Friday, 12 June 2009

Lessons from the recent severe bear market

Reviewing my investing of the last 1 year.

What I did right.

1. Investing in good quality stocks. These stocks were down in the bear market, but the majority have rebounded, some higher than before.

2. Investing when the price is low. Using PE, average PE and the PE range as a guide, and buying when the PE is at a discount to the average PE.

3. Keeping my investments to those businesses that I can understand, that is within my circle of competence.

4. Buying when the market is low.

5. Buying when a particular stock is sold down for various reasons other than to deteriorating fundamentals.

6. Not buying lousy companies. (Best avoided, short term gain, long term pain)

7. Not buying good quality stocks that are trading at high prices.

8. Selling certain stocks in certain sectors where the business will be challenging in a recession.

9. Selling certain stocks in certain sectors that were fairly or highly priced to reduce the amount of money at risk in the portfolio when the downturn was clearly established.

10. By not selling stocks that were priced at below 'fair value' during the severe downturn, despite the continuing falling price.

11. Not timing the market. Holding onto good quality stocks bought at bargain for the long-term in my portfolio even during the severe downturn. The biggest return has already occurred in the recent upturn of stock prices.

12. By averaging up or down in my purchases of good quality stocks. Both these actions are safe. By always buying more shares in the stocks at lower prices, and buying less shares when the stocks were at higher prices.

13. By investing big in a good quality stock that I am confident of its value when it was offered at a bargain.

14. By always buying at a bargain, or at a fair price. Never, never, never and never at high price.

15. Believing in myself and my valuation.

16. Ignoring the noises in the market.

17. Having a sum of cash for investing opportunities.

What I did wrong.

1. Looking at the price of a stock, rather than the business and the financial statements of the stocks.

2. Reacting emotionally to falling prices. (Not easy, but can be overcomed if I focus on the fundamentals of the company).

3. Not selling some stocks early in the downturn. (But then this would be market timing which I feel is an impossible strategy for one to profit from consistently.)

4. Selling some good quality stocks when the major fall in prices had occurred. (This action has the effect of reducing the amount of money in the portfolio at risk in a down market, but then also harmed the return of the portfolio in a up market. Most gains in a portfolio are derived by buying or holding stocks in a down market before the change in trend than by selling stocks in a high market before the change in trend. Moreover, the prices of these good quality stocks had since rebounded. It would have been better to hold or add.)

5. Not buying more stocks in March. (To do so, I will need to focus less on the prices of the shares and more on the fundamentals of the business.)

What I hope to do the next 12 months

1. Do the same

2. Reinvest the dividends, just as before.

3. Allocate more capital on a regular basis to increase the portfolio, just as before.

4. Continue to rebalance the portfolio at regular intervals, just as before.

5. Continue to maintain a focussed portfolio with little diversification. Eight (8) stocks in this portfolio will account for 80% of the total value of the portfolio, just as before.

6. Continue to invest a meaningful sum with Tan Teng Boo's managed funds, just as before.

7. Always keep enough cash for opportunistic investing when the occasions arise, just as before.

8. ...

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