Being rational in the crowd of madness
- Original Post from BPWLC BLOG

Today, the STI ended up at 3567.14 or about 240 points (or about 6-7%) short of the all-time high made by the STI in 2007. By now, it appeared more and more people are thinking that a crash is around the corner. Isn’t this the same old story that started as early as 2011 in the midst of the Euro crisis when it was widely expected that Greece would likely be the 1st country in the Eurozone to default? That was already about 5-6 years ago. Every year pockets of people would shout of an imminent crash. More recently, when the STI passed 3600, it appeared that many more are clamouring that a crash is around the corner. But then, what happened to the real stock market in all these years? Dow Jones Industrial Index (DJII) broke its all-time at least 40 times since the global financial crisis. The NASDAQ punched through the 7,000 mark. Hang Sheng pierced through its all-time high several times, Nikkei 225 perhaps at 20-year high. And our STI, though miserable, still managed to climb pass 3600, second only to the peak made in year 2007. Naturally, when the market is on an uptrend, it must peak sometime in the future, but it may not necessarily end up in a deadly crash immediately thereafter. It can a be long-drawn side-way movement or, perhaps, a gradual decline. The question is when would be the peak and how it is going to happen beyond that? It may happen in 6 months’ time or 2 years down the road and the side-way movement can last for another 2-3 years. After that it can continue to climb or maybe decline. There are just infinitesimal ways that it can happen. So, why anticipate a crash when it may or may not happen somewhere in the near future? In fact, by haunting ourselves that a crash is near, we may risk ourselves into holding too much cash making us look stupid when the market is in a bull run. It may be alright to hold cash for one, two or even three years, but beyond that would be a big drag on our overall portfolio performance. Investing is like doing a business. We do not get into a business when the time is good and then get out of it when it is bad. If there is really a crash, we just have to face it, and steer through it and learn from it. We always read on the news that billionaires whose wealth got decimated 30%-40% during a market crash. But that was only a point in the time-line. With their steady hands, their business actually improved to a next level when the crisis was over. Only businesses that did not sit on strong fundamentals and poorly managed would end up collapsing like a pack of cards during a crisis.
Suppose we have $100k and we engage a fund manager to help us invest. After a few months, when we found out that the fund manager had put 50% in stocks and another 50% in cash. When asked, the fund manager replied that he stayed 50% cash was because he anticipated a crash somewhere in the near future. What is likely our next course of action? We probably pull out the fund, isn’t it? Why would we want to engage the service of a fund manager when he is only 50% engaged?   Isn’t it the same question that we need to ask ourselves if we are managing our own funds when we are only 50% engaged. Think about it. Even if our stocks were to advance 30% for that year, the other 50% that stayed as cash would yield at most 1% return from bank interest.  That puts us a weighted average of 15.5%, which was below the STI ‘s advance of 18% last year, which was considered as a very good year.
So much has said about holding too much cash. As a matter of fact, I also do not advocate holding only 6 months average monthly expenses as an emergency fund either. Without some cash at our disposal, it would be difficult for us to make opportunistic purchases that may pop up from time to time. So, end of the day, it boils down to a few basic questions of personal finance. What is our risk tolerance level and our comfortable percentage in holding stocks?
Historically, with dividends thrown in, stocks are a good hedge against inflation.  Personally, I would estimate the historical inflation rate to compound around 2% annually, apart from some seismic shocks that happened once in a while. That should be matched by about 2% in dividend growth rate in blue chip stocks, even though it may not necessarily advance in lock-steps with the inflation rate. So, it means that if we purchase a stock and never ever sell it off, we should, in essence, not be worse off.  Of course, this is not the motivation for buying stocks. With a bit of stock price volatility but, generally, with an upward trend in the long run, it is highly probable that we can make some money along the way. In a nutshell, stocks should be considered as an avenue to provide a reasonable rate of return in the long run. Based on this very basic fact, we really do not need to be an A-grader in school to make money from stocks. What is more important are traits like discipline, able to acquire some skills on valuation techniques, perhaps pick up a few basic money management skills and get some understanding of the market mechanism. That’s all it needs to gain from stocks in the long run.
Brennen has been investing in the stock market for 28 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

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39 likes 77 comments
donaldchin

yup right nareshg, great growth is one of the best way to make a killing: hardwork in turning stones and digesting the Whys this so
great. dividend is secondary: most ppl want it both ways: great appreciations and good dividend.

nareshg

IMO, the real returns from our investment in stocks should be tied to FCF growth rate!
Invariably that translates into their stock prices and that gives investor the real capital appreciation. Companies with growth potentials usually have a poor dividend payout ratio.

marginofsafety

My take on this is pretty simple. Why do ppl stay in cash in anticipation of a bear market? To scoop up cheap stocks right? So if I can find stuff that are cheap now, why bother staying in cash and wait for that crash that god knows when will come?

For those peeps who have the majority of their allocation in cash right now, they are probably suffering from home country bias. I find it very hard to believe that if you are managing under say 9 figures, you find nothing that is of interest to you out of literally 10s of thousands of stocks out there.

To me, my cash allocation is just a consequence of not having anything to buy instead of a target allocation.

donaldchin

Reply to @BrennenPak : you got very good success, congra. Value investing margin of safety is very good
though a bit boring.

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donaldchin

just for the sake for ppl who have opposite views, sometimes, market can be timed.

Warrren Buffett time his exit 3 years before 1973 or more as market valuations got to
extreme end.

Charlie Munger didnt exit and crashed 30% or more in 1973. in 2009, he learnt from that mistake and in 2009
reserve a lot fresh ammunition and dive in JP Morgan $8.0, knowing govt privatisation of the big banks is not in the card, and hit a 5 baggers.

Michael Bolten, famous UK fund mgr choose to retire in 2007, avoiding a frothy market and i suspect to avoid tarnishing his great record.

Marc Faber, the famous boom gloom & doom fund mgr call for a crash pre-2000 and eventually it did crack open in Mar 2000. i thought his thoughts was rational, and avoid Tech stocks in spore or US stock and suffer a less painful cut. I long Creative and follow faithfully risk reward of the sell parabolic bull run theory and cut at 10% and
assume the end of the run in Creative, and it turn out to be True. $35 to $30 in 1 days,
and that nail the end of the Bull run for Creative and Nasdaq at 5000.

in 2007, SP500 reaches the same plateau as in 2000 internet boom 1500 and proceed to descend into the deep of 675 as the real estate crack open. i got that right as i was a book worm working my way into finanical and chance across the previous 10 or 20 there was a big crash in US real estate need some 1/2 trilliion to clean up. And happen to play attention that a HSBC bank was the first to write off a $2b loan profoliao. that i took it that it being a small player in US market mean likely a lot of the giants yet to report their score card is likely to be very red. that time, raffles education was at $4.00,now just 27cts. just great frothy levels.

by the end of 2017, from 2009 or 2011, US market keep roaring up
back to Internet theme. in duration , exceed past duration at least twice. Market never repeat itself, it rhythme. Fear is there, to find why not is the Cure.

after many knock out blows by the markets, i think it a truth to retreat
from frothy market and extreme valuation before the party end or oneself can caught in the Herd Instinct of Greed. just because it didnt crack now, doesnt meant it wont later on.

jim roger is a top Wizard, though u can see him in singapore doesnt
meant he lose his touch. his respect for buying very low to protect his downside and for stuff is like a 10baggers or more, THat how he compound his $30m to $1billion while he travelled the world 3 or 4 time across like a nomad. that i realised recently, he dont play till he find the fat fish in a barrel, and he just shoot the fish, he cant missed.
talk to the Great Finanical once why need to study so many stuff at the same time,
he answer "Making Money aint easy"

recent years, Paul Tudor Jones hedge fund has big % of puts on SPY
But US Market didnt crack. His fame is his accurate short into 1987 crash in US Market 27% drop in 1 day.

stanley druckmilller have similar positions earlier but reduced. his Phd in Economics and lot of Macro Plays has make him a Wizard to watch for his tea reading in the markets.

Quite a few big names has retreated to Family Fund, that meant they traded their own
family and employee funds eg David Teppar. Are they on to something? a Crash?
just my suspicious reversal deduction.

just a speculator biased (And could be inaccurate ) point of view to add to "Timing Discussion"

donaldchin

Reply to @BrennenPak : yup, same same lah,sometimes know but also forget and buy crap that bounce usually, but at 2008 dive, it went to zero, some sinochem co, Now hope to trade more kiasu.

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tanmingwang

walao. sti havent break record high going to fall liao? so many undervalued stock with PE less than 16.

BrennenPak

Reply to @tanmingwang : We are never the leading market, unfortunately. Otherwise, there will be more rich people...

Sporeshare

I think mkt may continue to chiong till CNY . After that, once the reporting season is over, we may see correction taking place. STI may still go up to test 3680!

Sporeshare

Reply to @BrennenPak : Agree! US is still hot with liquidility! It will eventually succumb to selling down soon ! Not for too Long I guess !

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Bluechipfan

By staying away from the market at arbitrary timing, we are timing the market. Personally I don’t like the idea. I attended a talk by an outfit who claim to be value based in their approach to investing. However, the speaker talked about keeping cash waiting for correction in 2018. I was a bit put off. Sometime later, the same speaker was featured in the newspaper reiterated the same point. I straightaway stop all newsfeeds from that outfit. How on earth that when one is supposed to be value based but actually talk about timing the market? On the other hand, I think Brennen has been consistent in his approach and please write more as I enjoy reading your post.

wellhandy

Reply to @BrennenPak : Due to the low volatility, I run tight stops. I won't go into risk management metrics.

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Lim_CH

A trend will remain a trend till proven wrong.

Lim_CH

Reply to @BrennenPak : Exactly. Look toppish is subjective but defining a trend can be objective depending on how one defines a trend.

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Peipei

With US corporate tax cut, I see bull run for another 2 years

BrennenPak

Reply to @Peipei : Perhaps, US bull run may stretch a bit further. But do remember that there would be a huge repatriation to US$ at the expense of the regional economies. A food for thought...

SSJ4

this time it is different liao?

BrennenPak

Reply to @akwl88 : Really don't know. If it really want to happen, it will happen.

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