The recent market turmoil has forced me to spend more time reading and reflecting on my investing philosophy. I have re-read a few of my old books and some new ones. I have found some very useful ideas in these books and I decided to reproduce the most thought provoking and most relevant to our current situation here.
These 15 Gems are from: One up on Wall Street – Peter Lynch; Survive and profit in ferocious markets – John Rothchild; Stock market wizards – Jack Schwager; Trading for a living – Alex Elder; and How to make money in stocks- William O’Neil. My comments are in italics.
1. Force yourself to buy on extreme weakness and sell on extreme strength. Although a fairly straight forward advice it is very difficult to implement as I recently found out. Buying on extreme weakness requires a lot of guts and self belief. My target entry price on Dangote Sugar has recently been met but I have been agonizing whether to buy. I finally decided to buy half of my initial plan on Monday. I will complete the trade depending on the direction of the marker in the next few days.
2. Market declines are great opportunities to buy stocks in companies you like. Supports the first gem. With this in mind it becomes a bit easier to implement the first advice.
3. Be patient. When the fundamentals say a stock is under priced but the market does not respond, stick with it. The market will respond.
4. Buying a company with mediocre prospects just because it is cheap is a losing technique.
5. Ignore the short term. True but easier said than done.
6. Think trades through. Including profit/loss exit points before you commit. It is essential to have an investment plan. Performance can then be compared to the plan and necessary decisions can be taken from a sound basis.
7. When you invest, ask yourself what is the worst that can happen. Consider the risks before the rewards.
8. Bear markets can last for 6 months or in rare cases 2 years. Don’t let them diminish your long term resolve. I hope the current bear run doesn’t go beyond 6 months. If it does, my resolve will be severely tested.
9. Bear markets are more compressed in time, more sharp in movement and more dramatic.
10. To come out ahead you don’t have to be right all the time or even majority of the time.
11. Cut your losses short. 10 and 11 work together. You can’t expect to be ahead if you don’t cut your losses short.
12. When it comes to mutual funds, select a good one and stick with it for 10 or more years. Automatically reinvest the dividends. True especially in our market that has been positive for 9 years running.
13. Concentration is critical to superior performance. The greater the number of stocks you hold, the more market like your performance becomes.
14. Hold no more than 10 stocks because your top ten ideas will always perform better than your top 100. Another difficult to follow advice in our market especially with regard to banking stocks. I need to prune down my holdings in banks but which do I keep?
15. Never make a bet you can’t afford to loose. True. You will sleep much easier if you apply this.
Sunday, July 20, 2008
Sunday, July 13, 2008
Are we Immune?
Capital Markets the world over have been in a state of turmoil and uncertainty for most of 2008. Most markets are in the red zone for the year including our own NSE. US markets entered official bear territory last week as major indexes closed 20% off the record high.
The NSE All Share Index is 17.6% down from the record high achieved on 5th March 2008. While we don’t have an official definition of a bear market, the mood among regulators and investors is that we are in a bear market.
From the comments of regulators of the NSE and investors, it appears most are perplexed as to why we should be on this bear run. That in my view is to ignore the strong positive run we have had in the last 9 years and the state of the world economy and financial markets.
Since last year when the credit crises surfaced in the US and Europe, the financial industry has not been the same. Record write offs by financial giants Citigroup, Merrill Lynch, UBS etc have followed. The crisis has slowed world economic growth and has pushed the US economy and other European economics onto the brink of recession. High oil and commodities prices have acerbated the situation.
Commentators the world over are predicting gloom. One that caught my eye was a comment by Peter Kenny, “the bottom line is that we are in the middle of a financial tsunami. This is a storm the likes of which this country (US) hasn’t seen”. With Fannie Mae and Freddie Mac (backbones of US mortgage market) facing a meltdown of their share price in the last few days, let’s hope Kenny is wrong. History has shown us that when all are predicting doom and gloom, chances are that recovery is just around the corner.
So what about us in Nigeria, are we immune to the turmoil? In my view we are not and our regulators should start acting that way. The high oil price has helped Nigeria more than hurt but even our manufacturers are groaning under the weight of high diesel price. More importantly, it appears liquidity in the capital market has gradually declined. Although we are told foreign portfolio money only accounts for 12% of the market, I am betting it can only get lower. Foreign money managers have bargains in their backyards and therefore have no incentive to come to Nigeria shopping. Add that to the fact that our own market is also on a bear run and therefore not as attractive as it once was. The liquidity has to come from within.
Regulators of our market need to acknowledge we are not immune to the state of global economic health. We investors need to also acknowledge that and stop worrying. After all our banks are in the best state of their lives unlike those in the US and Europe.
This bear run will surely come to an end like all things in life. Considering all the gloom around us, it might be sooner than we think.
Exchange.........YTD July 10th %
NSE.............(5.5)
Cairo...........(5.3)
JSE.............(6.6)
S & P 500.......(15.2)
DJIA..............(16)
FTSE.100........(16.5)
CAC.40..........(24.8)
BSE 30.(India)..(31.1)
Source: FSDH weekly report
The NSE All Share Index is 17.6% down from the record high achieved on 5th March 2008. While we don’t have an official definition of a bear market, the mood among regulators and investors is that we are in a bear market.
From the comments of regulators of the NSE and investors, it appears most are perplexed as to why we should be on this bear run. That in my view is to ignore the strong positive run we have had in the last 9 years and the state of the world economy and financial markets.
Since last year when the credit crises surfaced in the US and Europe, the financial industry has not been the same. Record write offs by financial giants Citigroup, Merrill Lynch, UBS etc have followed. The crisis has slowed world economic growth and has pushed the US economy and other European economics onto the brink of recession. High oil and commodities prices have acerbated the situation.
Commentators the world over are predicting gloom. One that caught my eye was a comment by Peter Kenny, “the bottom line is that we are in the middle of a financial tsunami. This is a storm the likes of which this country (US) hasn’t seen”. With Fannie Mae and Freddie Mac (backbones of US mortgage market) facing a meltdown of their share price in the last few days, let’s hope Kenny is wrong. History has shown us that when all are predicting doom and gloom, chances are that recovery is just around the corner.
So what about us in Nigeria, are we immune to the turmoil? In my view we are not and our regulators should start acting that way. The high oil price has helped Nigeria more than hurt but even our manufacturers are groaning under the weight of high diesel price. More importantly, it appears liquidity in the capital market has gradually declined. Although we are told foreign portfolio money only accounts for 12% of the market, I am betting it can only get lower. Foreign money managers have bargains in their backyards and therefore have no incentive to come to Nigeria shopping. Add that to the fact that our own market is also on a bear run and therefore not as attractive as it once was. The liquidity has to come from within.
Regulators of our market need to acknowledge we are not immune to the state of global economic health. We investors need to also acknowledge that and stop worrying. After all our banks are in the best state of their lives unlike those in the US and Europe.
This bear run will surely come to an end like all things in life. Considering all the gloom around us, it might be sooner than we think.
Exchange.........YTD July 10th %
NSE.............(5.5)
Cairo...........(5.3)
JSE.............(6.6)
S & P 500.......(15.2)
DJIA..............(16)
FTSE.100........(16.5)
CAC.40..........(24.8)
BSE 30.(India)..(31.1)
Source: FSDH weekly report
Friday, July 11, 2008
Cutting Losses Short
In the last four months the patience of investors on the NSE has been severely tested and it is getting to a breaking point. The All Share Index dropped to a year low 53,366 on 25thJune. There was a brief rally for a week but most of the gains have since been lost. Mercifully, the low of 25th June has not been breached.
Right now the market has been so volatile that the safest thing to do by non professional traders is to sit on the side lines. At least that is what I have been doing in the last two weeks. Another thing I have been doing lately is reading and I have read a few gems.
One common theme that keeps recurring in all the books is the need to cut losses and move on. According to the authors hanging onto a loosing position is a refusal to admit a mistake was made in buying the stock. Investors will save themselves from financial ruin by cutting losses short. The common recommendation is to exit a position once 8-10% is lost.
I have a limit of 15% although I could exit earlier if it is obvious the stock is heading for a major fall. My rationale is that I usually have about 12 stocks in my portfolio and a 15% loss represents an average 1.25% loss in capital. That is tolerable.
Earlier in the year I exited Standard Trust Insurance before it became a loosing stock. I sold Japaul in March and cut my losses. If I had delayed the decision, I would have been looking at more than 40% loss. Cutting my losses short is a key risk management strategy I have adopted. Fortunately, in spite of the bear run, none of the stocks currently in my portfolio are in a loosing position.
My advice is to always have an exit strategy either up or down at the time of entry. It is a well tested successful risk management strategy. Without it financial ruin could be around the corner especially in a long drawn out bear market.
Right now the market has been so volatile that the safest thing to do by non professional traders is to sit on the side lines. At least that is what I have been doing in the last two weeks. Another thing I have been doing lately is reading and I have read a few gems.
One common theme that keeps recurring in all the books is the need to cut losses and move on. According to the authors hanging onto a loosing position is a refusal to admit a mistake was made in buying the stock. Investors will save themselves from financial ruin by cutting losses short. The common recommendation is to exit a position once 8-10% is lost.
I have a limit of 15% although I could exit earlier if it is obvious the stock is heading for a major fall. My rationale is that I usually have about 12 stocks in my portfolio and a 15% loss represents an average 1.25% loss in capital. That is tolerable.
Earlier in the year I exited Standard Trust Insurance before it became a loosing stock. I sold Japaul in March and cut my losses. If I had delayed the decision, I would have been looking at more than 40% loss. Cutting my losses short is a key risk management strategy I have adopted. Fortunately, in spite of the bear run, none of the stocks currently in my portfolio are in a loosing position.
My advice is to always have an exit strategy either up or down at the time of entry. It is a well tested successful risk management strategy. Without it financial ruin could be around the corner especially in a long drawn out bear market.
Tuesday, July 1, 2008
As We Welcome Back the Bulls
The last few months have been very emotionally challenging to the average investor on the Nigerian Stock Exchange (NSE). As at 25th June the All Share Index has lost 19.6% from its all time high of 66,371 achieved on March 5th. The Index closed 53,366 on June 25th the lowest point since 16th November 2007 and down 8% for the year.
Fortunately for most of us, the worst seems to be over as the index went up for the first time in nine days on June 26th. Since then the index has appreciated 7% although it is still 1.6% down for the year. So what have we learnt from all this?
Keep an eye on market valuation
The Index closed at an all time high on 5th March at 66,371. The average market PE was 35.9 while the average dividend yield was 1.6%. If we compare this to the market PE and dividend yield on the last trading day of the last 3 years, we would definitely conclude that the PE was high and the yield low. These two indicators are used in other markets to access the valuation of the market. Our experience in the last four months indicates that these indicators can be used to good effect in valuing the NSE.
Year.....................PE......Yield %
5th..March 2008....35.9---1.6
31st.Dec 2007......30.0---2.1
29th.Dec 2006......23.4---3.88
30th.Dec 2005......16.3---4.75
25th.June 2008.....27.0---2.1
It is therefore very important to keep an eye on the market PE and dividend yield. A large diversion from historical trends calls for caution. While these two might not be enough to be sure of an over extended market, they can be used in addition to other factors such as excessive bullish outlook by analyst and the media, excessive speculation on penny stocks and stocks no longer responding to strong earnings announcements. All these were present in our market in the last few months. Therefore, in retrospect some correction was due. When such factors are observed, it is time to be cautious and consider taking money out of the market.
Stick to fundamentally sound stocks
This is an advice for all seasons but becomes even more important during a bear run. It is emotionally easier to stick with sound companies when the going gets tough. Weak companies tend to fall more in a bear market and recover less quickly when the bull run starts.
Most of the banks listed on the NSE are very sound companies. Although they took a beating during the bear run, they also led the recovery. In addition, at the bottom most of the banks were selling at very attractive valuations and provided a great opportunity for entry and subsequent gains.
Get rid of overvalued stocks
Once it becomes clear that a bear run is on the cards, it is advisable to get rid of over valued stocks. These will typically be stocks will high PE’s and low dividend yields relative to their sector and market. Intercontinental Bank and IBTC were two stocks that were selling at a premium compared to other banks. They suffered like most of the banks and they have been sluggish in the current recovery.
Cash
Always have some cash to take advantage of some great opportunities that will appear at near bottom. There were great opportunities from June 19th to 25th. Only those with cash were able to take advantage. Several stocks such as GTB, Costain and Dangote Sugar have already returned more than 20% from their lows attained in the last two weeks.
Cash can be kept in money market investments that could be easily liquidated to take advantage of bargains.
Finally
Whatever you do, once a bear run starts do not panic. Everything has an end. The long Bull Run ended on 5th March and so did the Bear Run after almost 4 months.
The market looks to be favorable in July although expect the current run to slow down in the next two to three days. Positive earnings announcements will ensure July provides investors with needed respite.
Fortunately for most of us, the worst seems to be over as the index went up for the first time in nine days on June 26th. Since then the index has appreciated 7% although it is still 1.6% down for the year. So what have we learnt from all this?
Keep an eye on market valuation
The Index closed at an all time high on 5th March at 66,371. The average market PE was 35.9 while the average dividend yield was 1.6%. If we compare this to the market PE and dividend yield on the last trading day of the last 3 years, we would definitely conclude that the PE was high and the yield low. These two indicators are used in other markets to access the valuation of the market. Our experience in the last four months indicates that these indicators can be used to good effect in valuing the NSE.
Year.....................PE......Yield %
5th..March 2008....35.9---1.6
31st.Dec 2007......30.0---2.1
29th.Dec 2006......23.4---3.88
30th.Dec 2005......16.3---4.75
25th.June 2008.....27.0---2.1
It is therefore very important to keep an eye on the market PE and dividend yield. A large diversion from historical trends calls for caution. While these two might not be enough to be sure of an over extended market, they can be used in addition to other factors such as excessive bullish outlook by analyst and the media, excessive speculation on penny stocks and stocks no longer responding to strong earnings announcements. All these were present in our market in the last few months. Therefore, in retrospect some correction was due. When such factors are observed, it is time to be cautious and consider taking money out of the market.
Stick to fundamentally sound stocks
This is an advice for all seasons but becomes even more important during a bear run. It is emotionally easier to stick with sound companies when the going gets tough. Weak companies tend to fall more in a bear market and recover less quickly when the bull run starts.
Most of the banks listed on the NSE are very sound companies. Although they took a beating during the bear run, they also led the recovery. In addition, at the bottom most of the banks were selling at very attractive valuations and provided a great opportunity for entry and subsequent gains.
Get rid of overvalued stocks
Once it becomes clear that a bear run is on the cards, it is advisable to get rid of over valued stocks. These will typically be stocks will high PE’s and low dividend yields relative to their sector and market. Intercontinental Bank and IBTC were two stocks that were selling at a premium compared to other banks. They suffered like most of the banks and they have been sluggish in the current recovery.
Cash
Always have some cash to take advantage of some great opportunities that will appear at near bottom. There were great opportunities from June 19th to 25th. Only those with cash were able to take advantage. Several stocks such as GTB, Costain and Dangote Sugar have already returned more than 20% from their lows attained in the last two weeks.
Cash can be kept in money market investments that could be easily liquidated to take advantage of bargains.
Finally
Whatever you do, once a bear run starts do not panic. Everything has an end. The long Bull Run ended on 5th March and so did the Bear Run after almost 4 months.
The market looks to be favorable in July although expect the current run to slow down in the next two to three days. Positive earnings announcements will ensure July provides investors with needed respite.
Subscribe to:
Posts (Atom)
