How do investors "chase the market"? It this a bad thing?

	How do investors "chase the market"? It this a bad thing?
Generally, an investor "chases the market" when he or she enters into a highly priced position after the stock price has increased rapidly or become overpriced. An investor who exits a position after the security has lost considerable value also is said to be chasing the market. Both positions suggest that the investor chased the market by following trends unwisely. Many investors unknowingly chase the market and endure large losses as a result. During the dotcom bubble, for example, many investors sought to profit from buying shares of internet and technology companies that were doing well. The popularity of dotcom companies eventually dropped and the investors who had chased the market were left with big losses. Investors who chase the market typically make investment choices based on emotion rather than careful consideration of market trends using statistics and financial data. For this reason, this strategy has been widely criticized and most financial advisors warn against it For more on this topic, read When Fear and Greed Take Over and The Madness of Crowds. This question was answered by Bob Schneider.

Read more: http://www.investopedia.com/ask/answers/09/chase-the-market.asp?partner=basics122311#ixzz1hPJzapcB

Lessons from the '87 Crash

SPECIAL REPORT October 11, 2007

Lessons from the '87 Crash

Enjoying the Dow's record run? Don't get too comfy. The market's Black Monday breakdown is a reminder of how quickly investor sentiment can turn

by Ben Steverman

As major stock indexes hit all-time highs, it's worth looking back 20 years to a far gloomier time, when investors were cruelly and suddenly reminded that the value of their investments can depend on something as unpredictable as a mood swing.

Every once in a while, fear, snowballing into panic, sweeps financial markets—the stock market crash of October, 1987, now celebrating its 20th birthday, is a prime example.

In the five trading sessions from Oct. 13 to Oct. 19, 1987, the Dow Jones industrial average lost a third of its value and about $1 trillion of U.S. stock market value was wiped out. The losses culminated in a panic-stricken 22.6% decline in the Dow on Black Monday, Oct. 19. The traumatic drop raised recession fears and had some preparing for another Great Depression.

Stock market crashes were nothing new in 1987, but previous financial crises—in 1929, for example—often reflected fundamental problems in the U.S. economy.

MYSTERIOUS MELTDOWN
The market's nervous breakdown in 1987 is much harder to explain. Especially in light of what came next: After a couple months of gyrations, the markets started bouncing back. The broad Standard & Poor's 500-stock index ended 1987 with a modest 2.59% gain. And in less than two years, stocks had returned to their pre-crash, summer of 1987 heights.

More importantly for most Americans, the U.S. economy kept humming along. Corporate profits barely flinched.

To this day, no one really knows for sure why the markets chose Oct. 19 to crash. Finance Professor Paolo Pasquariello of the University of Michigan's Ross School of Business says the mystery behind 1987 prompted scholars to come up with new ways of studying financial crises. Instead of just focusing on economic fundamentals, they put more attention on the "market microstructure," the ways people trade and the process by which the market forms asset prices.

True, in hindsight there are plenty of adequate reasons for the '87 crash. Stocks had soared through much of 1987, hitting perhaps unsustainable levels: In historical terms, stock prices were way ahead of corporate profits. New trading technology and unproven investing strategies put strain on the market. There were worries about the economic impact of tensions in the Persian Gulf and bills being considered in Congress.

OUT OF SORTS
But for whatever reason, the mood on Wall Street shifted suddenly, and everyone tried to sell stocks at once. "Something just clicked," says Chris Lamoureux, finance professor at the University of Arizona. "It would be like a whole crowded theater trying to get out of one exit door."

It's a fairly common phenomenon on financial markets. Every stock transaction needs a buyer or a seller. When news or a mood shift causes a shortage of either buyers or sellers in the market, stock prices can surge or plunge quickly. Most of the time, balance is quickly restored. Lower prices draw in new buyers looking for a bargain, for example.

Sometimes, as in 1987 and many other true crises, things get out of hand. What happens at these moments is a mystery that may be best explained by dynamics deep within human nature.

Usually, explains behavioral finance expert Hersh Shefrin, a professor at Santa Clara University, investors believe they understand the world. In a crisis, "something dramatically different happens and we lose our confidence," Shefrin says. "Panic is basically a loss of self-control. Fear takes over."

BUYERS AND SELLERS
Why don't smart investors, seeing others panic and sell stocks, step in to buy them up at a bargain?

First, it's very hard, in the midst of a crisis, to tell whether markets are acting rationally or irrationally. Buyers refused to enter credit markets this summer on fears about risky mortgage debt. It will take months, maybe years, to add up the full impact of losses on subprime loans.

It's also tough to think rationally yourself. "It's hard to keep your emotions in check when your money is on the line," Shefrin says.

And, even if you're confident the panicked market is giving you a buying opportunity, you're likely to want to wait until it hits bottom. If a market is in free fall, buying stocks on the way down is likely to give you instant losses.

Not only will buyers hold back. A falling market will bring many more sellers out of the woodwork. Leverage is one reason: Many investors buy stocks on borrowed money, so they can't afford to lose as much without facing bankruptcy.

This is one explanation for the temporary, sharp drops in many financial markets in the summer of 2007. Losses on leveraged mortgage debt prompted many hedge funds to dump all sorts of assets to raise cash.

THERAPY FOR A PANICKED MARKET
The solution to a panicked market, many say, is slowing down the herd of frightened investors all running in the same direction. New stock market rules instituted since 1987 pause trading after big losses. For example, U.S. securities markets institute trading halts when stock losses reach 10% in any trading session. "If you give people enough time, maybe they will figure out nothing fundamental is going on," University of Michigan's Pasquariello says.

There's another form of therapy for overly emotional markets: information. In 1929 and during other early financial crises, there were no computer systems, economic data were scarce, and corporate financial reporting was suspect. "The only thing people knew in the 1920s was there was a panic and everybody was selling," says Reena Aggarwal, finance professor at Georgetown University. "There was far less information available." In 1987, and even more today, investors had places to get more solid data on the market and the economy, giving them more courage not to follow the herd. That's one reason markets found it so easy to shrug off the effects of 1987, Aggarwal adds.

You can slow markets down, reform trading rules, and tap into extra information, but financial panics may never go away. It seems to be part of our collective human nature to occasionally reassess a situation, panic, and then all act at once.

Many see the markets as a precarious balance between fear and greed. Or, alternatively, irrational exuberance and unwarranted pessimism. "All you need is a shift in mass that's just big enough to push you toward the tipping point," Shefrin says.

IN FOR THE LONG HAUL
What should an individual investor do in the event of a financial crisis? If you're really sure that something fundamental has changed and the economy is heading toward recession or even another depression, it's probably in your interest to sell. But most experts advise waiting and doing nothing. "In volatile times, it is very likely that you [will be] the goat that other people are taking advantage of," University of Arizona's Lamoureux says. "It's often a very dangerous time to be trading."

Shefrin adds: "The chances of you doing the right thing are low." Don't think short-term, he says, and remind yourself of the long-term averages. For example, in any given year, stock markets have a two in three chance of moving higher. Other than that, it's nearly impossible to predict the future.

So, another financial panic may be inevitable. But relax: There's probably nothing you can do about it anyway. Anything you do might make your situation worse. So the best advice may be to send flowers to your stressed-out stockbroker, stick with your long-term investment strategy, and sit back and watch the market's roller-coaster ride.

Steverman is a reporter for BusinessWeek's Investing channel .

http://www.businessweek.com/investing/content/oct2007/pi20071011_494930.htm

Equity investors: Don't panic!

This week has heralded another sharp sell off in the stock market – but whatever private investors do they must not panic.

When there is a mass sell-off of assets everything falls. Photo: AP

By Garry White

5:02PM GMT 21 Nov 2011

Of course, the situation in Europe is serious – with debt concerns moving from Greece to Italy to Spain and now France. the US deficit is also of serious concern. However, events currently unfolding are not the end of the world. Equity markets are likely to recover from this crisis over the next few years as the global economy improves, but there will be plenty of pain on the way.

When there is a mass sell-off of assets everything falls – the good assets and the bad. Investing is a long term affair and panic selling could means good investments are sold when they are cheap. This defeats the main investment principles of buying low and selling high.

Of course, the value of an asset is only what someone else is prepared to pay for it – so although shares look cheap at the moment they could get cheaper in the short term. However, returns from the stock market over time – particularly when dividends are reinvested – are still likely to mean it is worth staying in the market.

There’s also the fact that panic selling can crystallise tax liabilities to consider.

The truth is, now is actually a great time to buy quality companies at what could be a bargain prices, as long as you have a sensible investment horizon. And are brave enough.  

Invest at the point of maximum pessimism." This is a famous quote from legendary investor John Templeton, who was one of the last century's most successful contrarian investors - hoovering up shares during the Great Depression. He was the founder of fund management group Templeton.

Conversely, the theory goes, you should sell at the point of maximum optimism.

It is important to remember that you will never time a market bottom or market top accurately. That's why Questor thinks the best investment strategy is to continue to drip-feed funds into the market – and this is especially the case when markets are falling.

This strategy is called pound-cost averaging and it makes good sense for investors with an appropriate time frame.

Although the sharp falls seen recently in equities is a concern – it is not a reason to panic. Sell in haste today and you may regret your decision in two year’s time.

http://www.telegraph.co.uk/finance/markets/questor/8904859/Equity-investors-Dont-panic.html

The psychology of investment: caution or risk?

What makes some investors revel in danger and others flee at the first sign of market volatility?

The psychology of investment: caution or risk? Photo: GETTY IMAGES

By Emma Wall

7:56AM BST 19 Aug 2011

7 Comments

Evolution has programmed us to flee from danger. But the same instinct that protected early human from the sabre-toothed tiger makes for an unsuccessful investor. As global markets have fluctuated wildly, investors have been indiscriminately cashing in their investments, panic selling as times get tough.

A tenth of the fund supermarket Fidelity FundsNetwork's customers have switched their investments into less risky assets as a result of the eurozone worries, with low-risk bond funds the preferred option over equity or equity-income funds.

But if those investors kept their composure and did nothing, they would have made money as banking stocks pushed the FTSE 100 up to close last Friday on 5,320, compared to 5,247 the previous week.

But what makes some people flee to cash deposits as markets crash and others gleefully seek out opportunities among the ruin? While many of us would prefer to consider ourselves spontaneous risk-takers, when it comes to the crunch, most investors value capital preservation over high-risk, high-income investments.

"Everyone wants minimum risk and maximum return, but it is rarely possible to do both," said Neil Pedley of Vestra Wealth.

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Wealth managers have the complicated task of gauging a client's risk appetite to allocate their cash correctly. Rather than take the client's word for it, wealth managers at Barclays Wealth employ personality profiling to gauge investment attitudes.

"It can be difficult for investors to be honest with themselves," said Greg Davies, who is head of behavioural finance at Barclays Wealth. "Some people like to think of themselves as composed risk-takers, but if you try to invest in a way that does not respect your natural 'type', you make decisions you are not comfortable with and you will lose money."

There are two parts of our brain that govern decision making.
1.  The first is rational, logical and more suited to decision making based on long-term goals. 
2.  The second controls emotional decision making – the fight-or-flight reflex.

In times of stress or perceived danger, humans default to the emotional brain and seek instant gratification, rather than considering long-term success. Though this "action bias" may have been a successful tactic when early human was faced with a predator, it does not help investors make money.

"When we pull our money out of markets during a crash, we get instant emotional gratification. We are happy because we have removed ourselves from the perceived danger – the risk of losing more money. However, this short-term thinking is bad for long-term goals," said Mr Davies.

As well as asking clients about their investment goals, Barclays constructs client portfolios based on the results from the personality profiling, which assesses composure in the face of risk.

The idea is that two clients could have the same amount of money to invest and the same long-term investment goals, but if one has a high level of composure and the other a low level of composure, their investments should be different. The client with the low composure is more likely to act rashly when he sees his investments fluctuate in value, so his portfolio is hedged with slower growth but low-volatility assets.

By constructing a portfolio in this way, Barclays lessens the chances of clients falling for pack mentality – buying at the highest price and selling at the lowest.

Wealth manager HFM Columbus also uses psychometric profiling to help determine clients' attitudes to investment risk, as well as the ways to best service clients, for example, are they likely to read fund literature, or would they prefer a short summary?

The test assesses five major personality traits: openness, conscientiousness, extroversion, agreeableness and emotional stability. "We are focusing principally on the 'conscientiousness' variant to ascertain how much or how little the client wishes to engage in the advice process and to ensure that we deliver the correct amount and type of information in order for them to make a decision," said director Marcus Carlton.

"We anticipate that the client's degree of conscientiousness will inform us if they are rash decision makers or if they make more studied decisions, and the profiler will also look at emotional stability in order to analyse likely reaction to unexpected outcomes – for example severe market volatility – so that we can protect clients and manage their expectations better."

You do not need a psychometric test to take advantage of this psychology. Mr Davies said investors should exercise self-knowledge and put in place a set of rules for investing.

"Most of us can help break our emotional investing habits by setting a framework in place in times of calm to be prepared for times of turbulence. You can bet those investors who are taking advantage of value stocks now will have planned their response to these situations. They will be informed and have engaged with markets for a while," said Mr Davies.

http://www.telegraph.co.uk/finance/personalfinance/investing/8710503/The-psychology-of-investment-caution-or-risk.html

Be fearful when others are greedy and Greedy when others are fearful.

How to overcome your financial fears in investing?

These are the usual three basic fears one has to face in investing, namely:

Fear of loss
Fear of failure
Fear of unknown

Here are some suggested ways to overcome these:

Fear of loss:  Understand the probabilities and consequences of any potential loss(es) in your investing.  Always remember, in the face of uncertainties, your investing actions should be based on the consequences rather than the probabilities of these loss(es) occurring.

Fear of failure:  Nothing venture, nothing gain.  Without trying, you have already failed.  Seize the opportunity.  Be prepared for possible failures too, but take these as valuable lessons preparing you for a better future.

Fear of the unknown:  Research the topic well to become knowledgeable.


Also read:
I Will Tell You How to Become Rich: "Be fearful when others are greedy, and greedy when others are fearful."
http://myinvestingnotes.blogspot.com/2010/12/i-will-tell-you-how-to-become-rich-be.html

I Will Tell You How to Become Rich: "Be fearful when others are greedy, and greedy when others are fearful."

I Will Tell You How to Become Rich
By Dan Dzombak
December 6, 2010

Wait! Don’t buy yet…
Successful investing starts with a smart watchlist.

"Be fearful when others are greedy, and greedy when others are fearful."

Warren Buffett gave that timeless advice in his 20s while getting his MBA at Columbia, and he's gone on to do very well with it. He avoided the tech-stock bubble of the late '90s, when everyone and their brother got greedy. And in this past downturn, he was able to snap up preferred shares of Goldman Sachs and GE on the cheap while other large investors ran for the hills.

What are investors greedy for now?
Three areas of the stock market have the majority of investors salivating at present:

Tech stocks. This sector holds many examples of bloated valuations. Chinese search giant Baidu (Nasdaq: BIDU) trades for an extraordinary 93 times trailing earnings! While I think the company is unbeatable, I worry about its valuation as an investment.

Dividend stocks. With interest rates low, people are clamoring for anything with high yields. Stocks such as Chimera (NYSE: CIM) and Annaly (NYSE: NLY) now have a fanatical following. While I've seen the case made for why they could be good investments, I still worry. When people are this greedy, disaster's usually not far off. My colleague Matt Koppenheffer believes dividend investing is a fad, but I'd say a more worrisome fad is...

Bonds. Investors are greedy for safety. They're worried about volatility and the markets, and they just want something safe. They couldn't be more wrong. If interest rates rise, they'll be slaughtered as bond prices fall. In fact, fellow fool Amanda Kish is wondering whether the bond bubble just popped. Intelligent investors should be fearful of the herd's lust for safety.

What do investors fear most now?
The best investment opportunities arise when investors are scared. Europe, especially Ireland, seems to top investors' list of phobias today. That said, Fools should tread carefully here, since Ireland has some serious issues with its economy.

I recommend that interested investors look at Ryanair (Nasdaq: RYAAY), Europe's leading discount airline. The firm paid its first dividend in October, and it has a great management team led by the outspoken Michael O'Leary.

After learning that competitor Aer Lingus had turned down a lowball bid from Ryanair for the company, O'Leary said, "It is doubtful that Ryanair will waste any further management time or resources making another offer for Aer Lingus, as its scale and losses will continue to render it increasingly irrelevant in Europe's airline landscape." That's a relatively mild comment, as far as statements from the outspoken CEO go, but it shows O'Leary's commitment to running his company with his own maverick style.

A world of uncertainty
A strange situation arises when investors are both greedy and fearful, as penny stocks can demonstrate. These equities are tiny for good reason -- feared because the companies behind them usually have a real chance of going out of business. Since they are priced so low, though, people's greed sometimes gets the best of them, and many investors decide to purchase "a lottery ticket."

Every now and then, this gamble pays off. Folks who bought Sirius XM (Nasdaq: SIRI) when it languished between $0.05 and $0.10 a share are sitting pretty now. But the verdict's less clear for YRC Worldwide (Nasdaq: YRCW). While it's no longer a "penny stock" in the traditional sense ,after a 1-for-25 reverse split in October, the company still meets the SEC's definition of a penny stock, which "generally refers to low-priced (below $5), speculative securities."

Be wary! For every Sirius, there are 100 carcasses of dead penny stocks like Ambac, Motors Liquidation (bankrupt GM), and Enron.

"... And invest with a margin of safety"
While Buffett didn't say this last part, "margin of safety" is known as the three most important words in investing. It's a very simple concept. Give your assumptions some breathing room, so if they prove wrong, you don't lose much. If you think a stock is worth $20, for example, and it's trading at $18, that's not much of a margin.

This isn't a hard-and-fast rule. The quality of the business and the brand, the strength of the balance sheet, and the size of its future growth opportunity all affect a stock's margin of safety.

WD-40 (Nasdaq: WDFC) is one quality business that many investors often overlook. Everyone knows WD-40; you probably have it on a shelf in your garage or under your sink right now. Here are three reasons why I like it:

Its products are basically the same as the competition's, but its strong brand allows it to charge more for comparable products, earning high returns on equity.

It's a very dependable business. WD-40 has a place in Americans' minds as being dependable and cheap. This is reflected in WD-40's 80% share of the U.S. consumer oil & lubricants market.

The balance sheet is rock solid. WD-40 has been paying down debt since 2002, leaving nearly none left. Once the debt is gone, the business will be able to reinvest the extra cash or increase its dividend, which currently stands at a healthy 2.7% yield.

http://www.fool.com/investing/general/2010/12/06/i-will-tell-you-how-to-become-rich.aspx

Safety is a myth. Risk is reality.

Fear is gripping markets: economists

Fear is gripping markets: economists

EOIN BLACKWELL
May 19, 2010 - 7:44PM
AAP

Fear and uncertainty, not market fundamentals, drove the Australian dollar to an eight-month low on Wednesday and pushed the domestic share market into the red, economists say.

Fears over US and German regulatory reform, the European debt crisis and the Australian government's resource rent tax saw the local dollar hit an eight-month low of 85.17 US cents on Wednesday,

Local shares fell, too, sliding 1.87 per cent to close at a nine-month low at 4,387.1 points for the All Ordinaries index.

Investor sentiment darkened further after the Westpac-Melbourne initiate consumer sentiment index showed a seven per cent slide for May, its biggest percentage drop since the height of the credit crunch in October 2008.

"It's just been one hit after the other," ICAP economist Adam Carr said of the global and domestic concerns.

He said the worries were unfounded with the economic fundamentals of nations in general, and Australia in particular, strengthening.

"The US is seeing what looks like a V-shaped recovery," he said.

"Everyone is waiting for the fall to come in China and it's not going to happen.

"When you look past all the hysteria, the Australian economy, employment, both are going at a very strong rate and interest rates are only about average."

Yet the headlines have been dominated over the past week by the uncertainty surrounding Europe.

A 750 billion euros ($A1.06 trillion) bailout package for debt-laden EU nations like Greece initially calmed markets last week.

But the mood didn't last long amid renewed speculation the crisis could spread and slow EU growth.

4Cast Financial Markets economist Michael Turner said it was hard to see how Europe could escape its debt woes without serious structural damage.

"The way people are expressing that at the moment is through the euro and the stock market," he said.

The Euro was trading at 1.2215 US cents at Wednesday's close, compared with 1.3240 US cents on May 1.

The euro is still above its long-term average of 118 US cents, Mr Turner said.

"It certainly goes a long way to show how fearful markets are with the way all this plays out."

Investor uncertainty reignited on Tuesday when Germany's securities market regulator, Bafin, banned naked short selling of certain securities - often cited as key factor leading to the 2008 financial crisis.

In the US, meanwhile, proposed reforms to the financial regulations that govern Wall Street are before the US Senate and are being fought over Democrats and Republicans.

But it's all just noise, ICAP's Adam Carr said.

"If you're pessimistic over Europe then you might as well quit your job, buy a gun, get some land and learn how to farm," he said.

"Because if you're going to be pessimistic on Europe, then you have to write off the US and write off Japan."

ANZ senior rates strategist Tony Morriss said the safe-haven bond market should to do well amidst the uncertainty and fear.

"I think on the sentiment at the moment you'd sell on any sort of rally in currency, which means that bonds should be supported."

© 2010 AAP

Buffett (1994): Investing can be done successfully even without making an attempt to figure out the unknowables.

Staying within one's circle of competence and investing in simple businesses were some of the key points that were discussed in Warren Buffett's 1993 letter to shareholders. Now let us fast forward to the year 1994 and see what investment wisdom the master has to offer in this letter.

Are you one of those guys who are quite keen on learning the nitty-gritty of the stock market but the sheer size of literature that is on offer on the topic makes you nervous? Further, with the kind of resources that the institutions, the ones that you would compete against, have at their disposal, it is quite normal for you to give up the thought without even having tried. Indeed, things like coming out with quaint economic theories, crunching a mountain of numbers and working on sophisticated spread sheets should be best left to professionals. While it is definitely good to be wary of the competition, in investing, one can still comfortably beat the competition without the aid of the sophisticated tools mentioned above. All it needs is loads of discipline and patience.

Thus, for those of you, who in an attempt to invest successfully, are trying to predict the next move of the Fed chief or trying to outguess fellow investors on which party will come to power in the next national elections, you are well advised to stop in your tracks because investing can be done successfully even without making an attempt to figure out these unknowables. Some words of wisdom along similar lines come straight from the master's 1994 letter to shareholders and this is what he has to say on the topic.

"We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen. Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%.

But, surprise - none of these blockbuster events made the slightest dent in Ben Graham's investment principles. Nor did they render unsound the negotiated purchases of fine businesses at sensible prices. Imagine the cost to us, then, if we had let a fear of unknowns cause us to defer or alter the deployment of capital. Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist.

A different set of major shocks is sure to occur in the next 30 years. We will neither try to predict these nor to profit from them. If we can identify businesses similar to those we have purchased in the past, external surprises will have little effect on our long-term results."

Infact, the master is not alone in his thinking on the subject but has an equally successful supporter who goes by the name of 'Peter Lynch', one of the most revered fund managers ever. He had once famously quipped, "If you spend 13 minutes per year trying to predict the economy, you have wasted 10 minutes".

Indeed, if these guys in their extremely long investment career could continue to ignore political and economic factors and focus just on the strength of the underlying business on hand and still come out triumphant, we do not see any reason as to why the same methodology cannot be copied here with equally good results.

http://www.equitymaster.com/detail.asp?date=2/1/2008&story=8

Tempting But Investors Resisting Lure Of Cheap Stocks

PERSPECTIVE | 06 MARCH 2009

Tempting But Investors Resisting Lure Of Cheap Stocks

By Gabriel Gan 

It is easy to forget about valuations especially in a super bear market where fear overwhelms common sense and logic. It is funny how we all chase after things that are expensive but shunning the same thing when it is cheap, and this can only be explained by the simple reason that we fear today’s seemingly low price will become even lower the next day.

Fear is such a powerful weapon so much so that it can totally knock all sense out of us: We buy and sell at the wrong time and mistakes are often painful.

I remember writing about sentiment being a far important factor than fundamental analysis and/or technical analysis whenever fear grips investors. At this moment, although fear factor is not as high as it was back in October/November, investors have turned despondent and have almost given up hope with some even not bothering to watch the stock market because bad news and more bad news are being reported by the media on a daily and hourly basis.

Nightmare On Wall Street

Watching the DJIA in action was better than watching the famous horror epic “Nightmare on Elm Street”, as Wall Street played out its own version of a horror show.

During the fortnight, the Dow Jones Industrial Average (DJIA) shed about 800 points from 7,555 to 6,726, breaking the October low of 7,449 with the utmost ease and traded to a 12-year low. While there was no fresh spark that triggered the selling, investors just cannot wait to get out of the market – a sign of desperation and exasperation rolled into one.

At the same time, the Straits Times Index (STI) was a battlefield for the bulls and the bears who tried to slug it out in search of a direction. For most part of early-to-mid February, the STI traded sideways refusing to budge even when the US and regional bourses rallied or tanked, with the bears securing a decisive victory on 16 February when the STI went below 1,650 and then tested the next support at 1,570.

In the previous issue of Shares Investment, I mentioned that the STI could test 1,570 and may even overshoot this support if the DJIA were to fall below 7,450. On the other hand, I also mentioned that the STI could move to 1,750 if the DJIA were to go above 8,000 in the most bullish scenario. We were unfortunate that the former came true and the STI had indeed gone as low as 1,502 but had since rebounded on the same day to close at 1,544 on 4 March.

As a matter of fact, all the major regional indices including the Hang Seng Index, the Nikkei 225, the STI and the Shanghai Composite Index did not revisit the October lows while the US indices, the European indices as well as the Australian and Kiwi indices all fell below October levels.

Of all the indices, the Chinese stock market fared the best with a blockbuster 700-point gain from 1,700 to 2,400 from October to February. This phenomenon tells a tale, as it clearly highlights what the world thinks of the Chinese economy and, to a smaller extent, the Asian economies.

Can We Pin Our Hopes On China?

Most people hope that China can help us out of this rut, with the exception of a handful who thinks that their respective economies have the divine right to be the messiah that we have all been crying out for.

No matter who the messiah is, the sooner we get out of this rut, the better it is for everybody.

China is the only major growing economy and with a reserve of some US$1.45 trillion, has the ability to spend its way out of trouble while helping others along the way. Some signs of China being the first to get out of trouble have appeared in the form of the February Purchasing Manager’s Index rising to 49 from 45.3 a month ago. At its worst month in November, the PMI read just 38.8. This is a sign that its US$585 billion stimulus package may be working.

Also, Premier Wen’s remarks that surging loans, growth in retail sales in January, and an increase in electricity output and consumption from the middle of February are signs that government measures are working, which may aid in the first-half recovery of China’s economy.

Most importantly, export orders, which make up a huge chunk of China’s Gross Domestic Product (GDP), rose to 43.4 from 33.7 while employment rose for the first time in six months from 43 to 46.1.

According to reports, government officials have indicated that the authorities may pump in RMB8-10 trillion of “government-sponsored investment” while an expanded stimulus package has been rumoured to be on its way to speed up the recovery.

All these measures, together with the “encouragement” of more lending by banks to unfreeze the credit market, will to a big extent boost an economy that is already strong, in relative terms.

To Shun Or To Buy?

Stocks across the board are looking cheap but buyers do not seem to be suitors as yet. If we were to talk about financial stocks, investors are worried that the contagion effect of a weak US financial system coupled with a weakening global economy may hit the three local banks even further in the next few quarters when non-performing loans start to grow. This is the main reason for the share price of the three banks being hammered.

If stocks were trading at 2X historical earnings, way below the net asset value, then what is stopping investors from jumping at this opportunity?

Flipping through Shares Investment has revealed that former darlings such as Celestial Nutrifoods (CEL) and China Hongxing (CHX) are both trading at 1.6X and 4X FY08 earnings, respectively. On a price to book basis, CEL is now trading 0.17X ($0.125 versus $0.732) while CHX trades at 0.34X ($0.10 versus $0.34).

Ridiculous? There are more such examples but these two companies deserve a closer look despite the troubles that investors believe they are in.

CEL continued to report growth in its net profit for FY08 but 4Q08 showed a profit decline primarily due to higher soybean prices despite higher selling prices. The point of contention now lies in the fact that its cash position (RMB811m) is lower than its debt (RMB1,225m) – a taboo in today’s market – arising from its convertible bonds that could be redeemed as early as 19 June this year. The market now speculates that CEL could follow in the footsteps of Ferrochina and become insolvent in the event that it fails to source for the funds that could allow the company to face redemption.

The more the share price falls, the higher the fear factor will become despite the management reassuring investors that it has several proposals on the table regarding the refinancing on the convertible bonds.

In the case of CHX, and also CEL, the failure to declare dividends for FY08 has also raised fears that both companies are in financial trouble. Although CHX also reported net profit growth for FY08 despite a profit decline in 4Q08, investors are concerned about its business model of providing advances to its distributors for running stores. The amount of RMB1.15b advanced to these distributors is feared to have been “lost” or “uncollectable” and hence the selloff in the share price of CHX.

The RMB1.15b aside, CHX still has RMB1.98b in cash, which translates into about a cash value of $0.149 per share – a premium of almost $0.05 per share over its last done price of $0.10. If an investor were to buy into this stock at $0.10, he would be covered by almost $0.15 in cash and getting the entire shoe/sports operation of CHX for nothing!

Of course the risks involved in buying these two stocks are high, especially if we were to consider the worst-case scenario. But if both companies were to pull through, the rewards could be high especially when CEL owns the hi-tech soybean zone in Daqing City as well as a biodiesel fuel ready for production in 1Q09 while CHX is one of the top five sports shoe brands in China.

Where Do We Go From Here?

A short-term rebound looks likely at the time of writing with the DJIA up more than 100 points 6,830 on 4 March. Should the DJIA not falter for the next two trading days, it is likely to test the resistance at 7,100 before it meets 7,450. While the former looks possible, the resistance at 7,450 looks quite out of reach for now.

Rallies for the past few weeks have been a flash in the pan and nothing more than that. The short-term target for the STI is at 1,570 followed by 1,600 and 1,650. Nothing has changed fundamentally and rebounds are still very much technical in nature and, thus, weakness should follow almost immediately.

Stay nimble and sell into rallies for now.

http://www.sharesinv.com/articles/2009/03/06/investors-resisting-lure/

Comment:  Very good article except for the final sentence asking to "stay nimble and sell into rallies for now."  We all know what happened to the market after March 2009.

Fear is your friend

Fear is your friend

When you take a long-term view, the horrific market indicators are actually your friends because they lower prices of the stocks you are interested in. Fear is your buddy. Doom and gloom are close pals. Economic devastation is your friend. In fact, you should want the market to freak out because there is no other easy way to get a fantastic price for a business. Of course, I'm speaking in an investing sense -- obviously a recession is no fun on a day-to-day basis. But fortunes are built in times like these.

Why should you care about a few years of poor results if someone is willing to sell you that business for a song? In two or three years, you could be sitting pretty while the seller will be left with only remorse.

But of course, we want to be choosy with our investments in these turbulent times, so we suggest you focus on:

• Companies with good track records (earnings per share growth, return on equity)
• Companies with strong balance sheets (low debt-to-equity ratios)

http://myinvestingnotes.blogspot.com/2009/04/fear-is-your-friend.html

The Only Thing We Have to Fear Is Fear Itself

The Only Thing We Have to Fear Is Fear Itself
Fear is the best salesman, after all.
October 2, 2008 @ 8:00 am - Written by Trent

Over the last several days, many readers have asked for my take on the economic crisis. I’m not an economist - my opinion is just that of an average person who has read a number of economics books and talked to a lot of people from all walks of life. Here’s my humble take on the situation.

From Franklin Roosevelt’s first inaugural address, March 4, 1933 (please, listen in):

I am certain that my fellow Americans expect that on my induction into the Presidency I will address them with a candor and a decision which the present situation of our Nation impels. This is preeminently the time to speak the truth, the whole truth, frankly and boldly. Nor need we shrink from honestly facing conditions in our country today. This great Nation will endure as it has endured, will revive and will prosper. So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself — nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance. In every dark hour of our national life a leadership of frankness and vigor has met with that understanding and support of the people themselves which is essential to victory. I am convinced that you will again give that support to leadership in these critical days.

Over the last two weeks, I’ve read countless articles and heard countless podcasts talking about financial apocalypse, spreading fear around like mayonnaise on a turkey sandwich. Most of the suggestions are maddening - I’ve heard previously rational people talking about pulling all of their money out of FDIC-insured bank accounts and putting them under their mattresses.

All of this is based on fear, not fact. Over the last few months, several financial institutions have failed, but in each case, the resources of those institutions were immediately absorbed by other companies or, in a few cases, by governmental buyouts. No one has lost a dime in a bank account. No one has lost a single cent of insurance coverage. Many large banks - like Bank of America - have already taken their losses from the subprime mortgages and rolled right through them, and they’re strong enough that they see this as a buying opportunity.

We all know the general storyline by now - these failures were the result of investing too much in bad mortgages. The truth is that no one knows how serious the actual problem is. No one. The ludicrous plan that Paulson proposed last week served one purpose alone - it gave him tons of cash to make sure that the banks run by his cronies wouldn’t outright fail. The truth is that he doesn’t know how bad it actually is. Neither does Bernanke. Neither do you, and neither do I.

The panicked talk, the whispered statements about apocalypse - they’re fear. Nothing more, nothing less.

I don’t claim to know what the “best” plan for resolving the situation is. My level of information about the true nature of the economic situation is extremely limited - and so is yours.

I’ll tell you what I do see, though.

I look out my window here in Iowa and I see the ongoing harvest of one of the largest soybean and corn crops ever - not the cropless Dust Bowl of the 1930s.

I don’t see a single person with a bank account that has lost their deposits, like my grandfather’s family did circa 1932.

I see people going to work, working hard and producing value for their wage, coming home, and buying the things that they need to keep their family going, which puts money directly into the economy.

I see unemployment barely over six percent, not the 25% rate at the time of FDR’s address.

I see industrial production still rising - in 1932, it had fallen by more than half in just three years.

I see a dollar that’s actually strengthening, not weakening, while the price of oil is down sharply from its highs earlier this year.

In short, I see a lot of things that make me optimistic about our ecnomic situation, a pretty stark contrast from the fear being peddled by some. I’m actually much more reminded of 1987, when banks were failing thanks to the Savings and Loan crisis and Black Monday, when the Dow dropped 22% of its value in a single day. We haven’t yet seen anything as worrisome as that, in my opinion - and that was just a drop in the bucket compared to the 1930s.

To put it simply, I’m still not worried a bit, and when I see the fear being bandied about, I’m reminded of FDR’s words.

So what have I been doing with my money as of late?

First, I haven’t taken a dime out of any bank. I haven’t seen any FDIC-insured bank account fail, and none have in the history of the FDIC.

Second, I actually maxed out my Roth IRA contributions earlier this month. Almost all of that money went into broad based index funds - namely, Vanguard’s Target Retirement 2045 fund.

Third, I haven’t made a single change in any plans I’ve had for investing other than the early Roth IRA buy. I’m still following my own game plan.

Now, ask yourself this. If you make any irrational moves, like pulling all of your money out of stocks, does someone profit from it? Of course they do. Your brokerage will make a fee from the sale, and a happy buyer out there will be glad to buy that stock from you at a nice discount. Fear is the best salesman, after all.

My sole piece of advice to you is this: don’t panic. Don’t make any hasty decisions. Sit back and get informed - and don’t just rely on one source for information, either. Get a bunch of different angles on what’s happening, from liberals and conservatives and moderates alike. If you’re worried about your money, do your own research and find out reasonable things to do with it. Take a serious look at what people who really know what they’re doing are doing with their money - in the last two weeks, Warren Buffett has invested $3 billion in General Electric stock and $5 billion in Goldman Sachs stock (an investment bank … weren’t we supposed to be afraid of those?) - he sees this current situation as an opportunity to buy, not sell.

And one more thing. Even in the darkest heart of the Great Depression, 75% of Americans had a steady job with a steady paycheck, which they steadily used to buy the things they needed. Those years also produced the Greatest Generation and an economic steamroller that ran through the last half of the Twentieth Century like a tidal wave.

It was true 75 years ago. It’s true now.

The only thing we have to fear is fear itself.


http://www.thesimpledollar.com/2008/10/02/the-only-thing-we-have-to-fear-is-fear-itself/

Fear Is Your Friend

Fear Is Your Friend
By Andrew Sullivan, CFA April 17, 2009 Comments (1)

Warren Buffett said back in October that he was buying U.S. stocks. In his widely publicized editorial in the New York Times, he didn't seem all that concerned about our ailing economy. And in times past, he's been right. But since October:

• The U.S. consumer confidence index hit three consecutive all-time lows.
  
• Trade activity has collapsed, with shipping rates from Asia to Europe hitting zero for the first time ever.
  
• Citigroup (NYSE: C) was brought to its knees -- its shares falling 75% since Buffett's article.
  
• The weak economy pummeled energy prices along with bellwethers like ExxonMobil (NYSE: XOM).
  

That's scary news, but I'd imagine Mr. Buffett is aware of all of the above. Yet the world's smartest investor is probably still buying. What the heck is he thinking? Isn't he concerned about the ongoing banking crisis, trillion-dollar bailouts, and skyrocketing unemployment? How could he see opportunity in a time like this?

Looking into the future

Buffett is buying because he can see the future. He can see the future not because he secretly spent a billion dollars to construct H. G. Wells' time machine in his basement. Nor did he hire Google to build an algorithm that can predict the future. His smarts are based on a simple way of viewing the markets and valuing businesses that anyone can grasp.

Buffett realizes that you buy stocks for the future, not the present. When you buy a share, you should do so with thoughts of owning that business for decades, not just the next few years. He also knows that the driving impulse of a capitalist society is to grow. Armed with this knowledge, he bought stocks like PetroChina (NYSE: PTR), Coca Cola (NYSE: KO), and The Washington Post when no one wanted them, and made quite a killing at it -- with his Berkshire Hathaway-fueled personal fortune worth $62 billion dollars at last count.

Buffett really does see the future.

And the future he sees now is drastically different from what the pundits would have you believe. Buffett sees a future in which banks function on their own, in which the U.S. innovates, in which the economy grows, and in which stocks are valued based on normal growth prospects.

Fear is your friend

When you take this sort of long-term view, the horrific market indicators above are actually your friends because they lower prices of the stocks you are interested in. Fear is your buddy. Doom and gloom are close pals. Economic devastation is your friend. In fact, you should want the market to freak out because there is no other easy way to get a fantastic price for a business. Of course, I'm speaking in an investing sense -- obviously a recession is no fun on a day-to-day basis. But fortunes are built in times like these.

Why should you care about a few years of poor results if someone is willing to sell you that business for a song? In two or three years, you could be sitting pretty while the seller will be left with only remorse.

But of course, we want to be choosy with our investments in these turbulent times, so we suggest you focus on:

• Companies with good track records (earnings per share growth, return on equity)
• Companies with strong balance sheets (low debt-to-equity ratios)
• Companies highly rated by the Motley Fool CAPS community (four stars or better, out of five)
• I fired up the handy CAPS screening tool and found 86 companies with at least a $5 billion market cap, long-term debt-to-equity under 50%, an EPS growth rate of 10%, and return on equity above 20%.

Here are three results I find interesting:
Company Name
CAPS Rating (out of 5)
Market Capitalization ($B)
LT Debt-to-Equity Ratio
EPS Growth Rate (last 3 Yrs)
Return on Equity (TTM)

Becton, Dickinson & Company (NYSE: BDX)
*****
16.3
16%
16%
25%

ITT (NYSE: ITT)
*****
7.6
15%
31%
26%

Abbott Laboratories (NYSE: ABT)
****
67.6
50%
20%
28%

At our Motley Fool Inside Value service, we spend every day ignoring the market panic and searching for the stocks that nobody wants, but that offer significant upside potential. We constantly evaluate businesses based on their future prospects in a normal world rather than in the scary present.

Andrew Sullivan has no financial interest in any of the stocks mentioned in this article. The Motley Fool has a disclosure policy. Coca-Cola is a Motley Fool Inside Value and a Motley Fool Income Investor selection. ITT is a Motley Fool Inside Value pick.

http://www.fool.com/investing/value/2009/04/17/fear-is-your-friend.aspx