Saturday, January 23, 2016

A Couple of Thoughts During This Bear Market

I'll pen a quick few thoughts about what I see in the current bear market environment.

Most investors are aware by now that bear markets are part of investing in the stock market. This is partially because one of the more recent and worst bear market condition occurred not too long ago in 2008 so a lot of investors are mentally more prepared for this. Many of them are referencing the GFC crisis as a benchmark to what they are experiencing right now and it's not necessarily a bad thing since the situation back then was pretty bad. For example, I hear many people are awaiting for OCBC to drop to $4 (GFC low) before they are willing to put their money. Whether or not they are right there, at least it is rather conservative.

The above situation also leads me to think that there are a lot of investor's focus on price rather than valuation. Taking a similar example on OCBC, it is somewhat quite different when their price was $4 back then versus $4 today. If you are a believer of fundamental analyst, you would understand what I meant by that. However, if you are a trader, you would probably be looking into that as a major base support line. Again, only hindsight will prove the right one.

During this bear market environment, indexes can also remain oversold longer than most dip buyers could remain solvent. What I thought was a cheap buy could actually be cheaper if I waited longer. This is because in bear markets, short setups often continue to push the price down even during oversold conditions. Perhaps, I would also need to adjust my personal version of margin of safety that are different when markets are in a bull run by discounting them more during this period. That's something that I am still trying to learn.

As academic have taught us, we are also used to using trailing twelve months (TTM) historical earnings to forecast the company's next 5 years earnings. This can be fatal because the past 5 years are probably good times which might not be repeated during uncertain economic conditions. For cyclical companies, it is better to normalized the earnings through the trough and peak to capture the full impact of the cycle. For other companies, it may be good to use conservative earnings during the recessionary period to forecast future earnings. The objective here is to ensure that we are not blinded by optimistic returns without thinking of the downside.

During the current market condition, I also experienced a situation where there are more choices of stocks that appear in my watchlist than before. This is because during bear market, all stocks are not spared and the share price will plunge giving investors plenty of choices to choose from. Do we go with companies that are able to maintain their strong earnings but having their share price not down much? Or do we go with companies that have their earnings battered so badly that their share price followed concurrently (e.g Keppel, SCI)?

Because of the above situation and our limited cash resources, investors are always faced with the one-decision, two-decision and three-decision during bear market as what Charlie Munger have pointed out. I am guilty of that myself.

  • One-decision - This is when you decide to buy a stock when their fundamentals are strong or sell because fundamentals have weaken. This is what a value investor usually does and they usually have the intentions to hold these companies for an infinite period of time.

  • Two-decision - This is when you decide to sell your existing position in favor of another stock that you think will reward you with greater returns in the long run. The decision to sell may or may not be due to fundamentals but more of limited resources to take advantage of the opportunity in the market.

  • Three-decision - This is when you decide to sell your existing position in favor of awaiting for a better entry price for the same existing position because you think the market conditions will push the price lower. This is called a three-decision because you sell and think the price is full, then you have to figure out when to buy back, and in the meantime face the dilemma of whether another opportunity might come up or if you might miss re-buying into the position should the market reverses upwards.

Howard Mark, in his latest memo, wrote this in his article which I really like a lot. He said, Up or down, the market has no special insight which conveys no consistently helpful message. It's not that it's always wrong, it's just that there's no reason to presume it's right.


  1. Hi B,

    I do not believe OCBC will drop to $4, unless there exist a financial crisis which will then later become an economic crisis much worst then 2008. But I agree that we should not use price as a reference.

    As of now, the 3 banks are already experiencing below their book values, which is way below the time in GFC where none of the 3 banks are below their book.

    Having said that, about this thing called value investing, it's good to idolise/learn from Warren Buffett, Charlie Munger or Ben Graham, but do not over-bewitched by them.

    They are living in a different era compare to us. Sometimes it pays to find out WB BH performance nowadays compared to many decades ago.

    Maybe B method of investing is better than Value investing?

    1. Hi Rolf

      If i remember correctly during the gfc the banks are also trading at somewhere around 0.8x p/bv. Let me check again on that.

      It's hard to imitate these successes. Rather than thinking about whether OCBC will reach $4 or not, I think it's better that we be equipped what we gonna do IF it does reaches there ;)

    2. GFC Uob PB never go below 1.

  2. Nowadays, better to find out bloggers performance and their estimated war chest and then formulate our own investing strategies based on these observations to suit our investing goals and needs. :-)

    1. Hi CW

      With the market not sparing anyone, it's hard to see who to follow now :)

  3. Hi B,

    I have a few thoughts on this bear (mini) too.

    1) the best defense is not seemingly which sector but rather the projection of next 3 years earning.

    Reits are supposed to be badly affected by interest rate hike, but u compare how they perform against the banks? Which is "supposed" gain because of higher sibor?

    People can calculate the impact of rate hike on earnings and perhaps add a few percentage drop in rental rate and occupancy rate to do a stress test. But no one really know how to accurately calculate NPL exposure perhaps?

    Next, timing the buying with how low STI is going ...

    When a price get lower, we shout a lower price for entry. The benchmark is always shifting... STI to go below 2500 e.g.

    My observation is STI had gone Dow. below by some 25% but I have counters that go down by almost 45% and also bucking the trend and going up by 10%. Some are just down by 5% or so only...

    So really using STI to time your buying is ... Unless u are an index investor. If company goes down 20% with fundenmental unchanged, buy if that is the price u are waiting for.

    1. Hi SI

      Thanks for your views there.

      It's really hard to predict who will outperform from here. What was originally a direct beneficiary of interest rate increases now has gone down almost half the value. It's amazing to think about what can happen within the short span of time.

      Everyone is saying the STI is cheap. I just look at some of the HSI blue chip stocks and you can't even believe how cheap they were now. These are the kind of things we are dealing with in our everyday's life. Amazing. Who says to me investing was easy? -.-

  4. Quote : "So really using STI to time your buying is ... Unless u are an index investor."

    Particularly useful for those Blue Chips retail investors waiting for "The Return of The King".

    1. Hi Uncle CW

      STI index investing is not spared either. I think we just had a lost decade in investing there as well .

  5. B,

    "Perhaps, I would also need to adjust my personal version of margin of safety that are different when markets are in a bull run by discounting them more during this period. That's something that I am still trying to learn."

    Now that's humility ;)

    (If you had said market is way oversold I'll come poke and troll you!)

    When Warren Buffet took out his famous newspaper ad late 2008 exhorting fellow Americans to invest in equities as its good "value", the S&P went down another 15-20% before it bottomed out in March 2009.

    Does this "temporary" 20% loss matter in 2015 near the market top?

    Ah! Buying near the lows with a 20% loss is different from buying near the top with a 20% loss ;)

    That's for those who bought during 2014/15 using "value investing" metrics to resolve their own cognitive dissonances.

    Evidently, what they though was true ain't so anymore...

    1. Hi SMOL

      Hahaha, I am still learning everyday in my life. Not being humble just being realistic about things. I want to improve so I need to be open minded about things.

      Value investing has been abused. Those who advocate value investing a year ago are probably wounded thinking why value investing doesn't work. Wink ;)

  6. Any view on Dairy Farm? I think the price still not that attractive. Templeton Asset Management just sold their DF shares from 7.25% to below 5%. Further sale don't need to be declared since their holding is now below 5%.

    1. Hi Anonymous

      Dairy Farm current valuation is attractive but I have to warn you about their potential near to mid term slowdown especially given how they just made acquisition in China which could see a repeat of what happen back in 1997/1998 days.

  7. I will be looking at SCI, Keppel, DBS, UOB and OCBC. Long time never touch blue chips at all. Now's a good opportunity.

    1. Hi Dividend Hermit

      Wow, that's a flurry of big caps blue chip counters there.

      With STI at this point, it may not be a bad thing after all.