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A Leo. Others perceive me as arrogant, pompous, aggressive, dominating, disparaging, unforgiving, demanding, impatient, obnoxious, loud and uncouth, intimidating, poor listener, generous, kind, intelligent, and open. Agree with the attributes as perceived by other. See or portray myself as original, flexible, skeptical, philosophical, logical, rational, analytical, interesting, hardworking, knowledgeable, keen learner, mischievous, worldly wise. Self aware of short coming and trying to change. Progress slow.

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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