Posted by Tang Michael > 2014-01-15 06:50 | Report Abuse

There are still a few re-floated sunk ships sailing/ drifting slowly.......can anyone guess which.......aaaaahhhh......waiting at the end of the rainbow........

Posted by bsngpg > 2014-01-15 07:27 | Report Abuse

I can contribute 2 data points to KCChong’s Concord Fallacy which are AKN and Transmile. I lost till pant down.

Posted by ProfitMan > 2014-01-15 15:28 | Report Abuse

When the price of a counter gets beaten down, it affects the investor psychologically. Usually emotion gets the better of the person when objectivity is much needed and more useful. Hence, investors throw good money after bad.

The negative psychological effect peaks when the the investor keeps averaging down only to find that it can go even lower and you end up with the limbo dance, "How Low Can You Go"! Some may recall the share market crash in the 90's when cheap becomes cheaper and became cheapest until it became dirt cheap.

Thats why some investors sell off the first instance the price reverse to an uptrend hoping never to see this share again in his/her life. And by then, the psychological effect would have taken such a massive toll on the investor that he/she does not even want to re-visit the fundamentals of the company and the one mission then would be to get rid of the share.

I have been caught myself during the early days of my investment trail when I was much younger and more gung-ho but fortunately not to the extend of total loss.

So, its always good to protect ones investment to cut loss when it hits the stop loss price. Once you get used to cutting loss, it becomes second nature but the frequency of loss cutting should be minimal. If not, we need to re-visit our own investment decision making process. Its always good to decide before buying in, how much loss we are prepared to take if the share turns down. Of course, it goes without saying that researching into the fundamentals of the company is a basic requisite.

Posted by Tang Michael > 2014-01-15 15:40 | Report Abuse

Selling to cut loss is very sentimental and sometimes bad for the self ego....look at the silly cimb today.......drop from 7.65 before anouncement to 6.95 just.....want to cut loss........target now some ill informed analyst said is 8.00.....mad dogs

Posted by kcchongnz > 2014-01-15 17:44 | Report Abuse

Cut loss?

There is a significant difference for those investors using fundamental analysis and those using technical analysis. Technical analysts base their trading strategy looking at price volume movement of stock prices. They generally follow the momentum theory; buy when price breakout and sell or cut loss when price “breakdown”.

Fundamental value investor carry out their investment basing on fundamental analysis of the business of the company and determining if the business is a good one. If it is, they make their buying decision emphasizing on cheapness; looking for earnings, cash flow, dividend, hard assets and enterprise value. Primary goal is to quantify the company’s current value and buy when cheap.

However, the future is uncertain and the outcome is often not the same as the probability, especially in the short run. Fundamental investors would not just simply sell a stock because it has dropped in price, by 10%, or 20%. They would make some checks as follow:

1. Have we made some significant mistakes in the analysis of the stock?
2. Have the fundamentals changed drastically?
3. Were we wrong about the management or the deterioration of management decisions?
4. “If we didn’t own it, would we be buying it today?”

If after checking, and the answers are negative for items 1 to 3 and affirmative for 4, why would they sell? Hack, why did they buy in the first place? So instead of selling and cut loss, fundamental investors would buy more. Fundamental investors trust the theory of mean reversion more than the psychological momentum theory.

My experience is that this strategy work for me most of the time.

Posted by miketyu > 2014-01-15 18:34 | Report Abuse

Dear Mr Kcchongz,

Lets assume you have bought stock A with intrinsic value of RM6 at price of rm2.5. In an event of similar situation of Lehman Brothers or anything event similar to 911, the share dropped to RM2 and maybe RM1.5 in few months time. The economy might take few months, maybe years to recover.
Based on your experience, would you still choose to hold or average down, or wait patiently until the price breakeven?

Posted by ProfitMan > 2014-01-16 01:05 | Report Abuse

Cutting loss is not an issue of FA vs TA. It is an issue of capital protection. The circumstances and reasons for a fundamentally good share to trend down is an important factor. If a share goes down in price temporarily by 10% or 20%, of course it is logical to buy in more. Then we would be buying in cheaper relative to its fair value and with a higher margin of safety.

But in a scenario where we have an external shock to the economy that rattles the stock market and causes the share to go down continuously, do we then cut loss or keep averaging down, even if it can be for a prolonged period of months to more than a year? It would be a better option to take a loss first and let the dust settle before buying back in if the share's fundamental value is still intact then.

Of course, different investors would deal with the situation differently and I respect that as long as the investor's method works for him/her. After all, we do live in an imperfect market.

Posted by kcchongnz > 2014-01-16 09:39 | Report Abuse

Posted by miketyu > Jan 15, 2014 06:34 PM | Report Abuse
Dear Mr Kcchongz,
Lets assume you have bought stock A with intrinsic value of RM6 at price of rm2.5. In an event of similar situation of Lehman Brothers or anything event similar to 911, the share dropped to RM2 and maybe RM1.5 in few months time. The economy might take few months, maybe years to recover.
Based on your experience, would you still choose to hold or average down, or wait patiently until the price breakeven?

miketyu, obviously you are clear of what I have said in the post just above yours. Ok let me try here again.

You bought a stock at 2.50 with an intrinsic value of 6.00. It drops to 2.00. May be drop to 1.50. Wait, how would you know it would drop to 1.50?

The economy may take a few months to recover. Is it an issue when you do investment? Is your horizon just a few months?

May be years. Ah long time eh. Again do how you know in advance?

miketyu, you see many value investors, including myself belong to a group who feel they don’t know what the future holds who would act defensively; buying stock at a steep discount to its intrinsic value. Yes, the basis of buy or sell is the intrinsic value of the stock.

But they know that stock market is like the swing of a pendulum, it can go to the extremes, and seldom stays at the center. They would act to take advantage of the swing of the pendulum.

I hope I have answered your question.

Posted by miketyu > 2014-01-18 10:32 | Report Abuse

Dear kcchongz,

I have only 9 months of investing experience. I would like to know what would a typical value investor do if the share price has fallen 50% (even if u bought it at steep discount to its intrinsic value) or more due to the fear and panic of other investors during situation like 911 or war maybe ( i mean those times in 2001 or 2008)? The bad situation might be a year or longer. If this situation happens it would be capital protection first or still value investing. Sorry that I didnt ask my question right at the first time.

Thanks for your sharing

Posted by kcchongnz > 2014-01-18 11:41 | Report Abuse

miketyu, ok let me go straight to the point, taking Maybank share and its adjusted share price as an example.

On 6th October 2008 when Maybank share was traded at RM5.55 and say my estimate of the intrinsic value of Maybank is RM8.00. So the margin of safety is 31%, more than my minimum requirement. So I checked my bank account and found that I have money which I did not need for a few more years and I bought Maybank share at 5.50.

Maybank's share price continued to drop to RM3.98 on 6th April 2009, or a whopping 28%. Would i as a value investor sell to cut loss? Why should I sell at 28% loss when my original thesis showed its IV is RM8.00? Has the fundamentals changed? Did Maybank having any toxic CDO, CDS, CDS^2 and the answers were none. So nothing changed. It was cheap at RM5.50 when I first bought it, so it was even cheaper then at RM3.98. So I would buy some more when I saw I still had a lot of money in the bank.

What happened after that? 5 years have passed and Maybank share price closed at RM9.80 on 18th January 2014. Now I can sell it for 77% gain but I would still check what is its intrinsic value now as IV changes as time goes on. The CAR would be 12% which is a reasonable outcome. Those shares which I bought later when it dropped to RM3.98 would yield a total return of 146%, or a CAR of 20%, a very good return indeed.

So remember, share price always deviates from its true value, but in the long run, price tends to converge to its value. That is the mind set and actions of a true value investor.

Posted by keanpoh > 2014-01-18 14:39 | Report Abuse

"In the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine" - Benjamin Graham.

Posted by kcchongnz > 2014-01-19 14:39 | Report Abuse

Posted by miketyu > Jan 15, 2014 06:34 PM | Report Abuse
Dear Mr Kcchongz,
Lets assume you have bought stock A with intrinsic value of RM6 at price of rm2.5. In an event of similar situation of Lehman Brothers or anything event similar to 911, the share dropped to RM2 and maybe RM1.5 in few months time. The economy might take few months, maybe years to recover.
Based on your experience, would you still choose to hold or average down, or wait patiently until the price breakeven?

There are three times to buy an asset that has been declining: on the way down, at the bottom, or on the way up. We don’t know when the bottom has been reached, and even if we did, there might not for sale there.

If we wait until the bottom has been passed and the price has started to rise, the rising price often causes others to buy, just as it emboldens holders and discourages them from selling. Supply dries up and it becomes hard to buy in size. That would be buyer finds it too late.

That leaves buying on the way down, which we should be glad to do. The good news is that if we buy while the price is collapsing, that fact alone often causes others to hide behind the excuse that “it’s not our job to catch falling knives.” After all, it’s when knives are falling that the greatest bargains are available.

That is why if we think something is cheap, we buy. If it gets cheaper, we buy more.

Howard Marks: The most important thing illuminated

Posted by miketyu > 2014-01-19 20:44 | Report Abuse

Thanks Mr Kcchongz for your kind sharing. The explanation with example is clear and magnificent. I am sure many of young investors here would benefit from your knowledge and experience.