Back in 2011, the stock market was plague with bad sentiments from the contagion with the European countries collectively known as PIIGS.
The market have been down 15-18%, the exact amount I couldn’t remember.
What I do remember is that everyone is expecting what happen in 2008 to happen in 2012.
It never did.
When the year starts, the market went straight up.
There was no dip for the investors to get in.
The guys who congratulated themselves be in 100% cash by selling everything, was caught being too under invested.
This time round, in 2016, it is the exact opposite.
If you are invested based on the January Effect, where quantitatively speaking, tends to do quite well, you get caught with your pants down.
Market has a way of making us look stupid.
I will keep this article short, because I met up with some bloggers and the consensus is that the articles tend to be a bit too long.
So this is the short version.
Read Howard Marks Latest Letter
For the investors who are still thinking this is a correction or something more than that, it pays to read some of the works of Mr Marks.
He is the chairman of Oaktree Capital, which is more heavily focus on distressed debt investing.
That tends to require the folks in there to be more in tune with the term RISK.
This kind of distress is where they operate best.
But Mr Marks skill is explaining what we are facing right now in the simplest way.
In this article he explains how from his perspective, he sees the China issue, the interest rate issue and the Third Avenue Junk Bond situation.
Ed Hyman and Stattman on the Global Outlook
Hyman has been voted Wall Street’s top economist by Institutional Investor for 35 consecutive years. The streak is unprecedented. Hyman may be the most influential strategist the public never heard of.
Earnings Period Can’t Come Sooner
Part of the process involves looking forward and ensuring where you put your money in is able to navigate the challenging environment well.
The data from the financial results gives us some idea how well the prospects and existing stocks will do.
Results allows us to value the business well and eventually decide whether to take up a position.
Bull or Bear or Sideways, the process is important.
If all prices recover, so be it.
The three categories of stocks
When general stock market falls 25%, there are 3 categories of stocks:
- Stocks that have price falls, with business that coincide with cyclical downturns
- Stocks that have price falls, with business that are exposed, or eventually exposed due to the causal factor of the market falls
- Stocks that have price falls, with business that stay largely intact, with the fall due to bad sentiments, fund flows
Which category would you go for?
What I written on related subjects in the past
I shall not repeat too much. Here are some related posts on the subject:
- You should beg for a 66% fall in prices instead of a 200% rise: A big fall early in your investing life will help you immensely rather than a big rise in prices.
- My understanding of Risk, Volatility and My System to Live with Them: We all fear the outcome of accidents on the roads, no one wants that outcome, but it is the appreciation of risk and volatility and not having a system to plan for the situation that cause more Wealth Destruction than the event itself
- Waiting for the coast is clear before investing? Perhaps turmoil is your best friend: I often get asked whether it is good to invest now, is the coast clear. This chart over here will tell you otherwise.
- A Jedi Mind Trick to keep you invested while a bear is looming: Afraid of the big bad bear? Some times its in the brain. How to trick your brain to keep invested.
- Waiting for a market correction. What is your action plan?: Stock market corrections can feel frustrating to wait for but they will come around. Focus on your plan when it does.
- Distress Stock Buying. Your favorite stock plunges. What is your plan?: Your favourite stock plunges, when do you buy? How do you know that is the right price to buy?
- Correction or not, make sure your process is sound: The market can gyrate, and that you won’t know where the market goes, but what matters is a sound plan when both up and down happens. A good simple action plan by Morgan Housel as well
- Preparing for the Recession: Stocks and Asset class setup recommended by David Rosenberg that an investor can divert into to prepare for a recession.
- Sell first, buy back later is not an easy game: Here is the maths behind your ability to take losses and why its not easy to judge things based on price
Selling and Buying
You can sell everything if you think the world is going to collapse on you.
But what is important?
To me its not about selling. You can sell so that you do not feel the psychological stress. Wiping your stuff off to start at a clean slate. That is good.
The important thing is whether you can get in to take advantage of low prices.
Whether you bought enough.
If you use the example of Keppel Corp, it presents a great opportunity when it fell from $12 to $8.
That is a 33% fall. You could sell at 10% fall hoping to buy back cheaper.
So what price would you buy Keppel at then? $8? $7? or $4?
How can Keppel fall to $4!
If you see $6 and you pull the trigger, a fall to $4 is still a 33% fall.
There is seldom an escape from the emotion roller coaster of stock market investing.
Unless you are a fundamental momentum trader.
So make sure you bought enough. And live to tell the tale.