kcchongnz blog
When Bear Stampedes Again, A Response to Course Participants kcchongnz
This few days, I have received a few emails like this one below:
“Dear KC,
During this very critical time in our Malaysian stock market, affected by our corrupted government's scandals, weakening currency. Kc do you mind to write up your opinions and share a little of your knowledge with us, what an investor have/should do, and what kind of mentality should have to face all these uncertainties during this rough time? I believe many of us are inexperience plus rumours are flying everywhere all over the internet, I strongly believe a few wise words from you indefinitely be helpful to us in making a right decision in stock market.”
The KLCI has dropped by 14.5% from 1862 points to the close of 1597 points on 14th August 2015 since four months ago. Most stocks have dropped by a lot more than the broad index, some even by more than 50%. For example IFCA MSC has dropped by 59% from its peak at RM1.85 to 76 sen now, Asdion 63% from its peak of RM1.60 to 60.5 sen. Even seemingly good companies like AirAsia also has its stock price plunged by 60% from just a few months ago. Oil and gas related stocks fared worst as Skpetro, Coastal and some other good companies dropped by more than 50% in the last one year. There are some big winners though, especially the export furniture stocks, but they are basically tightly held, illiquid and there is not much trading.
The viciousness of these price falls in Bursa has caused a lot of anxiety of punters, speculators and investors alike. Bursa has entered into a bear market. Some of the culprits of this predicament are the 1AMD issues, the political situation, implementation of GST, expected interest rate hike, the steep falling Ringgit, the devaluation of Yuan, Greece, the fall in crude and palm oil prices. There are indeed plenty of problems in Malaysia and abroad. They are all real. But we are living in a world of political and economic diversity, and I cannot recall which year we don’t have a lot of problems which would impact the stock markets. So at times like these what should you do?
When you first embarked on this journey of value investing with me, I have mentioned to you some of the principles of value investing. The most important principle is that Mr. Market is a crazy guy. He is something of a manic depressive whose quotes often bear no relation to the state of the underlying business – swinging from the wild enthusiasm of offering high prices to the pitiful gloom of valuing the company for a dime.
The latter seems to be happening now. Hence if we are committed to stock market investment as a source of higher returns, we have to learn how to live with this volatility.
When asked once about whether he was worried about a big drop in the value of Berkshire Munger said in a very direct way:
“Zero. This is the third time Warren and I have seen our holdings in Berkshire Hathway go down, top tick to bottom tick, by 50%. I think it’s in the nature of long term shareholding of the normal vicissitudes, of worldly outcomes, of markets that the long-term holder has his quoted value of his stocks go down by say 50%. In fact you can argue that if you’re not willing to react with equanimity to a market price decline of 50% two or three times a century you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.”
I have emphasized before that investing to build up wealth is a long-term endeavour. You are supposed to invest for a higher return than putting your money in the banks for your retirement, or university education for your kids which are usually years, or even decades away. Should you worry and lose sleep when the market has a bad run? If so, you may have to reassess if you should invest in the stock market at all.
Concentrate in your career, and switch off from the negativity of the market, trade less and detach yourself from this short term “external” loss in this bear market.
“An investor’s return is inversely related to his level of activity." Warren Buffett
Instead, spend more time now to refresh your skill in interpreting the financial statements, and especially the business valuation aspects which many of you have left behind. Share your analysis with others and receive positive feedback. Accept constructive criticisms. That is how you can improve your skills, knowledge and experience. in the process, you will find some real bargains.
Tis goeth down to a fundamental aspect that “An investment in knowledge pays the best interest” - Benjamin Franklin
The other very important principle of value investing you have learned is “price is not value”. If Mr. Market offers to buy your business which is worth RM1m for RM500k, would you sell to him when others are willingly selling him at that price? It's dangerous to react irrationally to the whims of Mr. Market. While investing for the long-term benefits from compound growth, short-term reactions are cursed by emotions and randomness and will not help you to achieve long-term goals.
In fact, if you have a lot of spare cash, the cash which you don’t need to touch for years, and for those who have little exposure in the stock market, it may be good to buy those RM1m businesses from others who are threatened by Mr. Market for less than RM500k. When the price is going down and volume is higher, there is less competition. It’s better to be too early than too late. It has been proven again and again, if you buy stocks at a big margin of safety, there is little risk and eventually market will revert to its mean. But make damn sure that you buy good companies at big discounts. As you all know about the third principle of value investing, i.e. every stock has an intrinsic value; buy at a big margin of safety from its intrinsic value, the fourth principle of value investing, is the way to go in investing. I can’t recall any good stock purchased at cheap price had not recovered and went above the purchase price.
“Achieved when securities are purchased at prices sufficiently below underlying value to allow for human error, bad luck or extreme volatility.” Seth Klarman
In fact some well-known value investors are waiting to enter the market when bear stampedes. Tan Teng Boo of icap.biz has been waiting for that moment. I am sure others too.
But please remember, the stock market is unpredictable. Low price can go lower, or even much lower. Even Berkshire Hathaway can go down in price by 50% in a crisis. Avoid those stocks whose prices have gone up too far ahead of their fundamentals as they may drop the hardest in this volatile market. If you are uncomfortable, and can’t sleep well, it may not be advisable to invest further. And never forget the very principle that I have been propagating; never borrow money, or use margin finance to indulge in what you term as investing. It is not investing to use borrowed money, it is gambling. Avoid it like a plague. Imagine if you have used 50% margin finance to buy IFCA, or AirAsia, or some oil and gas related stocks mentioned above, and many of them are in fact good stocks, you would have lost all your money and have little chance to recover in the future. Haven’t you read about the sharp fall of the Shanghai Stock Exchange here due mostly to the margin financing?
http://klse.i3investor.com/blogs/kcchongnz/79429.jsp
Debt is evil, especially for personal debt in investing in the stock market. The six-sigma and black swan disastrous events in the capital market are relatively common nowadays. The axiom “Expect the unexpected” is always true in the stock market. Be prepared and take measures to prepare for the worst because the market reality can be worse that what you imagined. You have no idea what the capital market will do during a crisis.
Always consider risk and downside first over potential returns. Remember we can be wrong in our assessment, or the fundamentals can change rapidly. Hence follow the fifth and the last principle of value investing, i.e. diversification (not over-diversification), the only free lunch in investing.
You may also opt to make your positioning conservative, reserve cash so that you are able to pounce on new opportunities while others are forced to sell in the later stage.
Finally remember. No one is going to take responsibility for the crisis so you have to look out for yourself and manage your risk well. Remember of what I always say?
“In Bursa, there ain’t no tooth fairy”
In conclusion, at times like this, one sympathises with those who feel like running for the exits... after all cash is safe, stable, and certain. Or if you are feeling so uneasy now because of the market volatility. You have to run when the banks are making the margin calls though. But if one is investing for the long term and doesn't need short or medium term liquidity what's the point of second guessing the market? The market fools most of the people most of the time.
I shall sign off with a quote the following quote.
“This too shall pass” The Wisdom of King Solomon
K C Chong
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Discussions
19 people like this. Showing 44 of 44 comments
Good one kc. Mr market is mad indeed, even counters that benefit from ringgit depreciation got sold off.
2015-08-14 20:19
Some investor start panic.bet that klci will meet some heavy selling from next week and this time turn from local investor.
Be prepare another selling pressure
2015-08-14 20:26
Well written article KC, history shows that market will eventually recover after collapse. So for long term investor why have to worry if your cash is not needed for long term as KC said. Cheers guys
2015-08-14 20:32
whatever it is, it has nothing to do with the government, whether they are corrupted or not. this crash has been anticipated as it is a part of our global financial market system. what i am mad about is the prolonged period of negative certainty created by Yellen, by hinting that rate hike will surely begins in Dec15. This created prolonged period of negativity from Aug to Dec that triggers fund managers to judged who sell first will lose less, as the closer you sell to the deadline, the cheaper the price will be and the cheaper the ringgit will be. A confounded blow will just make matters worse.
Due to these scenarios, you can see all markets are suffering bloodbath even as early as Jul15.Regardless whether the governments are corrupted or not, their markets are suffering the same terrible fate.However, as investor, we should be happy to see market consolidate as this kind of opportunity, even for me this is only my third time served with such an opportunity, first was 97, then 2008 and now 2015.
The first one 97, I was totally had no idea of how to capitalize on this kind of scenario, but luckily i bought my first house at a damn cheap price! The second one, I was not prepared at all, but this time 2015, guess what I've just sold my HOUSE!!!My bullets will be ready in October and once the dust settled, I'll be diving in, in a big way!!!
This kind of opportunity only come like once every 8 years, and I'm definitely not going to miss it!!!
2015-08-14 20:39
Be Greedy When others are fearful !!!
But Why I still not yet fearful....
Maybe another BIG WAVE will bring KLCI lower !!
2015-08-14 20:58
Good written kc,cash is king at this critical moment ,i wish i have plenty of extra cash now so that can get some good stock at a very high margin of safety.
2015-08-14 21:35
Probability, no didnt sold the house to dive in, coincidentally i am relocating, so managed to cash out before the market crash. I am buying another house at another great offer and the cash will be sleeping in TH.
I'll buy only when KLSE is below 1000;)
2015-08-14 21:40
Good write-up. Speaking of WB and Munger, I don't think they want to see Hathaway being caught with another 50% drop as they may not be around this time to see its recovery. That goes for all very senior investors in Bursa Malaysia too. What is your advice in these circumstances?
2015-08-14 22:01
at that age..and with that wealth its more of a game / hobby
than earnings for retirement.
if there are 'poor people' at that age...
entering the stock market..i don't think its advisable.
by the way life expectancy is increasing.
and you may also want to save for your generations..
2015-08-14 23:06
Priceless writing and philosophical. Just hold to good stocks and dividend base company. Commodity price rout, Greece, China economy slowdown interest rate hike is the main cause Cash is definitely king as it give opportunity to buy undervalued shares. No one can actually say will it be 1500 or rebound to 1700. Whatever will go wrong will go wrong.
2015-08-14 23:37
I for one, if I `know' that the market will fall by 50%, will be very worried indeed, irrespective of my age. If I cannot financially afford a hit, my pain may be more than that of WB's. One way to avoid the 50% haircut is to sell all and wait at the sidelines. Another, is to reinvest in some other vehicle that generates positive income. As they say, time is money. Worst come to the worst, to keep my money intact until the storm blows over. Any ideas?
2015-08-15 00:21
Many of us heard all these over & over again but yet when fears kicks in,most cannot remember & tend to react in an irrational manner.This article comes as a strong reassurance to inexperienced newbies like me & I hope the day the storm is over is not far ahead.Thanks!
2015-08-15 21:07
When the bears stampede, irrationality overcomes logical thinking. Panic selling sets in, price goes down and the cycle repeats. Nevertheless the brave ones still manage to hold on to their shares (those with strong financial backing) but those with margin financing will see their shares value wiped out and forced selling come into play again. The duration of the bear market may prolong and the overall scenario turns negative. Short term outlook is not good with all the negative economic indicators. The currency wars among the major economic powers also affects the stock markets.
2015-08-15 22:04
Hmm..... Seems majority of everyone had loss in faith. Be cheering! It's Saturday nite! Be remembered that every bad & good happened there are opportunity to earn money. Think out of your ways. Good day & be blessed!!
2015-08-15 23:09
kc, great article. Those using your investment strategies are hardly hit by the current fall in prices.
2015-08-16 10:35
Why does share investment has to be so harsh & stressful? Could it be more relaxing & fun? Any more relaxing approach besides taking the storm head to head?
2015-08-16 10:39
Remember what KC write in "When Bear Stampedes Again", : "It’s better to be too early than too late. It has been proven again and again, if you buy stocks at a big margin of safety, there is little risk and eventually market will revert to its mean. But make damn sure that you buy good companies at big discounts." Is it too early now or wait for a little while? I think is better too wait a little while until market is more stable. Don't wait too long because you will be too late.
2015-08-16 11:07
Correct!
During market crashes Good shares are also thrown down due to bad shares. Why? Those who hold bad shares on margin will be forced to sell good shares to cover margin calls.
See, in very bad times even the most precious things like gold is also taken to the pawn shop. How much more good shares? All will be liquidated! Cash and cash alone will be king.
King?
Meet the King of Kings today by going to www.chick.com
2015-08-16 11:10
Mr. Chong. God bless you and your family.
Your sound advice and wisdom are our guiding light.
2015-08-16 11:11
Posted by inwest88 > Aug 16, 2015 10:35 AM | Report Abuse
kc, great article. Those using your investment strategies are hardly hit by the current fall in prices.
Thanks for your kind words. But I think in a market which is full of fear, every stock got hit, and hit hard. It is a matter of how hard. Stocks which have little fundamentals, and have gone up in prices way above their fundamentals will be hit the hardest, now or soon if prices continued to drop and margin calls start. Those stocks which have good fundamentals and bought at cheap price will be hit in lesser force, and eventually they will recover.
I would say the best thing I have been doing is providing my views on the evils of margin financing. This is the time reality steps in.
2015-08-16 13:33
This is one of the best posts that I've read here. Including this observation: "But we are living in a world of political and economic diversity, and I cannot recall which year we don’t have a lot of problems which would impact the stock markets."
If we look back, even during those good times of a couple of years back, when the O&G and telco counters were minting money for traders, the conditions were not perfect either. There were also local political problems, plus external factors. Admittedly, the factors that we're facing now look more serious. But it's worth holding on to the main point from the quote above.
There are risks (always will be so), but I see the present turmoil and uncertainties as an opportunity. I had sold off way too early a couple of years ago and had left a lot of money on the table. But at the same time, I wasn't around when the O&G sharp decline started, as with the general fall arising from foreign investors selling. Some quality counters are now at attractive dividend yields - consolation for the investor while he waits for the price to recover.
To have a chance to make profits, one has to be in the game. If one is always fearful about prices falling, it's best that he just stays away from the stock market. Buy the Amanah Saham type of investment. But for those with much higher targets, he'll have to risk it with the stock market.
However, I'm approaching this cautiously - using just one-third of my intended capital for each of the selected counters. Whatever happens, I'd still have two-thirds of the cash left. The potential profits will be less, of course, but that's fine. Having cash in hand means having more options. For one thing, I can always opt to average up when the counters show signs of an uptrend (using another one-third of the capital).
Technical Analysis charts may not always produce the right results but at least there's some form of objective data to help with making decisions. Coupled with fundamental analysis, where only promising companies are shortlisted, I believe we have more than a fighting chance to make profits. Regardless of what the market looks like right now.
Do research, decide on what and when to buy, and then just wait. There's no need to start up the online trading app and follow the second-by-second blows. That's for short-term traders and speculators. Would stress us out unnecessarily. Checking the portfolio at noon and the close is more than enough. When it comes to quality counters, they tend to return to mean. It's just a question of how soon or how long. We have seen this before, again and again.
2015-08-16 16:03
kc, pls tell your students the only place on earth without any problem is cemetery. They are all dead.
2015-08-17 00:10
ha, ks55. wise word.
but remember this, when ppl in fear, Im feeling greedy!
Time to look at property stocks now. some are good fundamental
2015-08-17 13:38
kc, totally agree with "this is the time reality steps in". Hope to meet up with you again.
Posted by kcchongnz > Aug 16, 2015 01:33 PM | Report Abuse
Posted by inwest88 > Aug 16, 2015 10:35 AM | Report Abuse
kc, great article. Those using your investment strategies are hardly hit by the current fall in prices.
Thanks for your kind words. But I think in a market which is full of fear, every stock got hit, and hit hard. It is a matter of how hard. Stocks which have little fundamentals, and have gone up in prices way above their fundamentals will be hit the hardest, now or soon if prices continued to drop and margin calls start. Those stocks which have good fundamentals and bought at cheap price will be hit in lesser force, and eventually they will recover.
I would say the best thing I have been doing is providing my views on the evils of margin financing. This is the time reality steps in.
2015-08-17 15:44
@ks55 Thank you for your very kind words. I just try to share previous experiences of what worked and what didn't - especially the latter, because there are lessons whenever we make a loss. Or, failed to maximise an uptrend. The latter seems to be one of my weaknesses when trading/investing. After all the hard work of researching, then waiting for the counters to pick up, I'd often sell way too early. Would later shake my head looking at the profits I had left on the table.
We can learn a lot and thereby improve our investing in the stock market. There are ALWAYS opportunities, including and especially when the market is in turmoil. The problem is in spotting what are genuine bargains and what are potential traps. I just hope my strategy will pay off within the next 12 months.
2015-08-17 16:38
@paperplane3 - I'm looking at several property counters too. Like you, I see some very attractive counters at reasonable prices (can't say "cheap", because we only really know what the bottom is in retrospect).
Of course, when the market is like this, even the good companies will get whacked. I'm looking at those which are with attractive dividend yields AND have a record of paying out. Or tend to give bonus as reward. If we have to wait for the price to recover, at least we will have the consolation of receiving some dividend occasionally.
2015-08-17 19:35
I think in turbulent times like this, this article is worth revisiting.
2020-03-01 01:28
If you really want to stay invested at this point of time glove industries are the best choice. Covid-19 create huge demand of gloves and political uncertain will depreciate the ringgit.
2020-03-01 09:17
get the major turning points wrong...........I don't care what stocks u have........FD will still give better returns...........hahahaha
and huge losses from sticking to stocks when u should not be in stocks.........
a few good years, all the value investors surface and offering themselves as sifus ...............but alas, the past is over, the future not here...........only the present is real...............
2020-03-01 10:23
kc chong....some questions for u.......
Malaysia is part of USA meh?
Malaysia same strengths in rule of law as USA meh?
Malaysia same political stability meh?
Malaysia same predictability meh?
copy here, copy there American ideas about stock market..................got use meh?
2020-03-01 18:18
u know what, kc.... u will do all your students a favor if u don't lead your students to the stock market.
2020-03-09 22:28
"Even Berkshire Hathaway can go down in price by 50% in a crisis."
Can our Bursa go down by 50% in the current crisis ?
2020-03-09 22:28
Posted by ahbah > Mar 9, 2020 10:28 PM | Report Abuse
"Even Berkshire Hathaway can go down in price by 50% in a crisis."
===========
with this statement....no one has ever need to say they are wrong............................................
2020-03-10 00:22
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This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....
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Great write up!
2015-08-14 20:16