Once again, many investors have missed out on the latest market rally because of fear of more bad news and a further drop in stock prices. An outstanding feature of the current rally is the very early and strong participation of small caps or penny stocks as they had been savagely sold down last year. Those brave ones, who bought into such stocks in December in anticipation of a New Year Rally, would likely have made very handsome gains; even if they had bought blindly – no need to have special skill or knowledge!

One group of people, who lose money in the current rally, would be those non-professional short sellers (likely to have made much money in 2011) who were still very bearish of the market. It is pay back time for them, with many losing at least a portion of their gains.

What makes the stock market so interesting is that –

BULLS MAKE MONEY

BEARS MAKE MONEY

THE PIGS ALWAYS GET SLAUGHTERED

As usual, yr postings are interesting to read, observer2. My 2cents worth is that people lose the other half of the war (at least in the past 2-3 years) becos of the sudden nuclear attack from unexpected sources.

I believe bear markets of 2008 and 2011 aren't quite like the 'normal' bear markets, especially in terms of the severity.

If not for the bungling Euro leaders and the over-indebtedness of the USA, stock markets would have been more benign. The Euro and USA are in long-term declines and the rest of the world, incl the stock markets, have to adjust to the insipid consumer power in those regions.

The market slide over the past year has brought down the prices of numerous stocks, in particular – the small caps & S-chips, to an incredibly low level – virtually bear market bottom prices. However, the fall in prices of blue chips & stocks with good dividend yields were relatively less severe probably because of the ultra low interest rates causing many people to park their funds in safer stocks offering considerable returns than fixed deposit accounts. These investors were also less likely to sell off their investments because of the lack of better alternative places to park their funds.

As in every bear market, most investors were known to always give back a sizeable portion of their gains that they made during the Bull Run at the end of the day. This time round, all buy-and-hold investors of small caps stocks (especially s-chips) would have been hit particularly hard as they suffered the most severe sell down. Those who had quitted early can congratulate themselves for running away smartly to fight another day. Since the small caps got hit the hardest, some of them could be expected to give fantastic returns in the next bull market – history repeats itself.

On reflection, it appears that making money in the stock market is just half of the battle for every investor. The other half of the battle is safeguarding the gains that many of us pay little heed to until it is too late. The current bear market, regardless of its duration and severity, would sooner or later come to an end and a new bull market would then begin.

Is the current rally the start of a new bull market? No one can be certain until the bottom of the bear market has been positively established.

Below are 2 common challenges confronting every investor:

1. Making big profits in the next bull-bear round and to avoid making many of the silly blunders made in the past. Possible? [A tough challenge - How many of us have ended up saying more than once – “Lo & behold, I goofed up again.” or “Alamak, kena unwanted babies again”?]
2. Avoid losing back much of the realized gains and paper profits when the next bear market sets in.

The reasons for many of us losing back our profits had already been highlighted in detail at the start of this thread.

What makes investment in stocks so challenging and interesting is that the market is irrational and will fool everyone sooner or later. Too many investors have already been fooled into believing that the market would continue to be very bearish, at least for the first half of 2012,  (more Euro bad news & Greece certain to default) when along came the current strong market rally.

“Stock Market Is The Name

Deception Is The Game

When What You See Is Not What You Get

You’ve been Fooled, Once Again”

7 timeless pitfalls of investing

Regardless of institutional or retail investors, chances are, they would have committed these sins at one point or another.

1) Placing forecasting at the very heart of the investment process.
An enormous amount of evidence suggests that investors are generally hopeless at forecasting. So using forecasts as an integral part of the investment process is like tying one hand behind your back before you start.

2) Investors seem to be obsessed with information.
Instead of focusing on a few important factors (such as valuations and earnings quality), many investors spend countless hours trying to become experts about almost everything. The evidence suggests that in general more information just makes us increasingly over-confident rather than better at making decisions.

3) The insistence of spending hours meeting company managements
We arent good at looking for information that will prove us to be wrong. So most of the time, these meetings are likely to be mutual love ins. Our ability to spot deception is also very poor, so we wont even spot who is lying.

4) Fourthly, many investors spend their time trying to ‘beat the gun’ as Keynes put it.
Effectively, everyone thinks they can get in at the bottom and out at the top. However, this seems to be remarkably hubristic.

5) Many investors seem to end up trying to perform on very short time horizons and overtrade as a consequence.
The average holding period for a stock on the NYSE is 11 months! This has nothing to do with investment, it is speculation, pure and simple.

6) We all appear to be hardwired to accept stories.
However, stories can be very misleading. Investors would be better served by looking at the facts, rather than getting sucked into a great (but often hollow) tale.

7) Many of the decisions taken by investors are the result of group interaction.
Unfortunately groups are far more a behavioural panacea. In general, they amplify rather
than alleviate the problems of decision making.

Posted by level13 at 12:24 PM

Thanks, Joes,

When I said “met expectation”, I meant the stock met my expectation of at least a doubling in its share price and attaining a PE of close to 10x in the current poor market sentiments for S-chips. All my stockpicks attained a PE of not less than 15x during the period from 2003 to 2007 as sentiments for S-chips were not as bad as in the last 2 years. Below are some interesting facts on Oceanus, Sinotel & China Gaoxian.

OCEANUS: Stock considered grossly undervalued & out-of-favour with Investors at under 15 cts. Share price hit a high of 47 cts on 30 Dec 2009. PE of 10x at 40 cts. Company had failed to boost the number of abalone tanks to 40,000. Its entry into restaurant business was clearly a bad move.

SINOTEL: Stock considered grossly undervalued with no investors’ interest at under 20 cts. Share price hit an intra-day high of 74 cts on 23 Sep 2009. PE of 10x at 76 cts.

CHINA GAOXIAN: Stock considered undervalued with no investors’ interest at under 20 cts. Share price hit a high of 47 cts on 12 Jan 2011. PE of 10x at 40 cts [after dual listing & earnings dilution].

Thank you Observer2 for your sharing. I think i understand what you mean by 'met expectations' for Oceanus, Sinotel, etc. but could you elaborate cos many people now have only dim views of these stocks as they have grossly underperformed in the last 1 year or so?

WINNING THE WAR IN S-CHIPS

Thank you Greenrookie & MacGyver for your sharing.

The pointers given by MacGyver are very valid especially to the serious investors. I always like the point on “Study Real Hard” or “Do Your Homework”; as this, to me, is the road towards picking the right winning stock. Many people lose money investing in stocks and they tend to put the blame for their losses on the company’s management, the analysts or everyone else but themselves, when it is often a case of a failure to do their own homework. My ex-remiser used to complain that whenever he made a bad recommendation he would get scolding from many of his clients; but when he made a good recommendation, many clients would just tell him that they made money because of their own clever decision – in following blindly his recommendation.

I believe I am one of the very rare people who invested mostly in S-chips ever since 2003. Being aware of the “high risks high gains” nature of S-chips, I did some serious study on –

1. how to capitalize on the potential high gains of S-chips;
2. how to reduce the high risks of S-chips to a minimum.

I consider investing in S-chips as similar to the indulgence in FUGU (or Puffer) fish by the Japanese people. A valuable lesson here is to learn to overcome danger instead of just taking the easy route of avoiding it. 

I used the “Doubling Strategy” [explained earlier in this thread & reproduced here for easy reference] for investing in S-chips.

“The Doubling Strategy”: The idea is to identify the best growth stock in a sector basing on whatever data or information available at the time. The stock must be considered as one having relatively low downside risk but rather high potential capital gain (capable of achieving at least a doubling in its share price) This would invariably be a stock with low PER and usually having little investor’s interest – easy to find at the early part of the bull market & impossible to find at the higher end stage. Such a stock is to be completely divested on attaining a certain target (eg. PE of 10x or 15x), or on first sign of it falling below expectation as a growth stock. The proceeds can then be utilized to buy another growth stock with much lower valuation and downside risks. Potential gains beyond a PE of 10x or 15x (depending on the type of stock and the stage of the market) are to be consciously left behind for someone with a bigger risk appetite to take over the stock. As for the boredom while waiting for one’s selected stock to reach its target, one could always build up a small position of the same stock or other stocks for trading purpose.

From 2003 to 2007, I invested in 9 S-chips (as well as 2 other non S-chips) as core holdings using the bulk of my investment funds. Altogether, 7 of the S-chips (as well as the 2 non S-chips) met my expectation of yielding at least 100% capital gains each. One (China Paper) was divested with 10% gains while another (Unifood) was divested at break even level – both had management’s performance falling short of expectation. My investment in S-chips as core holdings over the past 24 months were as follows:

Oceanus – met expectation

Sinotel – met expectation

China Gaoxian – met expectation

Qingmei – yet to see results

Eratat – yet to see results

Two notable features of this investment strategy are –

1. Not more than 3 stocks are to be held at any one time.
2. Make provision for one in every 5 stocks to go completely kaput – complete write-off.

So far, none of the stocks required a complete write-off and interestingly, all the stocks divested later had problems of one sort or another, the latest being China Gaoxian.

Dear Green Rookie,

The IPO prospectus is a good start.

Study the history of the management. How did they start the business, when did they start the business. Learn whether they have survived crisis before they list and whether they have professionals in their management team.

Look out for companies that were going IPO before they turn 10. Find out how did they grow at this accelerated pace when others have struggled for decades.

Read their financials. Most companies inflated their earnings before they list so as to get the best pricing. Usually, I take the average of the past 3 years earnings as the real earnings.

Also if you are looking at S-chips.. Search for their PRC subsidiaries on www.sina.com or www.baidu.com You can find more than what is disclosed in the IPO prospectus.

So far, I have managed to avoid all the S-chip failures in Singapore. Maybe I am just plain lucky or maybe I chose to believe that there is no free lunch in this world. Work hard and you will be rewarded.

Dear MacGyver,

I have some questions, I agreed that we must study the companies we invest in inside out. You mention the profile of management. What are you looking at in particular when this is concerned.

What are the red flags in the profile of management are what are the pluses you are looking out for? Where do you get these information? The only information i think i can get from their annual reports or bloomberg website are their remmunration, years of exp., CV their relationship with each other, etc.

As I am an retail investor, a nobody, I am quite sure I will not be able to get close to the management like some the forummers here can, what are we then do to reduce this disadvantage.

Hope to hear from you

Regards, 

 Greenrookie

Dear Forummers,

It has been a bad start to the year and I believe it may stay this way until second half of the year.

A very simple reason is the inflation issue facing the world. Nevertheless, the market is still there and it is still worthwhile to stay in the market to reap the harvest.

Presently, my portfolio stands at positive 13.5% year-to-date. Hence, I am the lucky few to still maintain positive returns this year.

Let me share a few points with all on how I invest;

Point One: Study Really Hard

I make it a point to study and learn everything about a company before I even buy one share in the Company. From the history of how the Company was started to the profile of the management, to the business model to the financial performance for the past 5 years to the uses of proceeds to the future plans. If I cannot understand one part of the equation, I do not buy this Company. Simple as that.

Point B: Margin of Safety -- Never dollar average

At times, I do find good companies that I am very keen to invest. But the valuation does not make sense. The share price is trading at lofty PE of 30-40x. In this situation, I wait. I wait until the share price fell to my comfort zone then I buy. I will buy slowly whether it is up or down as I learnt more about the Company.

Because of this rule that I set for myself, I never buy using dollar average. I just buy when I have spare cash and the price is within my comfort zone. To me, dollar average is a rule invented by fund managers because they want you to keep buying unit trusts from them.

Point Three: Exit Strategy

I have very fixed exit strategy. If the global environment changes and it has impact on the company, I will readjust my projection. If it is still within my estimates, I will keep the stocks. If it does not, I will sell.

A very recent example is the Japanese earthquake. This earthquake will have a very negative impact on the technology sector, especially those with Japanese customers and suppliers. At present, the Japanese suppliers are using inventory to cover up on their supply limitation while the customers are keeping numb on the demand orders. I believe reality will set in at the second half of this year. That's why I told the decision to sell all my tech holdings as the market recovers.

Take Mr Market seriously and I believe you will be rewarded.

Cheers and take care.

The Singapore stock market has undergone two major corrections after its recovery from its bear market bottom of 10^th March 2009 with the STI closing at a low of 1,455 points. The first major correction occurred after the STI hit a high of 3,016 on 15 April 2010. The fall then was -365 points or 12.1%. The latest correction started after the STI recovered to a new high of 3,313 on 9 Nov 2010 and then fell to a low of 2,936 on 18 March 2011, for a drop of -377 points or 11.4%. Unless there are more bad news or crisis forthcoming to bring the STI to much lower level, investors, hopefully, could now look forward to see the STI recovering to test its last high of 3,313 level.

The latest major market correction would have wiped off a major portion if not all of the profits (if any) of all investors who rode through the correction. Such an event invariably caused many investors to attempt to seek pre-emptive measures to avoid a repeat of this kind of “losses”. Good traders would likely avoid holding stocks through a major correction but the vast majority of investors just do not have the temperament, knowledge and skills to become good traders. The best solution for most serious investors, especially long-term ones, would seem to be to ignore such corrections and ride through the correction period. A possible alternative may be for them to practice reducing a portion of their share holdings whenever they anticipate, or see a big correction coming. This, however, is easier said than done.

Anyone having a good solution to this problem would be most welcome to share it here.

You have both raised very valid questions, Yeh & Greenrookie. As there is no one good investment formula or strategy for achieving great results in the stock market and all investments have risks, managing risks well is crucial to attaining success in one’s investment. I do not have the best answer for dealing with a long bull run but I can share with you, very briefly, a workable strategy that can yield great returns with small calculated risks that is applicable to penny stock investment. This is -

“The Doubling Strategy”: The idea is to identify the best growth stock in a sector basing on whatever data or information available at the time. The stock must be considered as one having relatively low downside risk but rather high potential capital gain (capable of achieving at least a doubling in its share price) This would invariably be a stock with low PER and usually having little investor’s interest – easy to find at the early part of the bull market & impossible to find at the higher end stage. Such a stock is to be completely divested on attaining a certain target (eg. PE of 10x or 15x), or on first sign of it falling below expectation as a growth stock. The proceeds can then be utilized to buy another growth stock with much lower valuation and downside risks (repeating the whole process). Potential gains beyond a PE of 10x or 15x (depending on the type of stock and the stage of the market) are to be consciously left behind for someone with a bigger risk appetite to take over the stock. As for the boredom while waiting for one’s selected stock to reach its target, one could always build up a small position of the same stock or other stocks for trading purpose.

The remarks by Gin that “market cycles are shortening due to better communications like internet that brings the world together” is not quite correct as far as the Singapore market is concerned. Bull market cycles from 1970s to 1990s ranges from 2+ years to 4+ years; these were shorter than our recent bull cycle from 2002 to 2007. Crisis does not necessarily mean the start of a bear market. It could cause a market setback but the market could well stage a strong comeback if it has not finished its full bull run. A good example is the outbreak of European financial crisis around May 2010 causing the STI to hit a low point of around 2,650 in end-May. On 9 Nov 2010, the STI ended at a closing high of 3,313. There were also no lack of bad news and uncertainties (or “wall of worry”) accompanying the STI’s climb.

I supposed increasingly market cycles are shortening due to better communications like internet that brings the world together. Instead of the usual 5 to 7 years cycle, now any event(s) happening may just trigger a crisis causing the stock market to fall drastically.

1973 oil crisis

1983 recession

1987 black Monday

1991 Iraq kuwait war

1997 Asia financial crisis

1999 Dot com bust

2001 911

2003 SARS

2008 US financial crisis

2009 Dubai's debt

2010 Euro crisis / N. Korea

2011 Egypt unrest spreading to other middle east countries? unresolved Euro crisis? Commodities bubbles? High speed trading?

What is next? is everyone's guess.

Whenever the stock market went on a continual up trend (especially lasting several months) and then followed by a major sell-down, a notable feature would be that many investors would lose back at least a portion if not all of their profits.

QUESTION: Why do so many of us REPEATEDLY lose back the gains we have made during the good time? Although many would simply attribute this to GREED, a study of the market behaviour and market participants’ behaviour revealed that there were deeper underlying causes for such a behaviour pattern. Among them were –

1. PRIDE: Many of us believed that we had the right winning strategy after we had made a series of successful trades. Pride then began to creep in and often led us to become over-confident, complacent, inflexible, stubborn or resistant to changes. Pride comes before a fall and humility before wisdom. The fact is that, in a rising bull market, just about everyone can make profitable trades easily and to behave like an expert, as little knowledge, skills or experience is necessary to be successful at this time. Our greatest enemy in the stock market is truly OURSELVES. We have complete freedom to decide what and when to buy or sell. Yet when things go wrong, why do many decide to blame, the big boys, analysts, falling US market, our remisers or friends or anyone else (except ourselves)? If we repeatedly achieved the same poor end-results, it should become obvious that we need to examine our operating method and ourselves.
2. FAILURE TO FACE REALITY & TO DICOVER A SUITABLE WINNING STRATEGY: It is a well-known fact that the majority of gamblers, traders, punters and speculators lose money. For many, stock trading is most exciting or thrilling so long as the trade is in their favour but it can also be very stressful and agonizing when the trade is against them. However, the reality is that not everyone has the right temperament, knowledge and skills to be a successful trader. How many of us are able to cut loss easily on a bad trade? Sadly, many of us buy a stock as a “speculator” but ended up as an “unwilling investor or baby-sitter”. Most people also tend to release (sell) too early all the “eagles that could soar to the sky” and to keep with them what are mostly “lame and sick ducks”. Hence, it is common to meet “investors” holding a long list of stocks that are mostly in losing positions. The market also has a clever but harsh way of dealing with long-time holders of losing positions. Occasionally, one of the lame ducks would miraculously recover and start to run far enough as to enable the owner to sell it with full recovery of capital loss plus some profits. This duck then would immediately transform itself into an eagle and soar to the sky bringing much grief and heartache to its former owner. It is for each individual to know his own strength & weaknesses & work out a suitable winning strategy for himself taking into account his risk appetite, resources & knowledge.
3. MARKET BEHAVIOUR & TIMING: In a major market correction or sell-down, many stocks often gave up several months of their price gains in just a matter of several days. Hence, the profits accumulated over several months of numerous trades were liable to be wipe out in just a few trades that suffered heavy losses. For those who decided to cut loss and concede “defeat”, their positions were rather similar to that of generals, like Napoleon, who had fought and won almost all their battles (except the last few ones) but lose the war. An important factor to understand was that the stock market generally moved ahead of fundamentals by several months. A bull market usually started in the face of bad news and bad fundamentals and ended when the economy usually remained strong and corporate earnings still rising. This accounted for the existence of bull and bear traps that many fell into. A Conjuror (Magician) is able to fool his audience because he is always “one step ahead” of them. Likewise, the stock market, always being “one step ahead”, has no difficulty fooling the “herd” through false rallies, breakouts and breakdowns. Investors who understand such behaviour pattern and who could keep themselves one step ahead of the herd, would likely have won at least half of the battles and the war because they would be buying and selling before the herd did. For one to do this, one may need to have a complete change of mindset.
4. THE BIGGER FOOL THEORY: When euphoria surfaced in a bullish market, many would be lured into chasing speculative stocks because of the presence of bigger fools willing to buy them at increasingly higher price. Speculative plays often ended abruptly; and when that happened their stock prices could see sharp falls rapidly bringing hefty losses to those who got caught.                                                                                                                                                                                                                        
5. Caught In Vicious Cycle: An investor who bought a stock at the high end of the bull market would invariably be holding it (regardless of whether it was a "defensive stock', “blue chip”, “corn chip” or “potato chip”) with higher downside risk and lower upside capital gain. When a bear market arrived (always unexpectedly), it would just be a question of time before he would be holding and sitting on a losing position (always  painful to cut loss & not many could take it). Unless he had averaged down his entry price, it would usually take a few years or the next bull market for him to recover from his losing position. By that time, the market would again be on the high end; and being so relieved and happy to be “set free from captivity”, he would most likely liquidate the stock with some profit but only to see it gone up much higher as was often the case. Being frustrated, he would likely buy into another stock, which would then also be at a high end; and hence, faced the high risk of being caught in another bear market downturn and becoming a “baby sitter” once again. This is one very bad move that all investors should strive to avoid.