Thursday, October 22, 2009

Kopi 'O' reflection

Saw some comments dropped at my posts. There is a general feeling of fear of a big drop in the stock market, either triggers by the US markets correction or fear of China authorities will shift gear to tighten their monetary policy due to strong GDP growth(China’s Economy Grows 8.9%, Fastest Pace in a Year ) or local market is running dry on liquidity.

If you are a regular reader of my blog, you will know that I stick to core value of being conservative even though I talk like a trader at times. I hope I did not send a wrong message to all that I have turned into a penny stock Turtle or turning myself into a Chartist or Statistician. Adding a little knowledge to our investment knowledge or spice up things a little will definitely will not kill us. I kind of like to blend different investment philosophies that suit my personality, intellectual curiosity and financial circumstance to make things work for me. Being conservative means I draw margin of safety that could come from two sources:

1. Significant departure between price and value in traditional metrics such as PE, PEG, P/BV, P/FCF. P/EBITDA, etc ….

2. Market participants lost their minds temporarily.

This is like being in a garbage collection business. Let’s say we are in old newspaper collection business. You normally pay for $ 0.30 for 2 kg of old newspaper. For some reasons, the whole town got neurotic thinking of some kind of newspaper ink can cause health problem and decided to sell you between $0.0 - $ 0.05, will you accept the offer or quit the newspaper collection business? This of-course does not happen every day but it may happen 1 every 20 or 80 years.

One important point to consider is this, are your customers(newspapers companies) will be out of business ? If they are not, it is a good opportunity to take advantage of the situation.

When I see some of the garbage stocks being beaten down to almost nothing, as long as I think the stock market remains open in next 10 years, there are customers will take these rubbish out of my hands.

The philosophy of this investment is strictly trading on extreme pessimism. This is nothing new, Sir John Templeton had done in 1939 during the Second War. He borrowed some money to buy 104 companies less than US $ 1 dollar and being paid handsomely later on.

What I am saying is we should not be in regular old newspaper collection business but when it happen(1/20 or 1/80 years, seize the opportunity. Set up an Ad-hoc newspaper collection business and make that 1 -2 trades of my lifetime. With stock market recovered almost 50% or more, I will be real careful with this strategy. At this this juncture, be very careful of anchoring the previous High, if you do that, it will definately ruining your savings. If a stock has fallen by 90%, one dead cat bounce of 23.6 - 50% from the bottom is a safe bet. Beyond that, it's very dangerous game. I will definately anchor at the bottom and never at the top to keep myself in check.

I think the markets are clearly climbing the wall of worries, 40% fear and 60% greed. The ratio is shifting rapidly on daily basis. I am still sticking with my conviction this rally is not over until mid 2011.

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