We believe that we are able to second-guess every twist and turn of the market. We believe that somehow, we know when is a good time to bail out of the market and, if that wasn’t hard enough, when to go back in. But what we end up doing is to go in and out of the market at exactly the wrong time and, worse still, miss out on those all-important dividends that contribute to the total return because of GREED.
UNDERSTANDING THE MARKET
Truth is, NON OF US CAN TIME THE MARKET. We might like to think we do, but we have no idea what the market is likely to surprise us with next.
What we do know, though, IS WHETHER BUSINESS IS RUN PROPERLY. We can find out IF IT HAS STRONG GOVERNANCE IN PLACE. We can also find out IF THE COMPANY IS PROFITABLE AND THAT IS GENERATING CASH.
All of these things provide us with useful information about whether a company could be a good long-term investment. look for great businesses that can reward their shareholders over the long haul. Do not let FEAR cause you from cashing out or picking up great bargain when opporties arises.
Does anyone really know what the Fed is going to do and when? Of course not. So this isn't analysis. It's guessing.
And do you really want to risk your hard-earned capital on some talking head's hunch about the unknowable?
My guess is no.
Yet I know investors and traders who spend countless hours listening to this drivel on CNBC and its sister stations.
The odd thing is they invested equal time a few months ago pondering the myriad investment implications of the "fiscal cliff," something that turned out to be a complete nonevent. However, it was a big success for the media outlets that love to hype buzzwords - "fiscal cliff," "the sequester," "Y2K", etc. - to alarm and attract viewers and satisfy advertisers.
Slicing the Pie
In short, if you're devoting your limited time on this little blue ball to Bravo Sierra like this, you're patronizing businesses that are playing you for a fool.
So what should serious investors be focused on instead? If you are a long-term investor - and you should be if you aren't eyeing the actuarial tables and spending down your nest egg - you should be most concerned about your asset allocation. This is how you divide your portfolio between various asset classes like stocks, bonds, real estate investment trusts, TIPS, etc.
Your asset allocation is the primary determinant of your long-term investment returns and is your single most important investment decision.
If you are a short-term trader, you should be seeking public companies with good (and protectable) margins, growing market share and rising earnings that are likely to beat consensus expectations in the months ahead. (Beating expectations - whatever they happen to be - is the primary driver of short-term share price appreciation.)
How about Fed policy... where does it fit in? That's just it, it doesn't.
Listen to the greatest investor of all time, Warren Buffett. More than two decades ago he told the world, "If Fed Chairman Alan Greenspan were to whisper to me what his monetary policy was going to be over the next two years, it wouldn't change one thing I do."
So turn off CNBC. If you haven't noticed, it's summer outside.
Dear Foolish readers,
There is nothing quite like a good dose of reality television to help provide some light relief at the end of a day's work. One of my favourite reality shows at the moment is The Apprentice Asia.
It's quite an eye-opener to watch the contestants firstly take pleasure in seeing their opponents stumble and then resort to slinging mud at their own team members to avoid being fired by Malaysian airline tycoon Tony Fernandes.
How to lose money. fast
But this week's Take Stock Singapore is not about office politics. It is, instead, about one of the challenges that Tony Fernandes set for his prospective apprentices. The task was a simple matter of investing US$20,000 of virtual money in the markets through Contract for Difference (CFD). The team that made more money was the winner.
But even before the week's competition had started, I had already predicted that both teams would lose money. So, perhaps, the easiest way to win the challenge would have been to sit on the cash and not place any CFD bets at all.
Employing such a strategy might have incurred the ire of Tony Fernandes. It would probably not have made for good television vision viewing, either. But since the objective of the challenge was to finish with more money, simply doing nothing would, in my view, have been the most sensible tactic.
Defying the odds
I'm surprised the team members that comprised a lawyer, a financial coach and an auditor couldn't see that. But in the heat of competition, it is perhaps understandable that the contestants thought they could defy the odds.
For those who are not familiar with CFD, here it is in a nutshell: Traders aim to make money by placing small bets on the future price of assets. These assets might be shares, commodities or currencies to name three. What's more, traders can either bet on prices going up or going down.
If you managed to make the right guess, your gains could be magnified many times over. That's because your bets are leveraged. In other words, you are using borrowed money to make you wagers. But if you guessed wrong, then you could lose heavily. So, to avoid losing your shirt, traders can put in place "stops" that would automatically close positions if things should go against you.
Although the statistics about how many traders lose money are closely guarded, I suspect most people don't make money from their short-term trading activities.
That said, the allure of betting small and winning big can be a powerful magnet. It can lead some people to believe that can correctly predict the short-term direction of markets by scrutinising charts and studying graphs.
Truth is most people can't. And the final cash positions of the two teams said it all. One team lost US$3,628 or 18% of its original capital, while the other team gave up US$7,759 or 39% of its phantom pot.
Voting, weighing and pinball machines
The performance of the two teams is a good example of what Benjamin Graham meant when he said: "In the short run, the market is a voting machine but in the long run it is a weighing machine" . I would add that in the time-frame of CFD traders, the market would probably look more like a pinball machine.
Truth is, stock markets can be volatile in the short term. Just look at what has happened to the markets after Ben Bernanke said he might taper the amount of money he would need to provide if the US economy continues to show signs of improvement. Who would have guessed that the market would throw a taper-tantrum?
Firstly, if you think about it logically, the market should be delighted that the US economy is finally on the mend. Secondly, would anyone even notice if the US Federal Reserve were to pump, say, $65 billion rather than $85 billion into the US economy? I suspect not.
If Bernanke is right, and the American economy continues to improve, then so too should bottom-line profits at US companies. That could feed through to companies around the world too, if it hasn't already done so.
Make volatility your friend
As far as I am concerned, tapering should be seen as a good reason to invest in shares rather than cutting your holding as some badly-behaved market traders are doing. But think of it this way: while traders carry on throwing taper-tantrums, it gives us long-term investors more time to acquire the shares that we want own, at better prices.
Volatile markets can be disconcerting for investors. But as Warren Buffet once said: "Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it."
As for me, I don't need to look at share prices to justify the investments I have made. I only need to look at the company accounts and my dividend income statement. They tell me all that I need to know about the companies I have bought shares in.
The only reason I look at share prices is to see if I can buy more of what I like at more favourable prices. And in times of market volatility, I generally can, and I do.
Director, Motley Fool Singapore
Now, it seems market are hooked on cheap money from QE3. Solid economy data are being interpreted as an obstacle to further money printing.
A calls for a gradual winding down of asset-buying stimulus to commence right away.
Alan Greenspan, who like loved to keep his cards close to his chest but Bernanke does not like to shocks but prefers to communicate with investment community so as to give investors time to digest his next move. The first stage of the exit strategy has started.
Second phrase, the Fed will then reduce the amount of bonds it buy back depending on the economic condition.
The third phrase follow is the complete stop of QE3 after which interest rate will rise.
It is best to avoid highly leverage companies. Highly geared companies would be most at risk as they could see increased cost of debt. REITs are capital intensive companies which are leverage on cheap debt and high debt meaans high cost for REITs to growth.
On the other hand it is best to invest in cash-rich companies as these companies have no fear in high interest enviroment. During times of uncertainties cash-rich companies can capitalise on opportunties.
My stock-picks on market weakness are:-
Straco - yield about 4.5%
Second Chances - yield 8%
Biosensors - yield more than 2%
Cordlife - yield more than 3%
Undervalue Properties - CES, Roxy Pacific, HH & Superbowl