Common Sense About Dollar Averaging

I wrote this when I was totally disconnected from the world. I have no idea what was happening for the last few days except I saw some nice green board a few hours ago. I feel good to be able to get back on-line(again).

Are you feeling of regrets not buying or buying on 5 March? The truth is hindsight is always 20-20. The truth is we cannot know what is tomorrow going to be. Speaking of tomorrow, tomorrow will never come because we will always have tomorrow. Trying to guess what is tomorrow like is like what Hokkien says Liak Bo Qiu (Cannot catch the ball......pardon my Malaysian English).

OK, back to business, every solution to a problem is developed to address a unique problem. One should never copy blindly without spending time to examine the relevancy and understanding of the background. Anyone wish to plug and play is as good as plug and pray. So is Dollar Averaging. Don't get angry if God don't answer your prayer.

I have posted in my previous blog saying one should consider dollar averaging to cope with current volatilities. The first question one needs to ask is how much(current and future cash inflows) am I planning to invest? Then what is the time span I am planning to invest this sum of money? You heard this before, right? I know many of my readers are sophisticated, so don't try insult their intelligence, let's make things a bit more complex.

Let's start with the second part of my question. How low do you think KLSE will go from 1310? 1250? 1200? 1150? 1100? 1000? 950? Hmmmmm...........hello are you there? I hear dead silence.

For argument sake, let's say KLCI is selling at 15 times earning at 1310, the rest of the price and PE will be 1250 at 14.3 PE, 1200 at 13.7 PE, 1150 at 13.2 PE, 1100 at 12.6 PE, 1000 at 11.5 PE and 950 at 10.9 PE, now do you think KLCI will ever be selling at 9 times PE or 6 times PE?

Aha, in the world of investing anything can happen but selling at 950 is likely…. but….. but....... you said.... probability will be quite low unless 1997/1998 history is repeating again. So we are talking about KLCI fall by 27% from 1310 to 950 in the worse case scenario. Why don’t we do ZERO dollar averaging? Meaning wait for 950 to come, but it may not come my dear. Zero dollar averaging can be done by Master Yoda, if you are not, stick to dollar averaging.

So dollar averaging will be useful because we know it is about to bottom but we don’t know enough where is the bottom. Dollar averaging strategy may not be a disaster if we are paying for something that is reasonably valued. This will take volatilities out of the equation.

I shall never ever dollar averaging on China market now is selling at 40-50 times earning! It can fall very hard when PE going to 15X, if earnings cannot catch up fast enough or sudden liquidity is available.

Don't do dollar averaging in a bubbly market, please, please, please, don’t do it! Don’t call my name ($%^&^%%!!!!**8) when you got toast ( don’t turn yourself into Char Siu – BBQ Pork – but GOLD is OK!).

Now let's get back to question 1, how much am I planning to spend? Let's say $ 10,000 in 12 months, why 12 months? Pluck from the air, assuming US recession to end in 12 months, if we are in one already. So, I plan to spend 4 installments with $ 2,500 each within 1 year with interval of 3 months. There is pretty good chance I can make average 15% return in 5 years to ride out this storm with very little risk! (see table) This is my simple prescription for investing, take two Panadols(actifast if you wish) and go to bed - no X-ray, no blood test, no Greek(Alpha, Beta, Gamma ……… Theta), no calculus, no rocket science required! Just common sense plus a peanut size of guts.

Geeez ……. I am out of job because I have no more investing secrets to blog! Hang on!!!!! For those who are wondering what happened to MUI, stay tuned, I have some points to make. So come back regularly. Thank God I still have a job! You find it funny? This what the professional investment business is all about….selling stories. BTW, I am absolutely an Amateur, just like Bobby Jones, don’t doubt that OK? You find that I am offensive? Come back tomorrow, I will show you something.

Templeton Fund refused to sell stocks at unreasonable price

How are you feeling today after seeing so much bloods on the street? Everyone wish to buy during "Lelong", big bargains, but they got terrified when they got what they wished. What else can I comment?

Wrong question, instead of asking feeling, I should be asking thinking! What should I be thinking to take advantage of today sell-off? Investing must be head over heart, not the other way round.

One of the very respected value fund managers like Templeton refused to sell down their holdings because they think it is absolutely undervalued. They have taken an unconventional measure by borrowing money in order to meet redemptions. This will deliver better value to fund holders in the long run, good thinking I would say.

I don't feel good about the external volatilities but I feel good about great value every where. Dollar averaging on great companies could be a good strategy.......Listen, dollar averaging on great companies OK!, NOT dollar averaging on BAD companies.

I am freezing down here 1 deg C(don't try to guess where I am). I will continue to post on Friday after I get back to Malaysia. Good luck to all. BTW, I miss nasi lemak and Teh Tarik.

Capital Allocation Decision III

Why fully invested within 2 weeks? Why not keeping cash while waiting for bigger opportunity especially KLSE is in correction moods? True, if one has bigger sum to invest. However, in this case, I see good opportunity and not buying on impulse, put down a big bet was the right thing to do. Don’t procrastinate.

When one started with such a small amount, there are very limited options to maneuver. Transaction cost is a big problem for small investors. Minimum brokerage of $ 28 plus stamp duty and etc will workout around 2% for $1,500/transaction, a round trip of buying and selling will cost around 4%. This is almost same like putting money in mutual funds with loading fees between 5.5% to 6.5%. To achieve a better economies of scale, $3,000/transaction will keep trading fees more reasonable of around 1%.

Since I have $ 888/month coming, workout to be $ 10,656 a year. With that kind of money, I can only buy stocks 3 times/year. You see, very limited bullets, two more shots left only for 2008.

I need to be very sharp – must be a first class sharp shooter but at the same time I am only human. I must avoid making mistake on both new and reinvestment decisions at all costs in the first 3 -5 years. I must compound on successes and not failures.

Most people at this stage will be tempted to create high turnover hoping to build base as fast they can. I am totally disagree with this approach because the higher the turnover, the higher the probability you will make mistakes. You can win 9/10 times but 1/10 could destroy your capital base. Black Swan theory they call it. Let's take covered warrant for example, based on casual conversation with my broker, those entered in late December and January are in this situation, still licking wounds painfully and silently.

Next week, I will illustrate why the first 5 years is so important in building wealth.

The Economist: The tigers that lost their roar

Came across an article in the Economist condeming South East Asian companies. For those who are interested to read the full article, please visit http://www.economist.com/world/asia/displaystory.cfm?story_id=10760174

The key points are being summed up in the following three charts:

(i) GDP growth is lagging behind China, India. Post 1998 growth is terrible.



(ii) Hardly any global brands and companies. Even China, India, Brazil are doing much better than us, wake up!



(iii) Productvity growth lagging behind



How do you feel about these remarks?

"These companies don't have strategies, they do deals" Micheal Porter

"Hard to find Malaysian companies with business plans that will last 10 years" Gerry Ambrose of Aberdeen Asset Management. I am surprised by his remark since he always talk nicely of us in local newspapers.

More importantly, how do you feel about your future investment returns from South East Asia market in general, Malaysia in specific?

Capital Allocation Decision II

For investor with a shoestring budget, our early net worth creation growth is coming from our day job. We have to put in 100% of our energy and attention to do a good job. Yup, we got the point, we don’t have much time. All we have is probably 26 hours a week if we spend 2 hours a day on weekday and 8 hours a day on weekend, for a person who is really passionate about investing. For less serious investor, 6 to 8 hours probably will be a very big achievement.

We need to stay very focus to maximize limited time available. Personally, I am avoiding as many distractions as possible. I am trying to cut down watching business news (CNBC or Bloomberg), we probably won’t realize that one-hour is gone per sitting. The second place to avoid is traders’ chat room, I find it amusing, entertaining but probably won’t help me much. Thirdly, going after quantity over quality by hopping websites after websites in search of hottest stock tips. Forth, in my opinion, one should spend less time on brokerage reports, even though there are few really good ones occasionally. Lastly, don’t spend too much time on technical charting; investing by looking at rear mirror will not help much.

Some of the professionals and senior managers really amuse me, they put in so much efforts in their professional life but a lot more careless when come to personal investing.

To manage time effectively, my research is normally pull driven and not push driven, I will goggle a subject that I am interested rather than wondering around aimlessly. I will subscribe to top magazines/newspapers like Economist, Wall Street Journal, Reuters, The Standard Finance, China Daily. When I read newspaper, I will pay attention to industry statistics, watching stock price reactions on the news or arguments of money flow, etc. The most importantly is to spend more time on company annual reports.

I spend a bit of time monitoring the worldwide macro economy developments to have a feel whether a major correction is coming. I am not trying to seek Alpha returns or looking for lowest Beta. I just want to avoid major weakness of value investor of buying or selling too early. Those who play long enough in the stock market will understand how difficult it is to catch top and bottom. I should be OK as long as I am approximately right than totally wrong.

I will typically aim to read at least one book a month, whether it is finance or investment related or outside finance/investment subject. Knowing broader subjects will help to sharpen the art of seeing big picture.

Capturing thoughts on diary is important to me. I will review on monthly basis of my thoughts, observations, commitments to validate and compare reality and result to theory and target.

Looks like I need another session to write about capital allocation.

Turtle Portfolio Update

Turtle received saving of $ 888 for the month of March '08.

Capital Allocation Decision (I)

Every amateur investor faces three problems : knowledge, time and money.

Let's face the fact that we are probably dealing with the smartest people in the world when comes to buying and selling stocks. These professionals know what they are doing because that is what they do for a living. Let's give them respect for that.

If they decided to sell stocks, there could be real good reasons of doing so. The company fundamentals could be really deteriorating, fully valued and etc. The moment we buy stocks from them, we are assuming the seller is wrong. We need enough knowledge and understanding to do that. An amateur should avoid stock picking if they are not ready, don't force the issue OK?

The good news is the know nothing investor can buy the whole market through ETF or index fund. ETF has sufficient diversification to protect the investor from lack of knowledge, or ignorance in a stronger word. Winners will weed out losers over time, Darwinism will take care by it self.

Those who want to do active portfolio investing must acquire sufficient knowledge or else they are at the mercy of randomness, hot tips, Fung Shui, etc. The long term results could yield 3-4% returns if they are lucky and suffering permanent capital loss is no surprise. There is no compromising here. Buffet, Lynch, Ben, Soros, Miller are all have formal training.

Will continue with part 2 this coming Sunday.