Monday, September 12, 2011

The "buy & hold" mentality

I used to have this thinking that if one adopts the "buy and hold" strategy, our returns are superior due to the compounding effect.

While this is true, however, due to the complex world that we are living now, things can be unpredictable at times when the bear market comes. Your gains are wiped out completely or if not, in great drastic effect - for instance S&P downgrade of America AAA status causes worldwide markets to panic, the fear of a double dip recession, just 3 years after 2008.

When this happens, your equity (i.e. stock) can be way under your average/last purchased price when the indices fall. Unless your pockets are deep to average down, otherwise the emotional and mental aspect can impact you to a certain degree, no matter how much you try to convince yourself (hey, humans have feelings eh?). You start to see paper losses. You tell yourself it's temporary - after all market will shoot up. You start to seek advises from Professionals or re-affirm yourself that you are right in keeping that stock.

After all, your time horizon is long term and such temporary effects are secondary. The problem is, how long are you able to last?

Usually, cyclical based companies are affected greatly.

For example, NOL (Neptune Orient Lines) posted positive earnings during their quarterly reporting season. Previously, the company faced huge losses. In this short span of time, the market sentiment turned positive and thus causing the price to go up more than SGD$2.00 per share. Now, due to the situation of overcapacity and high bunkering cost with dropping freight rates, NOL share price is trading about SGD$1.10- $1.13 per share (last week prices). NOL management warns that they will incur FY losses should the environment remains bleak. In a sudden turn of event, analysts paint a negative picture, reminding retail investors about the danger lurking ahead.

I did not sell NOL based on the psychological aspect when sentiment could have overrided my rationale but I place a "hold" call as I forecasted the shipping business would improve in the next few years - 2013-2014. On hindsight, I could have sold and bought back lower at a cheaper valuation against my last purchased price.

Which is better?


I missed the market euphoria of NOL completely and have to wait for the next up cycle, which I think could be in 2013 onwards.

Thus, I ask myself this question - "I think I should have sold earlier when the price went up, instead of waiting for my TP (target price) on my forecasted period. I can buy back at a much cheaper price. Now the tide turns over me!"

It was lucky that my last average price of NOL is SGD$1.56 per share. My "buy and hold" in this instance can't possibly work out this far or perhaps I may be wrong.

The objective of the money game is to earn a profit and move on to other projects. So, I have to painfully bite the bullet, steer forward and anticipate the turnaround of the industry. In any case, I am prepared to average down NOL if needed, that is the price falls below $1. When the good time comes, I will sell all my NOL shares.

How about short term liquidity? Will it be possible to earn some amount of cash in passive terms while riding on the market volatility?

Yes, asset allocation is necessary. But do you wait till the dark clouds loom, your Advisor rings you and you start to manage the circumstances?

I am not sure about you but for me, my "mixture of antidotes" shall consist of:

(a) Dividends - to earn passive income when times are bad. It's doing great now!
(b) Capital gains - appreciates over time, taking a contrarian view at times
(c) Short term trading if there is a opportunity (money in pocket!)

Hence, I have separated my mixture to include 2 types of shares:

(i) Dividend paying
(ii) Growth - for example, property

I learn to be flexible and maximize opportunities in the stock market. We can stick to our investment principles, know our risk horizon and plan the time period. However, no one will compensate you when unexpected events occur.

Worse, you have to fork out more monies if the company issues rights to raise cash, that is if you do not want your holdings to be diluted.

My flexibility here is to try my hands in short term trading and in this instance, I have traded Noble Group for some short-term profits. At the same time, I have my Keppel Land shares for the longer term investment - will sell when the next property cycle goes up the trend, historically a 7 years peak and 7 years trough.

10 comments:

  1. buying and hold is a function of valuation of the future cash flow of things. if you buy and hold an nol that consistently spins off ships and pays dividends, you might still end up a winner.

    buy and hold at a point where future cash flow will be higher is important, not where future cash flow is likely to be dim

    ReplyDelete
  2. NOL is only good for cyclical play. The irony of life(NOL) is always there. When NOL started to pay dividends, it is usually time to sell the stock before you are caught in the next cycle. This stock's 52-week price used to be quite predictable,before world trade "Globalisation". Before Nol absorbs APL.
    Beware it's not for dividend income investment.

    ReplyDelete
  3. Hello KT,

    Yup, nothing enlightens more than personal experience. Your own "ah ha!" moment!

    We put our own flesh and muscles to the skeletons (foundation) of sound theories that suits our personal situation.

    If I have deep pocket (use money management instead of sell first buy at lower price later on - a variation of cut-loss), I can now average down NOL at $1.00 and 2 or 3 years later can shout loud loud that buy and hold works! Average down works! When NOL recovered back to $2.00 :)

    Different strokes for different folks!

    ReplyDelete
  4. Hi,

    For me it's "Buy and Monitor" - I did a post on this. Buy and Hold is kind of a fallacy because you need to constantly monitor the companies in your portfolio for any corporate events/announcements including earnings announcements.

    Cheers

    ReplyDelete
  5. Thanks guys for the feedback :)

    Drizzt - the problem is, due to the world complexity, sometimes it's hard to anticipate that future cash flow. Probably, we hope to buy it at a lower price and thus, reap rewards when Mr. Market appreciates the business. That said, I am not sure the time horizon for holding too long - a period where opportunity costs fly because we can't exit the position. I believe cyclical stocks like NOL will be better off when sold at a critical point, the time to lock in x amount of capital gains.

    ReplyDelete
  6. Temperament - yes, you are right! On hindsight, I have missed that. Thus, I am waiting for the next uptrend to sell NOL. Hahaha...

    SMOL - yeah! I agree different strokes for different ways - our end objective is to make $$$ while getting happy doing it. In fact, I am thinking of averaging down NOL when it drops to less than $1. Will monitor the status

    Musicwhiz - you know your stuff well :) monitor constantly is good via a system. Unfortunately, for me, I prefer to invest my time at other things which you know because I have this limited amount of time. I am not saying monitor is bad but to different folks, the level of time committed varies - unless there is a big announcement that warrants some attention.

    ReplyDelete
  7. I think flexibility is important - the readiness to maximize opportunities in the stock market when the time comes. Not on regular basis but it can be one-off for short term profit gains. I do not mean contra/short-sell or anything (not for me!) but the chance to grab shares at cheaper valuation; a risk-to-reward potential.

    For instance, if Noble Group drops below $1, I will be keen to buy up.

    Additionally, adjust your investment stroke as and when needed that suit you. At least during the bear market, you can receive your dividends then watching "red ants" in your portfolio.

    A mixture of each.

    ReplyDelete
  8. This is big question to me too.

    I think we can classify stocks into different categories. Some for stable dividend,the dividend tends to maintain even market down, can hold for long term. Some for capital gain, volatile with market up and down, that must be watched closely and decide to sell at critical point.

    ReplyDelete
  9. Ah John,

    Thanks for visiting my blog :)

    I agree with you - when market down, you earn dividends; companies that pay 4 times, 2 times and 1 time per year.

    When market up, you maximize opportunities via capital gains - that is if you managed to get the shares at lower valuation and sell them at a point perceived to be your TP (target price).

    My portfolio has split into both dividends and capital gains :)

    ReplyDelete
  10. The market is as volatile as ever and it would be unwise to think that you can foresee how the market will fare. Risk management is as important as learning and trying to analyze the market. Buying and forgetting is not a wise investment move. For me, it's more like buying low, analyzing, and selling high. Just my two cents.

    Martha Moore
    Epic Professionals

    ReplyDelete

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