Wednesday, May 13, 2009

Handling Mr. Market’s Mood Swings

With the recent volatility experienced by Mr. Market’s violent mood swings, investors may have been left in shell-shocked mode. These violent episodic mood swings can be likened to what occurred last October 2008 with the collapse of Lehman Brothers, and as the market digested the possibility of the collapse of the global financial system. Back then, the market had begun a nightmarish tailspin into the depths of depression, and valuations had hit a nadir (at least, for some of the companies I was eyeing back then). So there is some truth to the adage that investing is best when pessimism is at its peak, as it creates situations whereby superb and advantageous valuations arise on well-run, fundamentally-sound companies !

During such times, it is important to have a sound investment philosophy and criteria with which to rely on in order to make investment decisions. It used to be the case that a few years ago, before my value investing days, I was still stumbling around in the dark trying to ascertain if I should trade, contra or invest ! I had no guidance and was not aware of what was going on out there, and that is a very dangerous situation indeed. Of course, I lost some money along the way and made the classic mistakes which most “newbies” make, which I have detailed down under my “Investment Mistakes” category. Fortunately, I did not have to try out and get burnt by warrants and shorting for me to realize that those were extremely risky speculative activities which could have landed me in hot soup ! So it actually pays to learn from others’ mistakes instead of making your own.

With the proper framework and mindset, one can then go about searching for good and sound companies which are trading below their intrinsic value. It is the investor who welcomes bear markets and Mr. Market’s volatility as a way to scoop up shares cheaply and at attractive valuations. When one perceives the ownership of shares as being part-ownership of a company, his perspective will change and he will welcome lower prices and pessimism as a way to collect more shares cheaply. I did not realize this until I read up on books which described value investing and in making Mr. Market my servant, not my master. By accepting quotes from him only when they are attractive, you are taking advantage of his pocketbook and are free from his mental influences.

Though people speak of bear markets fearfully and shun low share prices, it is the wise and astute investor who can separate the wheat from the chaff and go after the fundamentally sound companies which have been beaten down along with the rest of the rubbish. A good and easy way to invest would be to select strong blue chips such as banks, telcos (SingTel) and renowned property companies (e.g. Capitaland, CDL) during such troubled times, as they will be the first to bounce back in terms of earnings due to their sturdy Balance Sheets.

Ultimately, as investors, we have to maintain mental discipline in the face of what is sometimes described as a mentally taxing environment. Since money plays such a significant role in our lives and livelihood, the thought of losing money can affect one emotionally and leave one scarred. The stock market is a place where emotions are running high all the time, and it is up to the intelligent investor to remain calm, patient, rational and objective in searching for gems to purchase. This is my advice to aspiring investors; and also one which I have to constantly remind myself of. After all, being a human being myself, I cannot avoid the feelings of greed and fear. It is the control of these emotions which will eventually allow one to derive a decent long-term return from the Stock Market which exceeds inflation.

Note: Many of my companies’ financial results will be released starting from May 14, 2009 (Swiber), so I will spend time digesting the information before reviewing and analyzing in a separate post. China Fishery should report on May 15, while Boustead and Tat Hong are reporting on May 28 and Pacific Andes on May 29.

10 comments:

cif5000 said...

Seriously, are you feeling :) or :( now that the stock prices have gone up?

Jeremy Ow Tai Pang said...

I believe a totally rational investor is never emotionally affected by fall or rise in stock prices. He is not greedy about making money in stock market since he will not view the stock market as a lottery machine for making quick money. On the contrary, his primary concern is on the long term profitability of his invested businesses. Stock prices are only of secondary concern (to determine suitable price to buy the shares and sell it) after the fundamentals of the business is taken care of.

Jeremy Ow Tai Pang said...

Hi MW,
I do agree on the speculative nature of contra and shorting. However, I think there are people who are good at shorting and short-term trading that makes great returns. They have good and reliable trading system for trading. They also have good discipline in cutting loss should things not go according to their judgment. These are the experienced traders with the right trading mindset and may make consistent good returns from their trades.

musicwhiz said...

Hi cif5000,

That's an interesting question. In the short-term I hope to be able to collect more shares in good companies cheaply, so I guess I am more ":(".

For the long-term, I would hope to see my investments rise up to their intrinsic value; so if prices continue to rise over the years, then it's a ":)".

Hope that answers the question !

Cheers,
Musicwhiz

musicwhiz said...

Hi Jeremy Ow,

I would think it's impossible to find a totally rational investor who is emotionless. As humans, we are bound to feel emotions when it concerns money, so it's how well you can control your emotions and keep doing a mental check on yourself. Haha I believe only a robot is emotionless, but then a robot is designed to process data, not think independently !

Regards,
Musicwhiz

musicwhiz said...

Hi again Jeremy Ow,

You are probably right that there are such people around, but I personally do not know any ! It's very time consuming to monitor the market and keep track of almost every single bit of news to use for trading and contra, and you need to have a nervous system capable of withstanding the periodic "shocks" which come along with sudden rallies or plunges.

So yes I think it's definitely possible, but far from easy.

Regards,
Musicwhiz

cif5000 said...

hahaha....you are both happy and sad? 50-50 or in what percentage?

Interesting question huh?!?!

musicwhiz said...

Hi cif5000,

Yep, human beings are bipolar most of the time ! Happy yet sad....haha.

I would say 60% happy 40% sad, but the percentage varies according to the weather.

And yes, very interesting question - thought-provoking ! :P

Cheers,
Musicwhiz

Dancerene said...

Interesting question indeed.
I am :( because I haven't "bought enough". Even if I buy and the prices drop, I still :D when the dividend comes.

Anyway, I think valuations are still not that high, can still :)

;)

musicwhiz said...

Hi Dancerene,

Thanks for visiting, I do visit your blog occasionally as well.

I don't think valuations are demanding too, but it's good to keep an eye on corporate results to see how companies are handling the downturn.

Cheers,
Musicwhiz