On the trail of the smart money

By Goh Eng Yeow


Timing an investment right is everything, a successful investor will tell you. (Createwealth888: Don't listen to those nuts who tell you that you can't really time the market and profit from it.)

You may want to play it safe by hedging your bets by sticking to buying only blue chips.

But if you make your purchases just as the stock market is experiencing a bull run, you may find yourself staring at a loss when the market corrects, even though there is nothing wrong with the blue chips that you bought.

That is the unhappy experience confronting many investors who believed - rightly or not - that they could not go wrong by parking their nest eggs in a cache of blue chips.

Some of them had bought into household names such as DBS Group Holdings, Singapore Airlines and United Overseas Bank (UOB) when the great bull run of 2007 was in full swing.

But even after the rebound in the past six months that saw share prices gaining by more than 80 per cent, these investors are still sitting on losses.

So a pertinent question to ask is whether timing an investment right is really so difficult.

Take the global stock market collapse in October last year. The Dow Jones Industrial Average plunged 14 per cent within a month, while Singapore's benchmark Straits Times Index (STI) lost 24 per cent.

The resulting loss in market confidence was so immense that many jittery investors bailed out of stocks altogether.

But around this time, legendary investor Warren Buffett took a contrarian view, and spent more than US$20 billion (S$28 billion) investing in United States corporate giants such as General Electric and Goldman Sachs.

He explained his rationale: 'Let me be clear on one point. I can't predict the short-term movements of the stock market. I haven't the faintest idea as to whether stocks will be higher or lower a month - or a year - from now. What is likely is that the market will move higher, perhaps substantially so, before either sentiment or economy turns up. So if you wait for the robins, spring will be over.'

His advice to investors: Be fearful when others are greedy, and be greedy when others are fearful.

Events in the past six months bore him out. He made a paper gain of US$2.8 billion on his Goldman Sachs investment alone.

Still, if you think that Mr Buffett is too tough an act to follow, there are local corporate titans worth tracking, like UOB chairman Wee Cho Yaw.

After keeping his powder dry in the past two years when share prices rose to record levels, Mr Wee sprang into action in March when the STI sank to a six-year low of 1,456 points.

While market gloom kept most investors on the sidelines, he picked up 800,000 UOB shares for between $8.25 and $9.01 apiece that month. Since then, UOB shares have doubled in price.

That same month, Mr Wee bought 680,000 shares in Haw Par Corporation for between $3.35 and $3.41 apiece. Its price has now almost doubled as well.

To cap what had turned out to be a remarkably busy but fruitful month for him, he launched a takeover on property conglomerate United Industrial Corporation (UIC), whose share price was then languishing well below its break-up value.

Despite the relatively low price of $1.20 apiece he offered for the rest of UIC shares, big investors such as Morgan Stanley - which presumably wanted to get out at any cost - sold their shares to him.

This enabled him to raise his stake in UIC from 30 per cent to 45 per cent and he made a tidy paper profit of $180 million as its price recovered.

The moves made by Mr Buffett and Mr Wee provide valuable pointers on investment strategies for investors.

For one thing, take with a pinch of salt the advice given by your financial adviser or bank relationship manager about the need to make your hard-earned cash work harder to give you better returns.

Even though bank deposits attract a paltry return in the current near-zero interest rate environment, it is good to hold some cash.

Otherwise, you may find yourself in the same boat as other cash-strapped investors who wish they had the means to snap up blue chips at bargain basement prices, as when the stock market went into convulsions last year.

The other lesson for investors is not to let their emotions cloud their judgment, as they react to the daily share price movements.

Take events in the past six months. In March, when share prices sank to their lowest levels in seven years, investors were so fearful that nothing could convince them to even look at the stock market any more.

Then in the past two months, they were panicked into buying shares at far higher prices, for fear that they might miss out on the rally altogether.

Is that the right approach to take in making your investments?

Surely not. A prudent way to take emotion out of the equation is to compile a list of companies you would love to own for the long term and the prices that you would like to pay for them.

If, for whatever reason, they suddenly become available at these prices, you should revisit your investment thesis, check if it is still valid and make your decision accordingly.

If you think you do not have what it takes to make your investment decisions on your own, try tracking the moves made by a corporate chieftain like Mr Wee instead.

He has spent his life tracking the share prices of the various companies he owns - UOB, Haw Par, United Overseas Land and UIC - and the timing of his purchases reflects a deep understanding of when they offer great value as investments.

You can't go far wrong in timing your investment decisions by emulating the moves made by such canny investors.