Thursday, 18 December 2014

Bear markets have three stages - "sharp down, reflexive rebound, and a drawn-out fundamental downtrend."

In this market, investors will need the margin of safety that a low price brings

The crash was just the end of the beginning. Now comes what could be many months of head-fakes and hopeful rallies that wind up in dead ends. You'll be Charlie Brown charging the football with head held high, only to land flat on your back.

Bear markets have three stages - "sharp down, reflexive rebound, and a drawn-out fundamental downtrend." 

Where it stops, nobody knows, but a portfolio with strong defensive stocks stands a fighting chance.

Wednesday, 17 December 2014

Strategy during crisis investment: Revisiting the recent 2008 bear market


Strategy during crisis investment: Revisiting the recent 2008 bear market

Although we may not know where the bear bottom is, buying in a down market may still lead to losing money. This is definitely true. As long as the purchase is not at market bottom, it may still result in losses for the time being. This is likely to be a short-term loss but compensated by a probable long-term gain. Even if we cannot time the market perfectly, we are definitely better off to “buy low and sell high” then to “buy high and sell low”.

Prices fell but value intact

Presently stock prices have fallen sharply. 

  • Banks are trading at 1x book value, 
  • property stocks sold at 50% discount from net asset value, 
  • utility stocks trading at single-digit price-earnings ratio providing an earnings yield of more than 10% net of tax and 
  • there are many good stocks trading at dividend yield of 2x bank interest rates. 


Warren Buffett, the second richest man in the world who makes his fortune from stock investment, is busy buying undervalued companies. He sees the value and he also sees prices detaching away from the intrinsic values.He said: “I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turn up.”


Catching a falling knife

Some may argue that buying now is like catching a falling knife. If you are not careful, you may be hurt and suffer more losses from falling stock prices.There is no doubt that we may incur short-term losses as long as we do not buy at the bottom. On the other hand, who can determine where and when is the bottom. As long as there are still unknown events or hidden problems, an apparent bottom now may not be the eventual bottom.Since we do not have all the information in the market, it is almost impossible to guess where the bottom will be.


In most cases, we only realise the bottom after it is over and by that time stock prices are running high with much improved market confidence. Market bottom could be there only for a short period. In most cases, market did not stay at the bottom waiting for investors. It will just move on.


Since market moves ahead of the economy by about six months, the market bottoms out when the economy is still gloomy, news are still negative, analysts are still calling underweights and most investors are staying at the sidelines.


Handling something we know is definitely much easier than dealing with the unknown risks, something which hits from behind without warning.When we invest during a crisis we actually go in with our eyes open. We know it is definitely risky but we also know it could also be very profitable. If we can handle the risk, the risk-reward trade-off will be very rewarding.


Emphasise strategies

What we need is to buy near the bottom, not right at the bottom. Investors’ frequent question now is when to buy, that is where is the bottom? Perhaps it is more intelligent to ask how much to buy now since nobody will be able to guess where is the market bottom.


Staggered buying is preferred over bullet purchase which is taking the risk of timing the market bottom. In staggered buying, a pre-determined amount will be set aside for investment over time, say in 10 equal portions. 

One common method of staggered investment is dollar cost averaging, an investment scheme made in equal portions periodically, either by a small amount monthly or larger amount quarterly. There are also several variations of staggered investment.


Anyway, staggered purchase is a preferred method to avoid the anxiety of market timing and the mixed feeling of fear of further downside and worry of missing the market rebound. As long as the market is undervalued, the strategy of staggered investment ensures that investors are in and are benefiting from the undervalued market.

Thursday, 11 December 2014

Where to put your cash? A house or a stock

Even as the stock market soars to record highs, federal regulators are announcing new, cheaper ways for cash-strapped borrowers to buy a home. With the catastrophic housing crash of the last decade still glaring through the rear view mirror, the government is again pushing home ownership as the best way to build wealth, but is it? "It would perhaps be smarter, if wealth accumulation is your goal, to rent and put money in the stock market, which has historically shown much higher returns than the housing market," said Nobel Prize-winning economist Robert Shiller at a Standard and Poor's conference last week.
Read More Case-Shiller home price index: CNBC Explains Shiller notes that the comparison between stock returns and home value returns is rough, given that stocks pay cash dividends and housing pays "in kind," in the form of housing services; that is, you get to live in a house. Still, if you remove all forms of dividends and compare the Standard and Poor's U.S. composite stock price index since 1871 and Shiller's own real U.S. home price index since 1890, the stock market capital gains outperform the housing market's capital gains. Both, he notes, are smaller than one might expect.
Read More Low down payment mortgages back for buyers "The real S&P composite has increased 12.2-fold from January 1890 to December 2014, or 2.03 percent per year, much less than most people would have guessed. Most of the real return in the stock market over the last century has come from dividends, not real capital gains," said Shiller. "Home prices have increased only 1.5-fold, or only 33 basis points a year. Essentially, home price capital gains overall have amounted to virtually nothing." One must also account for the costs of home ownership, costs that don't exist in stock ownership. Property taxes, insurance, maintenance, renovation all subtract from the capital gains of owning a home.
Read More The top 10 housing markets for growth in 2015 The downside to stocks, however, is capital gains taxes.
"If we had much stronger 401K [retirement]-type programs in the United States, much more heavily pushed, much bigger commitment from everybody, would that replace homeownership as a way to build wealth?" asked David Blitzer, chairman and managing director at S&P Dow Jones Indices. "Right now my impression is that the tax benefits of a 401(k) plan or other contribution pension plans pale compared to home ownership." The Case Shiller home price index (red) versus the S&P 500 Index (blue) since 1987. Source: S&P Dow Jones Indices A house can offer greater returns if the owner chooses to rent it out and not to live in it; however the consumption value of the home to the owner, again that value of actually inhabiting it, is gone. And that adds to Shiller's point that a home should not be seen as an investment vehicle, like a stock, but as a consumption good, like a car.
Read More Jumbo mortgage: CNBC Explains "You don't accrue as much wealth as a renter as you do as a buyer," noted Sam Khater, deputy chief economist of CoreLogic. "The con, though, is that with home ownership being the primary way that the middle class gets richer over time, and with the bulk of their wealth and equity tied up in housing, if home prices decline, they take a huge hit." The happy compromise, it seems, would be to keep less equity in your home, through a long-term, low-down payment mortgage, or, if you can qualify, through an interest-only loan, and keep more cash ready for investing in the stock market.
Read More Self-employed? Good luck getting a mortgage It's a riskier choice, given the current volatility in home prices, but it may be the best way to build wealth.

Friday, 5 December 2014

Don't just sit there, invest!

Foolish takeaway

To be scared out of the market - or to not start investing - because of periods of market uncertainty, volatility or even steep declines, has been a very expensive mistake.

Ignore market fluctuations. Buy great companies at good prices.

It's an approach that has stood the test of time - and made small fortunes for those who follow that path.

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