Friday, 15 January 2016

Investing In a Bear Market

You will seldom see me writing about investment on equity (stock market). First, I am not an expert. Second, my key to financial independence is not dependent on stock market. However, I do admit it is a good instrument to accelerate your financial goals, if you did it "correctly", or rather, "timely".

We definitely can't time the market. This is why people still buy stocks at STI 3500 level. I believe when STI reached 5000 level, there are still buyers. We need to understand a few simple logics. First, STI is a general sentiment on how Singapore stocks are doing. Second, It is forward looking sensing and don't represent any current stage of our country economy. Most probably, it is speculation based on yesterday news. We "speculate" based on our best knowledge. Since we can't time the market, how do we know we have bought companies that will go up, and not down? For income investors, how will we know whether the dividends are sustainable?

If you have done your thorough homework and invest knowing the valuation is cheap and the price is nothing but just a discount, then it is at most a better "speculation" knowing your chances of earning money in the long run will be more certain. A good company need to be discovered by the general public to unleash the price potential (if you are looking to sell them) as stock market price are generally driven by sentiments. There are always mismatch in the true worth of the company and the market price sentiments, and the difference is what we get in the long run. Hope you get the upside, and not the downside. If you bought the right company at a good price and it is not discovered by the public, then you most probably will enjoy the potential of good earnings, which will translate into returns like dividends or sudden jump in share prices (after decades of not being discovered and finally, it does). As for dividends, you have to understand the company has the right to reinvest the earnings to grow the business, for all I know. It may not land in your pocket.

Having said that, the bear market is simply a trigger of negative sentiments among the stock market. Knowing your asset allocations are utmost important to a successful investment. Knowing that you have set aside some emergency fund for your livelihood is important because jobs are at stake during bad economy. Then, you can invest the "excess" cash you have. Of course, if your risk appetite is huge, then go ahead and invest your life saving away. Especially if you are youthful and no financial commitment. At your own risk. I wouldn't encourage this.

If this time is no different with any other bears, remember, it is a cycle. We could be seeing the start of the fall or we have reached the bottom. For all you know, what have you catch so far? How long more the journey?

Always remember, don't over invest in a counter if you are uncertain. For example, averaging down a stock that has went down so much and you happened to own it, must have a limit. Ideally, it should not be more than 10% of your portfolio. Of course, if you are doing STI ETF investing, then the 10% can't apply as you are buying a fund that invest in 30 top market capitalisation stocks. Personally, I have a bit of Keppel Corporation and it is dropping every day. I know I am not going to average down unless it meet all the requirements like portfolio allocation, more certainty of oil industry and no better stocks to buy. What if it return to $8 or $10? Good for me. If it don't, I did myself a favour of not overcommit. This is the beauty of cherry picking to beat the STI ETF, if you can avoid the downsides and focus on the upsides.

My strategy? Eat slowly, and when it is time to be greedy, eat faster. When is the time? Always remember, there are two pricing. 1st price is the general market pricing that caused most stocks to follow in a uniform direction. 2nd price is the overly beaten price of a good company. Look for a company that is good and you know it is oversold. Watch your portfolio allocations.

Hope we emerge richer 5 years later after this post. What is the price you have to pay?

6 comments:

  1. Just curious, did you draw the FD bear yourself? Haha - I know, random question. Looks like yours is a super bear quite unlike the market these days!

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    1. Hi Kevin

      Product of photoshop. Haha. A bit kiddo :)

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    2. So FD is a super bear! Gasp!

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    3. Hi LP

      FD started this mascot with this purpose in mind. haha.

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