When to Buy

Many people will tell you to buy when the market is down.

They will quote:

Sir John Templeton: “The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” 

Warren Buffett: “Be greedy when others are fearful.” "Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful."

Buffett also said this, "The best thing that happens to us is when a great company gets into temporary trouble...We want to buy them when they're on the operating table."

Baron Rothschild, an 18th century British nobleman and member of the Rothschild banking family, is credited with saying that, "The time to buy is when there's blood in the streets." 

More articulated ones will say “buy when everyone is ignoring the stock market and sell if the aunties in the wet market start buying stocks.”

It all sounds so simple and easy.  But yes, they are right.  Again like Buffett say about investing, it simple but not easy.  Simple is not the equivalent of being easy as it is so often mixed up with.

We usually buy when everyone is buying.  We feel safe in following the crowd.  When everyone is desperately selling, it is very difficult to go against the tide and buy.

Investment pornography made it even more frightening. Headlines of “heavy selling” are prominently highlighted.  We are given the impression that, to quote Fred Schwed, on the “catastrophic day everyone sold and nobody bought.” 

This is always in my subconscious until I read his book, “Where are the Customers’ Yachts.”  He wrote: “Of course, there is just no truth in that at all.  If on that day the terrific “selling” amounted to seven million, three hundred, sixty-five thousand shares, the volume of the buying can also be calculated.  In this case it was 7,365,000 shares.”  So you are not alone if you buy at that time.

If we think that we will be brave enough to buy during such times, we may overestimate our rationality.  We cannot be certain on how we will react under emotional strain. 

Especially, we are also likely to be “bleeding at that time.”  As the original quote of Baron Rothchild is believed to be or some wise guy added to it, "Buy when there's blood in the streets, even if the blood is your own."  Highly unlikely and we need to be a very stoic and brave person to do so.  It would be too much to expect of us.  If we are not selling then, we are more likely to be like a turkey burying its head in the sand, then buying.  We avoid the news and ignore the market totally to avoid the anguish of losses.

Perhaps we can ready buy when such opportunity arises if we feel like James Montier’s reaction to the markets near meltdown – “Actually, very excited.  Not because I have some sick perversion that means I enjoy a crisis (although I may well), but rather because markets were getting cheap …….”  Yes, feeling excited would be the first step in the right direction.

Fear causes us to ignore bargains when they are available in the market, especially if we have suffered a loss previously.

Then we found the right excuse to procrastinate – wait for the bottom.  This will help us to put off confronting a difficult decision for as long as possible.  When the price rises a little, we decided not to buy feeling that we have missed it.  Actually I was advised to buy when prices recover so as not to catch the “falling knife” as we are not sure where the bottom is and no one will.

James Montier tells us in his book, “How Not To Be Your Own Worst Enemy”, the way Sir Templeton’s did it.     Sir Templeton was also concerned that he may not have the discipline to execute a buy when the market crushed.  He had standing orders with his brokers to purchase a list of stock on his “wish list” if for some reason the market sold off enough to drag their prices down to levels at which he considered them a bargain.

 We should do our investment research and/or decision when we are in a cold, rational state – when nothing much is happening in the markets and prepare and pre-commit to an action plan.   This is a simple but highly effective way of removing emotion from the situation.   This would also allow us to main a clear head during a sharp market selloff.  So do adopt Montier’s 7Ps - Perfect Planning and Preparation Prevent Piss Poor Performance. Like he says, never do supermarket shopping while hungry (you will overbuy).

I have also been a strong proponent of buying when there is a sharp market selloff.  However, my impatience has caused me much suffering in the middle of 2011.  However my belief remains strong with my experiences in 2009.

  

The opportunity arises again in Sep-Oct last year.  I was bleeding quite badly by then. My realized gain since June 2009 was total wiped out by my paper losses.

It started with the selloff of DBS Bank to below its Net Tangible. I just could not resist picking some of it.  However it was more of averaging down on the cost of the DBS shares which I am holding and bleeding.

Then I have 3 stocks on my wish list were sharply sold off – Keppel Corporation, Sembawang Corporation and Sembawang Marine.  I was feeling very excited.  I did a perfunctory check with my broker who was not aware of special reason but she did give me a word of caution – buy slowly.

My earlier trades on these stocks in 2009/2010

Buy     29-Dec-09    Kep Corp       8.24

Sell      07-Jan-10     Kep Corp       8.69  

22-Jan-10     Kep Corp       8.23

15-Apr-10    Kep Corp       9.69

04-May-10   Kep Corp       9.57

02-Jul-10      Kep Corp       8.41

01-Nov-10   Kep Corp       10.18

07-Apr-10    SemCorp       4.26

08-Apr-10    SemCorp       4.23

08-Apr-10    SemCorp       4.19

12-Apr-10    SemCorp       4.20

10-May-10   SemCorp       3.95

06-Sep-10    SemCorp       4.31

06-Sep-10    SemCorp       4.32

12-Sep-10    SemCorp       4.39

13-Dec-10    SemCorp       5.08

07-Apr-10    SemMar        4.33

08-Apr-10    SemMar        4.27

08-Apr-10    SemMar        4.21

24-Aug-10    SemMar        3.81

25-Aug-10    SemMar        3.78

06-Oct-10    SemMar        4.32

13-Oct-10    SemMar        4.39

25-Oct-10    SemMar        4.69

13-Dec-10    SemMar        5.14

These stocks are on my wish list as I have pleasant experiences buying and selling them in 2010.  In fact, I suffered some “regrets” for not holding on to them.  These are growth stocks with “value” quality and which pay good dividends.  I was hoping to hold some of them for a much longer term. However their prices hold steady at a peak level for quite sometimes.  It looked as though I may not have the opportunity to hold them again. 

I felt at that time I brought them a little earlier on hindsight.  Initial purchase of Kep Corp is on 26 Sep 11 at 8.02 as I told myself that the price is already a bargain as its price has dropped at 25% from its peak level in 2011.  If I do not buy immediately, I may not buy at all when the prices rise again.  I have not seen this price since June 2009 after it prices has recovered from the 2008/2009 global financial crisis.  The fundamentals of the company remain the same and its price is adversely affected by the global economic outlook. My plan was to buy slowly as it went down.  It fell further and I brought again at 7.22 about 10 days later on 4 Oct 2011. 

The fear was there and the feeling that it has not bottomed out stops me from buying more immediately.  When it started to move up by 5%, I just could not bear to buy at the increased price.  When you have brought at 7.22, it is very difficult to buy at 8.50.  On hindsight, even if I have brought at the increased price, the profit is substantial now with the price in around 10.80. 

Even though I know it is wrong, I couldn’t help feeling I should have brought more.  With a 40% increase in price after the sold off, we need not buy at the bottom.  This maybe hindsight based on historical facts. Price recovery from the bottom are often sharp and fast.

 

The window of opportunity was small and the price recovery was swift.  The stock took off again sometime in the third week of Oct 2011.By Nov 2011 it stabilizes around 9.50 and by mid Jan it was around 10.90 and exceeded 11.00 briefly.

            Purchases

22-Sep-11    SemCorp       3.65

26-Sep-11    SemCorp       3.38

            22-Sep-11 DBS                12.20

04-Oct-11    DBS                11.16

26-Sep-11   Kep Corp       8.02

04-Oct-11   Kep Corp       7.22

22-Sep-11    SemCorp       3.65

26-Sep-11    SemCorp       3.38

06-Sep-11    SemMar        3.76

12-Sep-11    SemMar        3.73

25-Sep-11    SemMar        3.54

04-Oct-11    SemMar        3.09

I underwent the same emotional turmoil when buying Sembawang Corp and Sembawang Marine.  I was also buying down and exposed to the danger of “catching the falling knife.”  I was hoping to buy at the bottom and as a result missed the opportunity to buy more.   I could not put it better than Seth Klarman, head of Baupost and value investor extraordinaire:

“While it is always tempting to try and time the market and wait for the bottom to be reached (as if it would be obvious when it arrived), such a strategy proved over the years to be deeply flawed. Historically, little volume transacts at the bottom or on the way back up …. Moreover, the price recovery from a bottom can be very swift.  There, an investor should put money to work amidst the throes of a bear market, appreciating that things will likely get worse before they get better.”

Or as it is commonly said:  The market does not turn when it sees light at the end of the tunnel.  It turns when all looks black, but just a subtle shade less black than the day before.

When asked about courage in buying during market selloff, Klarman looked at it differently: “Yet, we don’t actually think of it as courage, but more as arrogance. In investing, whenever you act, you are effectively saying, “I know more than the market. I am going to buy when everybody else is selling. I am going to sell when everybody else is buying.”

The “arrogance” or confidence can be derived from knowledge. Reading up on history of stock investment would give us a good foundation.  History is deemed to be one of the four pillars of investment by William Bernstein (His book:  The Four Pillars of Investing).  I quote from his book:  “a study of previous mania and crushes will give you at least a fighting chance of recognizing when asset prices have become absurdly expensive and risky and when they have become too depressed and cheap to pass up.”

And if we really want to make money, this is why we must buy during market selloff”, quoting Klarman again: “The prevailing view has been that the market will earn a high rate of return if the holding period is long enough, but entry point is what really matters. “

Combined this with the following advice from the sage, Warren Buffett, we are likely to be more right than wrong:

"The stock market is a no-called-strike game. You don't have to swing at everything--you can wait for your pitch. The problem when you're a money manager is that your fans keep yelling, 'Swing, you bum!'"   Be selective.

Let me share this:  Though I did not buy as much as I want and did not fully satisfied my greed, I did not suffer from regret of not buying which I think is worse.  In fact, it will help me when the next window of opportunity comes my way. 

 

References:

The Little Book of Behavioral Investing

How Not To Be Your Own Worst Enemy

James Montier

John Wiley & Sons Inc 2010

The Four Pillars Of Investing

Lessons for building a winning portfolio

William J Bernstein

McGraw Hill 2002

Opportunities for Patient Investors

PERSPECTIVES

September/October 2010

AHEAD OF PRINT

Financial Analysts Journal

Volume 66 Number 5

©2010 CFA Institute

http://www.scribd.com/doc/37268558/Seth-Klarman-CFA-Presentation#open_download

It Takes Volume To Be Bullish

A market that rises without real demand is a market that is whistling past the graveyard.

Shares battled back for the second session Monday following last week’s harsh selling. But the rally coincided with tepid volume, doing little to instill confidence that there is enough demand to sustain the seven-week advance.

After a market puts in a low and begins rallying, it is preferable to see that rally occur on strong volume. This is a sign that large investors, the lifeblood of any durable advance, are on board. However, after a market advance goes roughly six to eight weeks without at least several major accumulation days showing up, it is time to be concerned about the sustainability of that rally.

This lack of market volume was evident just prior to the end of the 2002-2007 bull market in mid-October 2007. It was also apparent during the six weeks leading up to the May 2 peak in the Standard & Poor’s 500 Index

The adage “it takes volume to put stocks up, but stocks can fall of their own weight.”

A brand-new bull market will typically see emerging leaders break out of bases and move up 20%-25% or so before pausing to digest their gains.

Adapted from: 

Demand wanted

By Kevin Marder

Sept. 27, 2011, 12:01 a.m. EDT

http://www.marketwatch.com/story/demand-wanted-2011-09-27

We Are On Our Own

When it comes to our money, don't trust anyone . In the end nobody cares more about our money than we do. Advisors can be counselors in a crisis market . But they don't have any more of a clue than you or I as to the future of the economy or stocks. Nobody has lived through a previous global deleveraging , coupled with instantaneous communication of every bit of noise as exists today. We are on our own.

Fear Of A Worse Tommorrow

We are afraid not just of today's terrible markets but of a worse tomorrow.

We feel like bystanders in our own financial lives—almost as if we were spectators at a racetrack equally incapable of stopping an impending car crash and of tearing our eyes away from it.

In the short run, it always feels better to be a buyer when the market is euphoric; in the long run, the investors who make the most money are those who buy when the market is miserable. For investors full of anger and fear, however, benign neglect might be the best they can muster

- Jason Zweig

http://online.wsj.com/article/SB10001424053111904070604576518584290614602.html?mod=WSJ_hp_MIDDLENexttoWhatsNewsSecond

The Soothsayers

Seeker-Sucker

Uncertainty is something that frightens us.   We seek assurance and knowledge of the future to reduce the uncertainty in our life and future.  We seek out Prophets, soothsayers, fortune tellers and even politicians offering hope and change.  We consult and listen to brokers, bank relationship managers, and fund managers looking for some shortcut to investment success and to get the best outcome for our investment or for peace of mind about investing. We also want to identify the fastest, easiest and safest way to get rich.  We believe that there is such a way.

On the other hand, the financial Industry try to meet this need of ours by trying to predict the future.   The more financial predictions they make, the more business they do and the more commissions they get.  As result, “the brokers began adding the business of prophecy to the business of brokerage.”

In this quest, we often also turn to various sources of so-called expert for information.  A very common source will be the popular financial media: magazines, newspapers, books, TV, radio, and the internet.

Unfortunately, the media is designed to “sell” newspapers, books, magazines, advertising time, and investment products—not to help us make good investing decisions.  Researchers found correlation between mutual fund recommendations and past advertising in three personal finance publications.  Positive mentions in these financial publication increase fund inflows by as much as 7% to 10%.

Do Ads Influence Editors?

Advertising and Bias in the Financial Media

Jonathan Reuter and Eric Zitzewitz

First Draft: October 2003

Current Draft: October 2004

http://129.3.20.41/eps/fin/papers/0501/0501003.pdf

We find that mutual fund recommendations are correlated with past advertising in three personal finance publications but not in two national newspapers. Our tests control for numerous fund characteristics, total advertising expenditures, and past mentions. While positive mentions significantly increase fund inflows, they do not successfully predict returns Overall, positive mentions in personal finance magazines and Consumer Reports are associated with an economically significant 7-10 percent increase in fund size over the next 12 months, while a positive mention in the New York Times is associated with a 15 percent increase.

The market is unpredictable, and yet so many people - financial analysts, brokers, mutual fund managers, pension fund managers, hedge fund managers, newsletter editors, market commentators on TV, bank and insurance sales personnel - make so much money by making predictions. It is also known that if someone is waxing poetic about a certain stock in chatrooms or blogs, that person could well be paid to do it.  

The investment advice and management industry is mammoth. The total revenues are well over $200 billion per year in the United States alone. A percentage of investors' assets provides the entire financial support for this industry. In 2004, the average cash take-home pay for each of the top 25 hedge fund managers was $251 million. It comes straight out of the investors' accounts. (Source: "The Big Investment Lie" by Michael Edesess).

Simply, the financial experts become oracles often with the customers' inclination and even enthusiastic cooperation.  We always think someone else has the answers. That's how Bernie Madoff  stole money from his investors.  Madoff ‘s victims are not ignorant people.  They are very smart and successful in their own fields.  However they are fools when it comes to investing. They believe either that they are smart enough to beat the market, or someone else is.    It's how scam artists make their living. 

We must always bear in mind that these advisers have their own self interest which will come before us.  Quoting John Rothchild, Author, a Fool and his Money, Financial Columnist, Time Magazine:

“The investor’s need to believe somebody is matched by the financial advisor’s need to make a nice living. If one of them has to be disappointed, it’s bound to be the former.”

Con artists are only interested in people who they can turned around to believe in them without question, and who they can manipulated to believe in their illusions.  They don't merely seek out the greedy or the weak or the stupid.  They seek out the needy - someone who has an unfulfilled desire. No one is immune. Many wealthy people are vain, and to them, appearing to be a high-roller is very important and as a result take unnecessary risk with their money.

You can be forgiven if you sometimes confused financial experts as con artists.  When trying to make a sale, it is not uncommon for the bank sales personnel to tell us that many of his clients has invested in the products and or that he is also invested and engaged in leveraging.  There is also the possibility of him give us assurance of profitability and low risk.  The more aggressive ones may even actively encourage leverage by 5 times the amount invested in a product saying that the yield from the investment product is higher than the present interest rates which will remain low.  It sounds like a free lunch.  What he failed to tell is that whatever the result, it will be amplified by five times. If the value of the investment product dropped by 20%, the total amount invested will be wipe out. Investors are encouraged to leverage simply to earn more commission for the financial experts or sales personnel.

There are many other examples of unethical practices by financial experts to increase their income.  One of the more common one will be “churning” – increase frequency in trading of products.  And this happen not only stockbrokers but by insurance agents encouraging clients to change their insurance policies at the detriments of the clients.  

Ben Graham Views of Market Crisis

Opportunities in Crisis

危机

When the market is desolate – everyone has lost money on everything.  We are so consumed by mental anguish that it is difficult to make rational decisions. The future is seems so bleak and every piece of news added to your agony. 

Nevertheless, the financial future is no more uncertain now than it used to be; in fact, it is  far less uncertain than when the market was at its peak, the future seemed bright, and  no one even imagine the disaster that would befall the market. Now, we realised the absolute certainty of blue skies ahead then was an illusion.  But all we now is the feeling and fear that worse misery may lies in store.  At this point of time, we may not be aware that this notion is also most likely to be an illusion.

With the market is plunging and the everyone is panicking, the easiest thing is to join in the mass exodus.  Many stress-out investors liquidated their whole portfolios in March of 2009, just as equities bottomed out.   

Investors who are  stampeded by the market panic is “perversely transforming his basic advantage into a basic disadvantage.”  How is this so?

Market fluctuate.  Though the price may change every seconds and minutes but the value should remain the same unless the fundamental changes.  Why suffer mental anguish over something which we have no control.  We, however, can control how we respond to it.

雨过天青

Yes, it is absolutely terrifying to be in the midst of a market crisis. However we cannot based on fear to make rational decisions. So when opting between following your emotions or investment plan, stick with your plan. Panic will not last forever, the crisis will eventually tail off. This one will too.  All crisis will passed as the history of markets showed for the past 200 years - Markets do recover.  When in a market crisis, think "This too shall pass."

Do not panic.  Do not sell off - this is where most investors made the serious mistake of selling low and buying high.  Selling will cause you irrevocable loss.  As Elis put in, "Flight to safety is like locking the barn door after the sheep had run off."  You are unlikely to buy back until the market has risen and regret will cause you to buy near the market peak - what Jason Zweig, call the Sheepish Bulls.

機不可失

Buffet said:  When other fear, we are greedy.  When others are greedy we are fearful.  We invert our emotions.  Market Crisis offers us the best opportunity to buy good stocks at wonderful prices.  History has shown that best money were earned by the people who stepped up and bought stocks and kept buying on the way down during market crisis.  Those who fled stocks for the safety of bonds and cash suffered. As it is popularly known - buy when there is blood in the street; even if the blood is yours.

So see Market Crisis as an opportunity and an advantage.  Though Bear markets may be gut-wrenching, they are the only means by which future returns can be raised.

泰然自若

Look at Market Crisis like disruptions in life ie floods, electrical failure, or earthquake. People are unable to continue their normal life and suffer a lot of inconveniences.  But things will return to normal with some changes and life continue. As an investor, your investment also go through raining day and sunshine.

Adopt an outlook of imperturbability - as long term value investor, prices in the short terms does not matter to us. .  If you have to know what your investments are every day, you're making a mistake. Look at it as trying to shake us off from our beliefs ground in history and facts.  Avoid investment pornography will prevent us from joining the market irrationality.

References:

Grace Goner (Truth Story)

Simple Way of Investing -
Grace Groner Way

I read about a true case in USA.  Grace Groner. 

She brought 3 shares of Abbot Laboratories, held it for about 70 years, and leave behind USD 7 million for charity.

Jim Royal, How You Can Become an Accidental Millionaire, May 28, 2010

http://www.fool.com/investing/dividends-income/2010/05/28/how-you-can-become-an-accidental-millionaire.aspx

Jonathon Hoenig, The Perfect Hedge for a Risky Era?,  8 March 2010, SmartMoney.com

http://www.smartmoney.com/investing/stocks/The-Perfect-Hedge-for-a-Risky-Era/#ixzz0koU35A2y

Details of above  posts or articles can be found at the end of this post or at the links.

She brought the 3 shares of specially issued Abbott Laboratories for USD 180 (about USD 3,000 in today’s dollar) around 1935.  She held on to these shares until she passed away in 2010 leaving behind a fortune of USD 7 million to her alma mater, suburban Lake Forest College.

How did she amass such a sum?

She lived within her means.  Groner was thrifty perhaps from her experience with the Depression.  Grace did not drive but walked around her town of Lake Forest, Ill. just outside Chicago. She owned a house that she had inherited from a friend. The one-bedroom place was stocked with the barest of possessions. She bought second-hand clothes at yard sales.  She also enjoyed giving money to needy local residents, and many years ago she even established a scholarship program at Lake Forest College by donating $180,000.

You can do that?

Grace's story demonstrates the power of buy-and-hold investing and compounding by reinvestment of dividends over a long period of time.. After many stock splits over decades and reinvested dividends, her three original shares became 129,000 shares worth roughly $7 million.

Her simple living is what permitted her to hold on to her investment over a lifetime. 

What I think happened?

After graduating in 1931, Groner began work as a secretary at Abbott. A few years later, she bought the three shares of Abbott.  She worked there for 43 years.  She is likely to have brought the 3 shares on urging of her colleagues or as a form of loyalty to her employer. 

She was not likely to be active in the stock market at all.  She was not likely to know the complexity of the market and may deemed it too dangerous to buy and sell stocks with her Depression era experiences.  As a result she is not affected by investment pornography and noises. 

As Hoenig put it, “she didn’t use Fibonacci retracements, high-frequency trading or advanced moving averages, but simply reinvested her dividends and never sold.”  Likewise, she is unlikely to have read Ben Graham or Taleb. If she did, she may have sold her stocks much earlier (because she was likely then to be an active investor).

She may even have a stoic and imperturbable attitude in life as I presume from her simple living. She was regularly employed and thrifty and had no demands for extra money. She did not put a lot money into the stocks and is not concerned about its performance.  As a result, she had the fortitude and discipline to hold on to her stock during its ups and downs.

Of course, these are my presumptions.  I know it is not easy doing what she and perhaps Uncle Chua had done.   What I am trying to deduce is how we can act like her in our investing behaviour.

Warren Buffet said “Investment is simple but not easy.”

Simple as Grace Groner or Uncle Chua have done.

But difficult …. The human temperament.  Most of us don’t want to wait 65 years for our money to compound into millions.

Most of us want to get the hand on some extra money to spend – we are not thrifty and often lived beyond our means.

Most of would have sold much earlier ……