Friday, 3 July 2020

Market Timing: There are only two types of investors

There are quite long periods when the market falls and takes a long time to regain previous highs. 

How shall we judge whether you should try to take advantage of this?

Market strategies:  Dollar Cost Averaging versus Absolute Bottom Buying Strategy

Dow Jones Industrial Average Index from 1970 - 2020.  This is a period of 50 years which spans inflationary and deflationary cycles and which has seen several crises and crashes as well as bull markets.  It seems like a long and fair sample period.

Imagine that over this 50-year period there are two competing investment strategies. 

  1. One is to invest an equal amount every trading day throughout the period irrespective of market conditions - the so-called dollar cost averaging.
  2. The other strategy requires enough foresight for the investor to invest the same amount daily, but to stop investing when the market turns down and save the cash.  This money is only invested when the Dow makes a new bottom, hitting its low point in any period of decline (hence why it is known as an "absolute bottom buying strategy").

This is a somewhat more realistic example of how you might apply foresight, rather than measuring what would happen if you had such certainty about the future you were able to sell everything just before the market turned down and then buy it back at the bottom.


Over the 50-year period, the second strategy would have produced returns 22 per cent higher than the first.

It sounds impressive - perhaps a little less so when you break it down to a 0.4 per cent outperformance per year 

But think of the time and effort you would have to spend monitoring markets to get those calls just right.

Possibly foregoing any significant gains

Since March 2013, the Dow is up just over 150 per cent in total, averaging 13.3 per cent per annum. 

Imagine if you had acted on market fears and taken your money out of equities or stopped investing ahead of that performance. 

Should you risk foregoing any significant portion of that gain for a maximum upside of 0.4 per cent per year.


Nobody has perfect foresight:  

  • wrong about the events and 
  • wrong about the market's reaction to events

In reality, attempt to implement the second strategy will almost certainly cause harm to your net worth as nobody has perfect foresight.  In your desire to time the markets, you will stop investing, or worse, sell and take money out when you expect the market to go down and instead it goes up.

Think back to Brexit and Trump's election.  We were told by most commentators that they wold not happen, but if they did, the markets would plunge.  Not only were they wrong about the events but they were also wrong about the market's reaction to events.  The markets soared.

There are only two types of investors

When it comes to so-called market timing, there are only two sorts of people: 

  1. those who can't do it, and 
  2. those who know they can't do it.  
It is safer and more profitable to be in the latter camp.

There is a lot to lose and little to gain from market timing.

Reference:  The Financial Times

There is a lot to lose and little to gain from market timing.

There is a lot to lose and little to gain from market timing.

When it comes to so-called market timing, there are only two sorts of people

  1. those who can't do it, and
  2. those who know they can't do it.

It is safer and more profitable to be in the later camp.

What is market timing?

With the Covid-19 pandemic dominating the news and recent volatility on world stock markets, you may have heard a lot about market timing again. 

Advisers and financial commentators will probably not use that actual term.  What they will talk about is whether you should sell some or all of your equity investments because of the economic effects of the coronavirus and the subsequent effect on the market.

All of this what is termed "market timing" in the jargon of the investment trade - holding back investment or taking some or all of your money out of the market when you anticipate a fall.

Problem of this approach:  Can you anticipate the markets?

The word "anticipate" indicates the first problem with this approach. 

Most people whom I encounter take their money out during or after a fall - as they did in March. 

[They are doing the equivalent of driving whilst looking in the rear view mirror (or at best, out of the side window of the car).  You need to look out of the windscreen in order to have the best chance of driving safely.  The trouble with doing that in terms of the stock market is that the visibility is often so poor, it feels like driving in fog.]

Markets are second order systems

Such approaches to investment are almost all futile.  Markets are second order systems.  What this means is that in order to successfully implement such market timing strategies:

1.  you not only have to be able to predict events
  • interest rates, 
  • wars, 
  • oil price shocks, 
  • the impact of the coronavirus, 
  • the outcome of elections and referendums - 

2.  you also need to know what the market was expecting,

  • how it will react and 
  • get your timing right.  

Reference: Financial Times

Friday, 26 June 2020

Know your Investment Profile

Your investment profile

Define your investment profile by identifying:
1.  Your goals and constraints
2.  Your risk ability and tolerance
3.  Your cognitive biases and their impact on your emotions.

Profiling:  everyone is unique

Differences go beyond the level of wealth and stem from:

  • 1.  Age
  • 2.  Education
  • 3.  Phase of life
  • 4.  Profession
  • 5.  ...

Financial situation as the core of your profile

1.  A very wealthy person with relatively little planned expenses

  • Will be able to take considerable investment risk, as you have enough funds aside to absorb potential losses.
  • Will be said to have a "high risk ability"

2.  A person with limited wealth and a large part of his assets reserved for financial commitments:

  • Can only take limited investment risk, as he lacks funds to cover potential losses
  • Will be said to have a "low risk ability"

Ranking the objectives is also key

1.  List your objectives and rank them by degree of priority:
  • Saving for retirement
  • Providing for children's education
  • Purchasing real estate objects

2.  Risk tolerance will be:
  • High for less important objectives
  • Low for important objectives

Investment horizon:  the longer, the better!

1.  The longer the investment horizon, the higher the risk ability
  • .... as investments may recover from potential losses

2.  The shorter the investment horizon, the lower the risk ability
  • .....  as investments cannot recover from potential losses.
3.  Unless you want to speculate ... but at your own risk!

Cognitive biases and the 3 steps in investing

Cognitive biases affect investment decisions when:

1.  Defining the investment universe
  • Choosing which asset classes / securities are taken into consideration

2.  Constructing the optimal investment strategy
  • Forecasting expecting returns and risk

3.  Adjusting and rebalancing the portfolio.

Cognitive biases:  defining the investment universe

When defining the assets universe you want to invest in:
  • You tend to over-invest in local companies (home bias)
  • You tend to overweight recent information (recency bias)

You should get out of your comfort zone and do extensive research on securities which may not necessarily be close to your home, nor provide readily available information.

Cognitive biases:  constructing the portfolio

When making forecasts:
  • You may be influenced by recent data, which may not be relevant (anchoring bias)
  • You tend to be over-confident (overestimating expected returns and / or underestimating risk)
  • You tend to look for evidence which will confirm our beliefs and ignore information that contradicts them (confirmation bias)
Look for the black swan!

Cognitive biases:  rebalancing

When rebalancing the portfolio:
  • You tend to overestimate the value of assets you own and underestimate the value of (similar) assets you do not own (endowment effect)
  • You tend to sell winning positions too soon and hold onto losing positions for too long (disposition effect)

The right question to ask yourself

For example:  

You bought 1000 Nokia shares at 30 EUR.  The stock goes to 60 .. and then drops to 20 EUR.  The question to ask yourself is:

"If I had 20,000 EUR today, would I purchase 1000 Nokia shares?"
  • If you answer "yes", then keep the position.
  • If you answer "no", then sell it.


Before constructing a portfolio, you need to define your
  • Objectives
  • Risk ability and tolerance

You should be aware that you are influenced by cognitive biases which may lead to sub-optimal investment decisions.

You should try to adjust as much as possible for these biases.

Friday, 19 June 2020

KLSE Market PE 19.6.2020

Company Mkt Cap (b) Last Price PE DY ROE
MAH 9.607 5.79 26.18 2.59 3.99
AMMB 9.404 3.12 6.06 6.41 8.47
AXIATA 32 3.49 37.89 2.72 5.42
CIMB 36.616 3.69 9.45 7.05 7.09
DIALOG 20.141 3.57 32.78 1.06 15.08
DIGI 33.744 4.34 23.7 4.19 228.88
GENM 15.855 2.67 22.36 7.49 3.78
GENTING 17.213 4.44 13.22 4.95 3.69
HAPSENG 21.411 8.6 18.38 4.07 15.6
HARTA 38.827 11.46 89.32 0.72 17.11
HLB 31.475 14.52 12.29 3.44 9.17
HLFG 16.203 14.12 9 2.97 8.82
IHH 47.477 5.41 86.15 0.74 2.46
IOI 27.34 4.35 66.82 1.84 4.58
KLK 23.826 22.04 56.91 2.27 4.07
MAXIS 41.683 5.33 28.4 3.75 20.86
MBB 86.334 7.68 10.23 8.33 10.82
MISC 35.175 7.88 - 4.19 -0.7
NESTLE 32.689 139.4 52.39 2.01 72.7
PBB 64.443 16.6 11.87 4.4 12.55
PCHEM 50.56 6.32 20.07 2.85 8.29
PETDAG 20.962 21.1 41.19 4.03 9.16
PETGAS 34.311 17.34 19.19 4.73 13.77
PMETAL 18.898 4.68 41.23 1.07 14.01
PPB 24.355 17.12 22.31 1.81 4.95
RHB 19.369 4.83 7.99 6.42 9.3
SIME 14.827 2.18 17.93 4.59 5.79
SIMEPLT 33.941 4.93 83.14 0.2 3.09
TENAGA 67.2 11.78 18.21 8.49 6.74
TOPGLOV 39.094 14.58 59.68 0.51 18.94
Company Mkt Cap (b) PAT (m0 DIV (m) DPO Equity (m)
MAH 9.607 367.0 248.8 0.68 9197.0
AMMB 9.404 1551.8 602.8 0.39 18321.3
AXIATA 32 844.6 870.4 1.03 15582.1
CIMB 36.616 3874.7 2581.4 0.67 54650.3
DIALOG 20.141 614.4 213.5 0.35 4074.5
DIGI 33.744 1423.8 1413.9 0.99 622.1
GENM 15.855 709.1 1187.5 1.67 18758.7
GENTING 17.213 1302.0 852.0 0.65 35285.7
HAPSENG 21.411 1164.9 871.4 0.75 7467.4
HARTA 38.827 434.7 279.6 0.64 2540.6
HLB 31.475 2561.0 1082.7 0.42 27928.3
HLFG 16.203 1800.3 481.2 0.27 20411.9
IHH 47.477 551.1 351.3 0.64 22402.3
IOI 27.34 409.2 503.1 1.23 8933.6
KLK 23.826 418.7 540.9 1.29 10286.5
MAXIS 41.683 1467.7 1563.1 1.07 7036.0
MBB 86.334 8439.3 7191.6 0.85 77997.2
MISC 35.175 -241.0 1473.8 -6.12 34428.6
NESTLE 32.689 624.0 657.0 1.05 858.3
PBB 64.443 5429.1 2835.5 0.52 43259.5
PCHEM 50.56 2519.2 1441.0 0.57 30388.2
PETDAG 20.962 508.9 844.8 1.66 5555.8
PETGAS 34.311 1788.0 1622.9 0.91 12984.5
PMETAL 18.898 458.4 202.2 0.44 3271.6
PPB 24.355 1091.7 440.8 0.40 22053.8
RHB 19.369 2424.2 1243.5 0.51 26066.2
SIME 14.827 826.9 680.6 0.82 14282.2
SIMEPLT 33.941 408.2 67.9 0.17 13211.6
TENAGA 67.2 3690.3 5705.3 1.55 54751.9
TOPGLOV 39.094 655.1 199.4 0.30 3458.6
KLCI  964.98 48117.0 38250.0 0.79 606066.2

Market PE 20.1
Market DY 3.96%
Market ROE 6.3%

Market P/B 1.59
Market DPO 0.79

Excellent comments on Margin of Safety by Warren Buffett

Warren Buffett explains Margin of Safety

'Don't confuse day traders with serious investors'

'Don't confuse day traders with serious investors': Warren Buffett and Howard Marks will win over time, Princeton economist says

"I don't confuse day traders with serious investors," he said. "Don't be misled with false claims of easy profits from day trading."

The economist and author added that almost all individual traders suffer losses over time, highlighting three studies to support his claim:
  • Active traders on Charles Schwab significantly underperformed a low-cost index fund over a six-year period.
  • Less than 1% of Taiwanese traders consistently beat a low-cost ETF over a 15-year period, and 80% lost money.
  • 97% of Brazilian day traders lost money, and just 1% earned more than the national minimum wage.
Malkiel also emphasized that savvy investors diversify and rebalance their holdings, manage their tax burdens, avoid trying to time the market, stick to their convictions, and use investment structures such as low-fee ETFs.

Thursday, 11 June 2020

Unconventional Market Policy: Exit Strategy (8)

Special Operations
Overall, special operations other than the traditional repurchase agreements might be needed to sterilise the effects of unconventional policy measures at the appropriate time in the future. 
1.  One option would be to have the fiscal authority issue debt certificates to the market and deposit the proceeds with the central bank. 

  • The switch in the ownership of government debt from the private sector to the monetary authority would alleviate the inflationary pressures arising from the additional liquidity. 

2.  Another option would be for the central bank to issue debt certificates itself, as the ECB for example can do according to its Statute. 

  • In this way the central bank would essentially change the composition of the liabilities side of its balance sheet, moving away from excess reserves and towards less-liquid debt securities. 
  • The effect, compared with government debt issuance, would in essence be the same.

Financial loss for the central bank
An important final element related to the exit strategy, but which should be considered carefully already when deciding to embark on unconventional measures, is that when the central bank sells the assets their value is likely to have declined considerably, given the higher rate of interest. 

This implies a financial loss for the central bank. 

The consequences for the financial – and overall – independence of the central bank should not be downplayed.

Unconventional Market Policy: Exit Strategy (7)

Getting the timing right in withdrawing additional liquidity
Getting the timing right in withdrawing additional liquidity is likely to be decisive in order to ensure a non-inflationary recovery. 
Generally speaking, the lower the reversibility of the non-conventional operations, the larger the risk of being behind the curve when the macroeconomic and financial market situation improves.
Indeed, to a large extent the speed of unwinding of unconventional measures would depend on their degree of reversibility. 
(A)  Some of the unwinding would happen automatically as central bank programmes become increasingly unattractive as financial conditions normalise

  • For instance, many lending facilities provide liquidity at a premium over the main policy rate or with a high haircut applied to the required collateral, making interbank lending the more attractive option once normal lending activity among market participants is restored. 
  • As a result, the central bank’s balance sheet would decline automatically as demand for its funds decreases. 
  • As noted, the ECB’s current liquidity-providing operations imply an ‘endogenous’ exit strategy as banks would automatically seek less credit from the ECB when tensions in financial markets ease. 
  • The speed of the reversibility would therefore largely depend on the speed of the resurgence of the financial system. 
(B)  In the euro area, the revitalisation of money markets is key to the ECB’s exit strategy and any future interest rate decision should therefore avoid a further disruption of money markets. 

  • In this context, bringing the main policy rate too close to zero would risk hampering the functioning of the money markets as it would reduce the incentives for interbank lending. 
  • This, in turn, could blur the important signals coming otherwise from the resurgence of interbank lending and the associated positive effect on the ECB’s balance sheet.
(C)  Obviously, the speed of tightening would also depend on the maturity of the assets bought by central banks within the framework of their easing programmes. 

  • Differences in the maturity of assets will ensure that a tightening of the accommodative stance would come in gradual tranches. 
  • This is important to avoid any abrupt tightening of credit conditions in the middle of the recovery. 
  • At the same time, measures centered on assets that are longer-term in nature and less liquid could pose challenges to the future unwinding of these measures. 
  • If market conditions were to improve faster than expected, an increase in the average maturity of the central bank’s portfolio would make it more difficult for financial markets to return to normal private sector functioning and would also heighten medium-term inflation risks.

Unconventional Monetary Policy: Exit Strategy (6)

How quickly should policy-makers reverse their policies? 
On the one hand, withdrawing liquidity in such large quantities will trigger a substantial contractionary monetary policy shock. 
The large size of many easing programmes will make it difficult to sell assets without a significant market impact. 
If it happens too quickly or abruptly, policy-makers risk choking off the economic recovery or imposing heavy capital losses on lenders. 

  • For instance, in the corporate bond or commercial paper market, even small sales of securities by the central bank could cause spreads to widen considerably and to sharply tighten credit conditions for firms. 
On the other hand, with policy rates at record low levels and additional liquidity-providing measures adopted in so many countries, the possibility of inflation risks emerging sometime later is not something that can be excluded. 

  • Retaining such exceptional policy measures for too long might aggravate the upside risks to price stability and sow the seeds for future imbalances in financial markets.

Unconventional Monetary Policy: Exit Strategy (5)

Reaction of the Financial Markets to the Start of Unwinding

This raises the question of the reaction that financial markets might have to the start of the unwinding of the direct easing measures. 

1.   How would markets react to the central bank starting to sell the government bonds it purchased under the direct quantitative easing policy? 
Such a start would signal presumably that the tightening cycle is close and could affect yields. 

2.  If the amount of assets to be sold is significantthis can have an impact on the market conditions of the underlying assets, possibly further depressing its price.

Unconventional Monetary Policy: Exit Strategy (4)

Unwinding of 'Credit Easing' Policies (Unwinding the Purchase of Corporate Bonds)

Measures taken through the purchase of corporate bonds aim to revitalise the flow of credit in certain market segments.

These measures are primarily designed to bypass the financial sector and to ensure that non-financial corporations still have access to external financing. 
Now, in theory, by stimulating longer-term investments and hence aggregate demand, these measures might induce inflationary pressures in the medium to long-term, independent of the functioning of money markets and lending by banks. 
The strength of this channel depends on the depth of the corporate bond market. 

  • If policy-makers were to react to these inflationary pressures by raising interest rates pre-emptively while money markets were still weak, the consequences for the banking channel of intermediation could be severe. 
  • If, however, markets were to function properly again, there would be no reason to postpone the unwinding of ‘credit easing’ policies to a date longer than needed. 
Taken together, this reasoning suggests that purchases of privately issued securities should be unwound before or at the same time as interest rates are raised back to normal levels.

Unconventional Monetary Policy: Exit Strategy (3)

What are the implications for the sequencing of unwinding conventional and unconventional policy measures? 
It means that non-standard measures that aim mainly at restoring the orderly functioning of money markets, such as supplementary longer-term refinancing operations or an extended menu of eligible collaterals, might have to be rolled back before interest rates are increased again.

(A)  First of all, because raising interest rates in an environment in which such unconventional measures were still judged to be necessary would risk undermining a sustained recovery by money markets
If concerns about the required and available amounts of short-term funding still prevailed among market participants, raising rates might reinforce these fears and could lead to further, unwarranted upward pressure on overnight rates. 
(B)  Second, supplying extra liquidity to the markets through non-standard measures while, at the same time, tightening monetary policy would send mixed signals on the effective monetary policy stance. 
Measures to alleviate the strains in money markets could in fact be seen as a continued easing of the monetary policy stance. 
(C)  Third, with non-standard measures such as the unlimited provision of liquidity still in place it might be more difficult for the central bank to steer the level of market rates consistent with its policy target
For example, a fixed rate tender with full allotment usually leaves the banking sector with a large daily liquidity surplus, which needs to be mopped up by additional fine-tuning operations towards the end of the reserve maintenance period in order to avoid a sharp drop in the overnight interest rate. 
This, however, causes extra volatility in the markets as well as large interest rate fluctuations that are undesirable from the point of view of an effective signalling of the monetary policy stance. 
(D)  Fourth, with markets still in need of additional non-standard measures, the pass-through of an increase in policy rates would probably be hampered. 
The orderly transmission of any monetary tightening would only resume once trust among market participants has had been restored and money markets were operating normally again. 
(E)  Finally, in any bank-dominated system of fund intermediation, in which the recovery of the economy largely depends on the soundness of the banking system, inflationary pressures that would require a tightening of monetary policy are likely to appear only when the banks take up their normal lending activity again. 
This, in turn, implies that non-standard measures should ideally be rolled back before interest rates were increased.

Unconventional Monetary Policy: Exit Strategy (2)

Most of the unconventional measures (quantitative easing and credit easing) put in place are designed to stimulate lending, to convince savers to hold risky longer-term assets.

The extremely low interest rates and ample liquidity aims at favouring borrowers and penalising lenders over the medium term.

The effectiveness of these measures mainly depends on the readiness of banks to go back to their main business of lending to households and firms rather than parking excess reserves with the central bank.

Problem of Exiting or Reversing
Prospects of rising interest rates may discourage private savers from purchasing longer-term assets, as a tightening of monetary policy inevitably implies a capital loss for those who bought these assets. 

An increase in policy rates – and in particular in the deposit rate – risks undermining banks’ incentive to re-engage in funding the private sector. 

Raising policy rates, or the expectation of such increases, when confidence is not fully restored could therefore be counterproductive.

Unconventional Monetary Policy: Exit Strategy (1)


How and when do central banks need to unwind the extra monetary stimulus? 
Simple answers:
  • when the economy rebounds and 
  • inflationary prospects are back in line with the central bank’s price stability objective. 

Not Easy
Unfortunately, for a number of reasons, formulating an adequate exit strategy is not such an easy task. Why? 
Two choices that need to be made: 
  • first, devising the right sequence for the phasing out of the conventional and unconventional monetary policy accommodation; 
  • second, deciding on the speed at which the unconventional accommodation is removed.

To unwind unconventional monetary policy operations (in the case of quantitative easing and credit easing policies)
  • it normally implies selling assets outright, and in significant amounts

In the case of the endogenous easing measures, the unwinding happens automatically, since banks should naturally 
  • reduce their demand for central bank money and 
  • increase interbank lending as their situation normalises.


Conventional and unconventional monetary policy
Lorenzo Bini Smaghi,
Member of the Executive Board of the European Central Bank,
Keynote lecture at the International Center for Monetary and Banking Studies (ICMB),
Geneva, 28 April 2009




1 Direct Quantitative Easing

2 Direct Credit Easing

3 Indirect (or Endogenous) Quantitative/Credit Easing