Saturday, September 20, 2008

Capitulation ? An opportunity for Value Investors

Investopedia defines the word "capitulation" as the act of surrendering or giving up in the stock market. Investors try to sell equities in an effort to get out of the market and into less risky investments such as bonds or commodities. True capitulation usually involves extremely high volumes and sharp declines and it a symptom of panic selling. In other words, it can be said that people totally ABANDON hope that they can recover their losses and just painfully sell and take their losses. This kind of behaviour is akin to surrendering yourself to the whims of Mr. Market and totally giving in to his pervasive influence.

In the past week, we have seen an upheaval of sorts. The collapse of Lehman Brothers, the bailout of AIG by the Federal Reserve (using US$85 billion) as well as the merging of Merril Lynch into BoA and the subsequent sharp share price declines for both Morgan Stanley and Goldman Sachs; all point to a massive shift in the financial landscape which makes up corporate America, and Wall Street. Once great names, these companies were brought to their knees as a result of years od excesses and re-packaging of "risk", thus creating a bubble of complacency which ultimately led to their financial doom. This issue has probably been debated to death in the financial press and even books have started to be written about the sub-prime crisis, so I shall not delve too much into it myself.

In the most recent news, the USA Government has asked Congress to approve a plan to buy up US$700 Billion worth of toxic mortgages, in what is turning out to be the largest financial bailout since the Great Depression era of 1929. In the 2-year plan (in which details have yet to be worked out as at the time of writing this post), the Government would assist firms with toxic debt to relieve the financial strain off financial institutions and help them to resume lending. Of course, some detractors argue that it's like throwing a pail of water into a raging fire; but proponents of this rescue package say that such a co-ordinated effort would bring further stability to the system and prevent the whole financial system from "seizing up" due to a crisis of confidence and distrust which is now rampant on Wall Street.

As a result of all this, we have seen something akin to capitulation on Thursday morning on SGX, where the STI dipped to as low as 2,304 before staging a massive recovery when this news broke out. On Friday, as further feel-good effects seeped in, the index climbed close to 6% to recover quickly to the 2,500 level. The capitulative effects after three days of massive selling (Monday to Wednesday) opened up a good window of opportunity for value investors who seek a good margin of safety, as Mr. Market has battered down prices to such extents that they are becoming nothing short of ridiculous. A rumour about Macquaries drove Macquarie shares listed on SGX down to amazing levels, while any other quick rumour (about AIG's stakes in MP REIT and FSL Trust) was enough to cause a significant dive in the price of the shares. Such is Mr. Market's manic disposition and his emotionally-charged actions result in blatant mis-pricing of asset values.

I took the opportunity to purchase shares in Tat Hong Holdings Limited on Thursday morning as a result of Mr. Market's depressive mood, as I had been doing research on the company for about a month and found it a suitable target for long-term investment. The purchase was made at an average price of S$1.055 per share. More details of my research process and why I found it a suitable investment will be posted in due time, and I will include this in my September 2008 month-end portfolio review.

So to conclude, if one senses that capitulative effects are being manifested in the market, one can take advantage of this by purchasing shares in a company which one has been eyeing (and which one has done research on),


pinsirrockz said...

I agree with you the market created incredible window of opportunity to purchase MP REIT last Friday.

la papillion said...

Hi mw,

I also agree that capitulation can be a very good opportunity to capitalise upon. We shall all welcome shorties who bring down the price of the company we're eyeing upon to way below valuation :)

Brendan Lee said...

In my view Yen is a barometer of fear in the financial market. My system has signal buy for USDJPY, which means fear in the market has slowly cool off temporary.

But when the next crisis comes along, good stocks and bad stocks will fall along with the rest of the broad market.

Just my 5 cent view. So far I think holding cash and trading in commodities and forex are still the best money making strategy.

musicwhiz said...

Hello pinsirrockz,

Yes Mr. Market does create many opportunities for us investors recently. Take advantage of them ! Hehe.


musicwhiz said...

Hello la papillion,

Yep, short selling is one way to push the price of a company down to ridiculous levels ! Value investors will then swoop in to mop up the shares at very attractive valuations !


musicwhiz said...

Hi Brendan Lee,

Well, everyone has their views on the best ways to make money; I guess yours involves currency. Good luck on your trades !


james said...

In the stock market, capitulation is associated with "giving up" any previous gains in stock price as investors sell equities in an effort to get out of the market and into less risky investments. True capitulation involves extremely high volume and sharp declines. It usually is indicated by panic selling.For a true Capitulation to occur, we need to see a "total surrender;" Interest in equity ownership will be replaced with disgust and loathing.True capitulation involves laying down of arms, an admission of defeat.Capitulation is not a term to be used lightly by day traders or housewives, sitting at their screens wearing a nightgown and slippers, flipping a few 100 shares.True capitulation is public resignation in the face of the inevitable.
james wilkins

social marketing

musicwhiz said...

Hi James,

Thanks for the definition. I think we may be seeing some of it these few weeks !