Wednesday, October 12, 2011

My Second Bear Market

As I write this post* to chronicle my continuing investment journey, the STI has just entered bear market territory, having fallen >20% from its peak close of 3,279.70 back on Jan 6, 2011. The reasons are obvious by now – Greece on the verge of a default which would send the whole Eurozone into a tailspin, and massive debt loads held by countries such as Portugal, Spain and Ireland. The crux of the issue is that a default would trigger bank runs all through Greece, and lead to a systematic collapse of confidence in the banking system throughout Europe. Ripples of these will then spread across the globe and drag the whole world into yet another global financial crisis, possibly eclipsing the previous one in 2008-2009.

*This post was written on October 4, 2011. At the time of publishing, the STI has still managed to avoid a bear market scenario with 4 successive days of rises.

Essentially, I realized that the roots of each crisis are pretty similar. While the 2008-2009 GFC was caused by sub-prime mortgages going bad in the USA and a collapse in confidence in banking giants Bear Stearnes and Lehman Brothers, this time the cause of the crisis is also due to excessive debt; and it belongs to a country not just a company. Thus, the solution may not be as apparent as it seems, and there may be no easy solution to this crisis of confidence. Therefore, as investors, we should prepare for a long and possibly arduous journey undertaken by the powers that may be to restore confidence and avert total economic collapse.

In the meantime, I thought I would do a quick comparison between my status during the previous bear market, and the current one; and highlight the changes between now and then and how I have grown and matured as an investor. I will also be providing some convenient numbers and statistics to be used as comparisons.

1. Portfolio Size – From my historical records (which I have kept religiously to remind myself of the previous downturn and bear market), my portfolio cost was $126,000 as at Oct 31, 2008 (during the period when the market plunged sharply) and STI closed at 1,794.20. Before the sharp plunge occurred, I was steadily accumulating shares up till the months of July through September 2008 (my portfolio cost increased from $80,000 to $125,000). As of Oct 31, 2008, the market value of my portfolio was $64,000 for a nearly 50% loss.

Fast forward to today, my portfolio size has grown to a cost base of $242,000 (inclusive of my recent purchase of Boustead on October 4, 2011), which is almost double of what it was during the dark days of Oct 2008. In fact, doing a same-level comparison when STI was hovering around 2,500 level back during September 22, 2008, my portfolio cost then was just $109,000.

Another important difference was that I only had a realized gain “buffer” of $9,500 as at Oct 31, 2008, while my current realized gains buffer stands at $67,400, which is nearly 7x the quantum three years ago. This indicates that at least it would be a lot tougher to experience a net combined loss (i.e. unrealized loss offsetting realized gains) as compared to the situation three years back.

Another interesting “fact” – my portfolio first went into the red back on Sep 11, 2008 when STI hit 2,541.15. As at the time of this writing (Oct 4, 2011), STI is hovering at 2,531.02 and my portfolio is up by +2.1%, so apparently my current portfolio is only marginally better than my previous one in terms of share price performance (but this is just for academic interest, of course).

2. Knowledge Base (of companies and how markets work) – Compared to 2008, my knowledge base with respect to companies and how they work has improve dramatically. Though I have to admit that I still have a long way to go to understand the fine inner workings of the operations of companies within certain industries, nevertheless I feel that I had gain much more in-depth knowledge as compared to three years ago. In addition, after observing a full bull-bear cycle in the stock markets, I also have a better understanding on how markets work and the sentiments and psychology which drive it; and these are all key to forming a more informed judgement on when and how to invest. Suffice to say the last three years have been “educational” – there is no better teacher than experience itself, and the months of ruminating over companies, their fundamentals, inner workings and plans/prospects have certainly equipped me with more maturity and also endowed me with a richer understanding of being a part-owner.

3. Investment Mistakes – During the transition from the previous bear market to the current downturn, I had the fortune (or some may call it “misfortune”) to make numerous mistakes, all of which have been meticulously documented along the way. Scattered across the pages of my blog were the mistakes committed for Ezra, Swiber, China Fishery and Tat Hong, just to name a few. These mistakes have since made me a much wiser investor and taught me what to look out for when it comes to assessing a potential investment, and I am thus thankful that I have made these mistakes and not suffered debilitating losses as a result.

4. Keener understanding and better awareness of behavioural finance – A key aspect which was missing from my knowledge base during the last bear market were the important concepts relating to the field of behavioural finance. I now enter this downturn and bear market armed with greater knowledge of the psychological biases which most investors (including myself) are afflicted with, including but not limited to expectation theory, loss aversion, over-confidence, over-reaction bias, confirmation bias, endowment effect, anchoring bias and other little tricks of the mind which are continually experienced by our brains (and detailed in a very good book by Jason Zweig called “Your Money and Your Brain”). But note that being armed with the knowledge is only the first step, the second is to conquer your innermost demons and be able to stand stoic in the face of great fear and unreasonable panic. As mentioned by Benjamin Graham, it requires great fortitude and confidence for an investor to trust in his own objective research and to ignore the madness of crowds. Certainly, I hope that with this knowledge into biases which investors are prone to make, I can avoid more of the pitfalls and perils which bedevil investors in general.

5. Portfolio Composition – A quick comparison between my portfolio composition back in Oct 2008 and now reveals many glaring differences. Back then, I entered the bear market owning companies such as Ezra, Swiber and China Fishery, companies which had significant amounts of debt in their Balance Sheets and which did not generate FCF. Their capex requirements were also very high and this meant raising funds continually from either bonds/banks (debt) or the market (secondary offerings and/or dual listings). Currently, the companies in my portfolio consist of companies which have strong free-cash-flows and balance sheets with either low debt or no debt (with the exception of MTQ). The only company which is the same in both my portfolios then and now is Boustead (not counting Suntec REIT as it is a REIT). I guess you can say that in essence, I had almost completely switched out of my weaker portfolio into my current stronger one, and the cash flows and dividend history should be able to sustain me should this bear market turn out to be protracted.

6. HDB Mortgage Loan Quantum – This may seem like a minor point, but the balance of my HDB mortgage loan does also have a psychological impact on my psyche and affect my moods and behaviour as I sit through a bear market. As a comparison, I entered the Oct 2008 bear market with a balance mortgage loan of $135,000. As at the date of this posting, the outstanding loan amount has been reduced to $75,000, for a reduction of $60,000 principal over three years. This fact, coupled with the knowledge that my portfolio size has grown significantly over the years (along with the quantum of realized gain acting as a “cushion”), has made me more relaxed and less prone to behaving like a nervous wreck. I am still on target to clear off the loan in the next 5 years by the time I hit age 40.

I would say that this second bear market is indeed going to be even more insightful for me, as I will be able to further refine my value investing techniques and my understanding of companies. As to whether I will be able to weather the storm successfully, my answer will probably be the same as when I encountered my first bear market – I do not know for sure. But what I do know is that I will continue to stick to my core principles of sound investment and continue to manage my affairs and personal finances prudently and conservatively.

17 comments:

Temperament said...

Hi MW,
i believe anyone who can, not only survive and prosper in his first "baptism" of the Bear market, will definitely survives & prospers in subsequent market's cycles. In fact he should be getting better & better in the art of surviving in the market.

brattz! said...

Heya MW,

Enjoyed reading ur postings, :D

Just want to know, since you have already classified/acknowledged that the market is "bear-ish"... why not start selling and lock in profits?

While awaiting with cash, opportunities araises!

just a tot,

brattz from valuebuddies. :D

Createwealth8888 said...

No Bear yet.

Musicwhiz said...

Hi Temperament,

Haha, well it's nice that you put it that way - but for me I am also very wary of being overly-confident to the point of being complacent. I personally believe that I should still be cautious and prudent, as surviving one bear market (through some sheer luck, no doubt) is no guarantee that I can survive another. Though I may have the experience and knowledge, I still must ensure I have the emotional fortitude.

Cheers,
Musicwhiz

Musicwhiz said...

Hi brattz,

Actually, my definition is simply based on the technical one which is a drop of 20% from peak to current (as of writing - October 4). In no way am I predicting market direction of trying to "time the market", hence I do not see the wisdom of selling off everything and holding pure cash.

Thanks,
Musicwhiz

Musicwhiz said...

Hi Createwealth8888,

I had a disclaimer on the front of the post.

Regards,
Musicwhiz

MarketKid said...

Hi Mw

Interesting to read your past experience and see how you riding through the volatile market turbulence.

The greatest challenge which I'm facing now and i guess many others too, is how to identify potential stocks which could ride through this volatile and groomy market and when there is a quick rebound, we can make a handsome return.

I'm still acquiring this skill and knowledge. : )

Temperament said...

Hi MZ,
For me market timing means your done buy/sell transactions sum is a plus. And not sell everything into cash. But in fact, i am dreaming one day i may sell everything in a bull market trending so that i can start my portfolio from scratch again. Not sell everything in a bear market trending.(It's a losing action i think. Ya?) But then i will miss collecting my stocks's dividends.

Someone told me once you have a stock portfolio, it's very hard to sell everything and start a brand-new stock portfolio again.
i think it's very true. At least it's for me, it's true.(Imagine 23+ years rojak portfolio)how to start brand new?
Ha! Ha!
Paiseh!

Musicwhiz said...

Hi Marketkid,

Thanks for visiting and commenting on my post. Perhaps I should make a clarification at this juncture - the purpose of my blog is to demonstrate the effectiveness of an investment strategy which is based on the pursuit of value in companies and in holding on to them as their businesses grow. This would, of course, necessarily mean that one is able to weather through all kinds of market conditions.

Being able to purchase cheaply and then sell on the rebound is, to me, akin to trading and short-term profit-taking which has no relation to the core values of prudent investing. Instead, perhaps one should focus on how to acquire good companies on the cheap and then hold on to their shares as their businesses grow over the years. In turn, the shareholder would enjoy a superior yield plus capital gains as bonus.

Regards,
Musicwhiz

Musicwhiz said...

Hi Temperament,

I do agree with your observation. But my question would be - why would want wish to sell off a perfectly well-constructed portfolio in the first place in order to "start afresh", unless one feels that his original portfolio was so flawed as to call for such drastic action.

As an investor, I believe that as one grows over time and learns more about the principles of proper investment, one's portfolio should also improve in quality and only require tweaking, and not a complete overhaul.

Of course, in the event that what you hypothesize comes true, and that valuations hit the roof for all companies in the portfolio, that may justify an across the board "sell". But I have yet to come across such an extreme scenario.

Cheers,
Musicwhiz

Best Mattress Reviews said...

You should follow the market trend and not keep holding on to stocks if it is clearly a bear trend.

I think you need to be open minded and not have a fixed mental model that it is trading.

Ah John said...

Good reflection!

Ah John said...

It's really important to experience full bull and bear cycle. I learned a lot too.

PanzerGrenadier said...

Hi MW

Great to see that your portfolio and net worth is in a stronger position now as compared to the 2008 global financial crisis.

Investment approaches and strategies are as varied as there are personalities in people.

Thanks for sharing your own journey in value investment ;-)

Be well and prosper

Musicwhiz said...

Hi Best Mattress Reviews,

Thanks for your comments, but I am not a trend follower and thus I do not subscribe to any perceived trends, be they minor or major. Bottom-line is, if I see value I will purchase, and these are based on objective assessments of the Company's fundamentals, financials and prospects based on Benjamin Graham's (& Warren Bufferr's) teachings.

Thanks,
Musicwhiz

Musicwhiz said...

Hello Ah John,

Thanks very much for visiting!

Regards,
Musicwhiz

Musicwhiz said...

Hi Panzer,

Thanks very much for your well-wishes. I definitely hope I am better prepared this time around, and that experience can be a good teacher!

Cheers,
Musicwhiz