Bear Trap(s)

Bear Trap(s)



There is an interesting post on this topic here: http://ssinvesting.blogspot.com/2008/05/how-to-define-bear-trap-if-public-bank.html


One of the challenges in investing for the long term is to have a personal strategy in handling volatility of stock prices.


You can choose to avoid such volatilities by investing in stalwarts like Nestle. This stock has long term revenue and profit growth. Its share price is trending upwards in keeping with its business performance. The consistency and predictably attracts certain types of investors. Yet, there are others who feel investing in this stock is not for them. Too slow and the returns are at best moderate!


Then, there are stocks with high volatilities or Beta. Their prices swing greatly, often based on rumours. Long term investors will be better off ignoring these fluctuations and monitor the quarterly reported results instead.

A good safety strategy in investing is to assume the attitude that all shares in the market are overpriced. This will prevent you from making big mistakes and forces you to carry out the appropriate valuation to counter this belief before putting good money to work.


What to do when the price of a good stock suddenly dropped drastically?

Instead of looking at price, follow PE. PE fluctuations up or down 20% are quite normal. You can usually ignore these, assuming you know the business of your investments well.


However, do not ignore the big fall in the PE of more than 20%. Check the news. What might be causing this sudden fall in price? Is there any fundamental deterioration in the business of the company? Will this be a temporary or permanent situation? You may have to decide to hold or sell quickly depending on your assessment.


Should you be buying more? If yes, when?


Let's review some recent events in the market.

Transmile: When news first broke a few years ago, that the auditor was unwilling to approve the accounts without qualification, the shares got sold down. This was a good learning experience. Some thought this was a buying opportunity. With the benefit of hindsight, cutting loss by selling at $9 to $11 was definitely better than the below $1 price the stock is trading at present. Wonder why related Kuok's company bought the shares during the particular period? The objectives of the majority or significant shareholders may not be in congruent with those of the minority shareholders. It was more to inspire some confidence in investors in Transmile.



PBB: Public Bank too was sold down since last year. Another drop occurred in Feb and March 09. Generally, the banking industry is going into a tough period. The price of the stock will reflect this. Is this a sell or a buy? Is this a temporary or a permanent setback to PBB core business?


Selling or buying into Transmile and PBB when their stock prices sunk are 2 entirely different operations. Which is a bear trap? Which is an opportunity or investment?

Usually the price will remain low for sometime after a bad news was known. You have time to pick these stocks. The important thing is to do the homework, check out and follow the news as this unfold. What is its impact on the long term durability of the business of the company? If you have done the homework, the analysis, the assessment of the impact of the news, the risks, and you understand the business and issues, be courageous. Make your own decision based on your own analysis. Don't be swayed by the crowd, or follow the crowd or look for affirmation by others.

The link: http://ssinvesting.blogspot.com/2008/05/how-to-define-bear-trap-if-public-bank.html rightly pointed out that the bear trap need only be applied to lousy companies with no prospect of recovery in their business. Those investing in good high quality companies need not fear the "bear traps" situations. Thanks for sharing this point. Instead the best opportunity to buy good quality companies is when they are being sold at low prices on some temporary bad news, assuming that these companies are within your circle of competence.