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

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 ……

Uncle Chua

Simple Way of Investing
The illiterate but smart way

I read how Uncle Chua made $17 millions (it was not stated in which currency, Malaysian or Singapore dollars)  from stocks in these postings:

The story of Uncle Chua

Thursday, May 14, 2009

http://myinvestingnotes.blogspot.com/2009/05/story-of-uncle-chua.html

Value Investing Made Simple by Uncle Chua

Just for Laugh ...

Sunday, 16 January 2011

http://createwealth8888.blogspot.com/

True story Or made up?  Most of us are unlikely to believe the story but agree that it is possible to do so. It isn’t important whether this is a true story or not. It is a nice case study for us to learn from. 

Uncle Chua is a retired businessman with cash.  He has been investing in stock for a long time. “Uncle Chua explained: "I bought some of them as early as in the 60s. I was then in my 50s and retired”. In 1997, he would be at least in his 80s when “In mid-1997, when the Asian Financial Crisis started sweeping across regional markets, Uncle Chua didn't sell a single share. Instead, he started buying shares - again ALL blue chips and ONLY blue chips”

How he did it?

It took a lot of guts.

I presume the following:

He had lot of experiences in stocks and gone through many cycles up and downturns of the market.   Though he was illiterate and may not studied the history of the stock markets, he was confident from his experience that eventually markets recovered.

So he may not know about Baron Rothchild’s, John Templeton and Ben Graham, he did it correctly – “buy when there is bloodshed in the street.”

His illiteracy also helped in that he may not be exposed to much investment pornography that may derailed him from his single minded and simple investing style.  He would also not monitor his stock daily as he does not even know  “how to use the Teletext facility on his TV set,” sparing him the antics of Mr Market.  He truly exemplified what Warren Buffet said, "Success in investing doesn't correlate with I.Q. once you're above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing."

He must be very rich to continue investing in 1997 with “couple of hundred thousand,”  especially at the age of 80+.  This amount should only be a small portion of his total wealth as he is unlikely to risk everything in the market at his age.  There is also no need for him to do so.  That is why in this world, the rich get richer.

Most of us may not be in the same position as him – with so much money to spare.  However, we need not do it to the same extent but we must take advantage of the situation to invest some of our savings, on what Ben Graham would call,  “very satisfactory terms."  This would minimize our regrets which may cause us to charge into the peak of the market after its recovery like Jason Zweig’s “sheepish bulls”.

References:

Baron Rothschild

Simple Way of Investing
The time to buy is when there's blood in the streets

Baron Rothschild did this

Warren Buffett buy when there is fear in the market

Marty Whitman does it with great interest in distressed debts.

Sir John Templeton" buy during “point of maximum pessimism."

In fact, all great investors do this.

Baron Rothschild, an 18th century British nobleman and member of the Rothschild banking family, made a fortune buying in the panic after Napoleon’s lost at the Battle of Waterloo. He opined: "The time to buy is when there's blood in the streets."

A second part to Rothschild's quote attributed to Mark Mobius "even if the blood is your own."

Marty Whitman, of the Third Avenue Value Fund,  likes purchasing bonds in distressed companies with rebound potential. Whitman bought bonds in the oil-drilling company, Nabors Industries, which filed for bankruptcy protection in 1987. A year later the company emerged and the bondholders' debt was converted into equity. He also purchased bonds of K-Mart both before and after it filed for bankruptcy protection in 2002.  He only paid about 20 cents on the dollar for the bonds as there is a great danger that the company would shut its doors for good.  Whitman made a nice profit when the company emerged from bankruptcy and his bonds were exchanged for stock in the new K-Mart. The shares jumped much higher in the years following the reorganization. In 2009, Third Avenue Management LLC increased its stake in Forest City Enterprises Inc., the property developer whose shares have tumbled 83 percent in the past year.  The fund is investing in distressed debt while avoiding most stocks, reported Bloomberg on 28 May 2009. Whitman said that Third Avenue plans to invest in more companies that are seeking to pay down debt and is avoiding stocks because of short sellers’ ability to drive down prices. Whitman said he’s finding “huge, huge opportunities,” in distressed debt and may launch a new fund for those investments.

Sir John Templeton ran the Templeton Growth Fund from 1954 to 1992. He was a contrarian investor, buying into companies when they hit the "point of maximum pessimism." His investing style can be summed up as looking for He looked for value investments, or what he called "bargain hunting", by searching out such targets in many countries around the world that offered low prices and an excellent long-term outlook.  He pioneered international investing.

He is one of the past century's top contrarians. In 1939, with war raging in Europe, Templeton bought $100 of every stock trading below $1 on the New York and American stock exchanges of some 104 companies, 34 of which were bankrupt, for a total investment of roughly $10,400. Four years later he sold these stocks for more than $40,000! Templeton was also said to profited when he bought low during the Depression and sold high during the internet boom.

Templeton became a billionaire as a true pioneer of globally diversified mutual funds, including the Templeton World Fund, which was formed in 1978. His flagship Templeton Growth Fund posted a 13.8% annualized average return from 1954 to 2004, well ahead of the Standard & Poor's 11.1%.

Warren Buffett found the opportunity in the 1973-74 bear market to purchase a big stake in the Washington Post Company - an 100 bagger investment.   According to him, he was buying at a deep discount the company could have "… sold the (Post's) assets to any one of 10 buyers for not less than $400 million, probably appreciably more." The company had only an $80 million market cap at the time.

A useful reference for this topic where I obtain most of the above information:

Buy When There is Blood In The Streets

 by Daniel Myers, CFA

http://www.investopedia.com/articles/financial-theory/08/contrarian-investing.asp

Fred Schwed

Simple Way of Investing
A little wonderful advice

Fred Schwed J. give “a little wonderful advice” in his book, “Where Are the Customers’ Yachts?”. 

It is still relevance.  John Rothchild, Author, a Fool and his Money, Financial Columnist, Time Magazine has this to say about his book:

It’s amazing how well Schwed’s book is hold up after fifty five years.  About the only things that’s changed on Wall Street is that computers have replaced pencils and graph paper.  Otherwise the basics are the same.

Schwed recommended:

Like other great ideas, this one is simple:

When there is a stock-market boom, and every is scrambling for common stocks, take all your common stocks and sell them.  Take the proceeds and buy conservative bonds.  No doubt the stocks you sold will go higher. 

Pay no attention to this – just wait for the depression which will come sooner or later.  When this depression – or panic – becomes a national catastrophe, sell out the bonds (perhaps at a loss) and buy back the stocks. 

When the Market Crash, there would be as many shares sold as brought.

The public reads the papers and reading about the “large selling”, “new selling wave threw the market into utter chaos”, and “during the final hour equities were thrown overboard in huge lots, without regard for price or value.”, it get the impression that on the catastrophic day everyone sold and nobody bought.  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.

No doubt the stocks will go still lower.  Again pay no attention.  Wait for the next boom.  Continue to repeat this operation as long as you live and you’ll have the pleasure of dying rich.

A glance at financial history will show that there never was a generation for whom this advice would not have worked splendidly. …….

In fact, I think you need to do it only once and will benefit greatly from it

Simple But Not Easy

It looks as easy as rolling off a log, but it isn’t.  The chief difficulties, of course, are psychological.  It requires buying bonds when bonds are generally unpopular and buying stocks when stocks are universally detested.

Schwed Jr, F. (1940). Where Are the Customers’ Yachts? By Fred Schwed Jr,. John Wiley & Sons,.

Jim Roger

Simple of Investing
Wait for Opportunity

Jim Rogers is somebody else you ought to listen to on the subject of managing your own money. He used to work with George Soros. Rogers drove around the world twice, once on a motorcycle and once in a car, and wrote a book about each trip.

Rogers told author John Train in 1989 that you should, "take your money, put it in Treasury bills or a money-market fund. Just sit back, go to the beach, go to the movies, play checkers, do whatever you want to.

"Then something will come along where you know it's right. Take all your money out of the money-market fund, put it in whatever it happens to be and stay with it for three or four or five or 10 years, whatever it is.

"You'll know when to sell again, because you'll know more about it than anybody else. Take your money out, put it back in the money-market fund, and wait for the next thing to come along. When it does, you'll make a whole lot of money."

We don't get to see Rogers' balance sheet because he's not a public company. But Buffett clearly follows his own advice. His latest Berkshire Hathaway balance sheet shows total cash & equivalents of more than $46 billion, equal to about 27% of the entire company's current market value.

Not Easy

The only problem with this simple strategy of sitting in cash and investing only when circumstances are ideal is human nature. Nobody wants to do it. Nobody wants to be patient. Everybody wants to buy and sell quickly and make a fortune overnight. Judging from the results most people get, they really just want to buy and sell quickly, whether they make a fortune or not!

Of course, the average investor's impatience is just another easy way for us Extreme Value types to get an advantage. We can sit in cash, wait for something that is too good to pass up, then buy it and hold on.

Jim Rogers and Warren Buffett on How to Manage Your Money

By Dan Ferris, editor, Extreme Value

Saturday, May 26, 2007

http://www.dailywealth.com/960/Jim-Rogers-and-Warren-Buffett-on-How-to-Manage-Your-Money