it back the way you lost it.'
Hot-shot fund managers burnt by crisis.Bad timing and risks taken on S-chips behind huge losses at CMIA and Abax.
They were Asia's hot fund managers a few years ago with people beating a path to their door, but they have left bloodied by huge bets on S-chips and penny stocks that turned toxic in the financial crisis.
What is your attitude towards these pictures? Do you see Risks and Opportunities as Half Full or Half Empty Glass?
Another thing to remember as well if you are doing very well in the Market making tons of money from the Market is the Law of Averages in the Market remains a powerful mean-reversion of wealth transfer to others. The Hot-shot fund managers above are good examples.
Follow the advice from Rocking Wall Street: Four Powerful Strategies That will Shake Up the Way You Invest, Build Your Wealth And Give You Your Life Back: Gary Marks.
If you have made more than ENOUGH from the Market to last your lifetime, it is time to GO FISHING or GO ROCKING or DRINK LYCHEE MARTINI or lim Kopi O and shake leg.
Last updated : 14 Sep 2019
I am 63 yrs old uncle living in HDB heartland who has achieved financial independence @ 56 and finally retired @ 60 from full-time job as employee on 1 Oct 2016.
Single household income since 1995 with three children.
Currently, two sons and one daughter are working.
I have been doing 20 years of long-term investing and short-term trading in Singapore stock market only since Jan 2000 so I am that so-called Panda or Koala in the investment world.
I am currently executing my Three Taps solution model to maintain sustainable retirement income for life till 2041 @ 85 yrs old.
Disclaimer: Stock trading involves significant risks. Create Wealth trader is not a licensed Investment Adviser and will not be responsible for any losses which you incurred. You are advised to always do your own homework before making any trading decision.