Thursday, 30 July 2015

Bottom Fishing or Catching a Falling Knife? - Anchoring Trap in Behavior Finance.

"The first thing every investor must learn is to do absolutely nothing. Nothing at all, unless there is something worth doing.  Most investors, they can't. They must keep acting." - Jim Rogers

" The greatest profits is not made by trading, but by sitting. " - Jesse Livormore

"In the stock market, you don't have to swing at everything. You wait for your pitch."  - Warren Buffet

The above famous quotations tells us one thing. Investing in stock market works differently from working on other area. In the stock market, chances can't be evenly distributed in a calendar year. Most of the time, you need to do nothing. Either holding your stock position and see the market rise, or holding cash to wait for market fall. 

This is one of the crucial difference between investor and salaried worker. Investors are rewarded by making smart decisions in a few critical points, not by working hard every day! (frequently buying/selling) 

This is because market tends to move in trend (human behavior). Uptrend, Downtrend, or Flat. Investor need to understand the power of a trend. Do not fight with trend. Dance with it. Make friends with it. If the stock tells you that I am catching a flu. Then don't get too close until fully recovery. Warrent Buffet said one should be greedy when everyone else is fearful. True. But ask yourself, is everyone else fearful already? Or are they as greedy as you to think all others are fearful now? 

We heard that just because a stock price is rising, it is not the good reason to buy. But empirically, the opposite is more true. In a trend, most of the time, a trend continues itself. Only at few junctions, trends reverses. When a downtrend forms, you should examine the reasons behind. Is the downtrend warranted? If the stock goes bad fundamentally. It should drop. You should short sell it, instead of bottom fishing. In many cases, downtrend has its valid reason as the stock is or has turned lousy. Hence, investors should respect market, not boldly challenge it. Even if the downtrend goes excessively, should you bottom fish? Remember: Buy good furniture at reasonable price. Don't buy lousy furniture at low price.  As Hong Kongers say: 宁买当头涨,不买当头跌!( (if must act stupidly once), rather chase a stock when it is rising, than bottom fishing when it is going down.)  

We know that price is fluctuating. But so is the value. One must not fall into the anchoring trap described in the behavior finance. - Anchoring means investors attaches (anchors) our thoughts with the recent reference points. 

1.
For example, SembCorp Ind. When it was trading at narrow range around 5.0, how many would believe it could drop to today's price level? How many "value investors" had been caught in this down trendInstead of embracing the oil catastrophe, we should steer away from it. We should sit tight with money, until, as Jim Rogers said, something worth doing. Many made the mistake because they fell into the trap of anchoring behavior. 



Semb Corp is just an example. Other oil counters are leaking too. Keppel had break out the critical support level of 8.0, which opened a whole new room for short-seller. We will see new lows after new lows for some time.



See my early post :

Offshore and Marine Sector ---The leaking oil...


2.
Another example is the Noble, another commodity player. 
Today its price dropped more than 11% one day! to a new low of 0.52. 

Another vivid demonstration that when a trend forms, it intends to go as far as possible.
See my early post : Short Noble Until its death?


3. 
The other two sectors that could be joining the debacle, to a lesser extent, are Telcos and REITS. 

The great REITs run post-GFC seems finally losing its power. Indeed office REITs have dropped significantly already. Is it time to bottom fish? I can't comment. But I remember Jim Rogers once said" great bottom is not 3 or 4 years low, it is 10 or 15 years low. " Take CCT for example,  Is it a good stock? Yes! Can its price go lower? I say why not? Given the oversupply situation in CBD offices, rising interest rates, and fading confidence in REITs sector, it can well test new lows before truly finding bottom. 



Are telcos better? The low we had seen recently probably are not the lowest point in this cycle. Starhub and M1 have more room to fall. Singtel could be more resilient, but not much better. In the case of Starhub, some think the 3.7 on the flash dropping day as a supporting level. I call it a frontier for new lows. Watch once if the price closes below 3.7. It could turn a resistance level. New lows can be expected.





4.
No reason to panic though. This is the beauty of stock market. Only in the great crisis, are there great opportunities. We wait for the clear sign of rebound. We must allow some time for the downtrend to finish its course. Patience is the key. Whenever there are still idiots eagerly jumping into a downtrend, the down trend is not finished yet. Only when the whole market are full with pessimism or sheer panic, we start to shop.

Just like in the case of China Stock Market, when Shanghai composite index at 2000 for many years, retail investors shun it like shits. When it went up to 5000 this year and corrected a bit, many thought it was opportunity and jump in! 

Many of those, who avoided the peak, were caught in the mid-level of the downtrend. ( 没死在山顶,死在半山). Many used leveraging. Hence 10% or 20% correction ( common in China) can force position closure, and take away all their money. Even after that market rebounds a bit, they were dead already. China governments, so powerful in controlling economics, can not save it. If you can read Chinese, pls read here. A story about a young Shanghai entrepreneur who made a fortune of 8 mil in business, and lost all in stock market in a month. Tragic.

The only lesson history teaches us is that people don't learn the lessons from history!!

7 comments:

  1. Hi Richard

    You've touched on a lot of great points there I was about to say and blog but guess I didn't have to now.

    My favorite is your point number 4. When there are still people jumping into the downtrend, it is not the time yet. The time will come and I am sitting and anticipating eagerly for some of my target to reach my price :D

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    Replies
    1. Thank you dear. Your blog is a great inspiration to me. I like your high level of cash reserve.

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    2. Ass...saya tidak menyanka kalau saya sudah bisa sesukses ini dan ini semua berkat bantuan MBAH RAWA GUMPALA,saya yang dulunya bukan siapa-siapa bahkan saya juga selalu dihina orang dan alhamdulillah kini sekaran saya sudah punya segalanya,itu semua atas bantuan beliau.Saya sangat berterimakasih banyak kepada MBAH RAWA GUMPALA atas bantuan nomor dan dana ghaibnya,alhamdulillah kini saya sudah bisa membuka usaha kembali yang dulunya pakum karna masalah faktor ekonomi dan kini kami sekeluarga sudah sangat serba berkecukupan dan tidak pernah lagi hutang sana sini,,bagi anda yang punya masalah keuangan jangan sungkan-sungkan untuk menhubungi MBAH RAWA GUMPALA karna insya allah beliau akan membantu semua masalah anda dan baru kali ini juga saya mendaptkan para normal yang sangat hebat dan benar-benar terbukti nyata,ini bukan hanya sekedar cerita tapi inilah kisah nyata yang benar-benar nyata dari saya dan bagi anda yg ingin seperti saya silahkan hubungi saja MBAH RAWA GUMPALA di 085==316==106==111




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      Ass...saya tidak menyanka kalau saya sudah bisa sesukses ini dan ini semua berkat bantuan MBAH RAWA GUMPALA,saya yang dulunya bukan siapa-siapa bahkan saya juga selalu dihina orang dan alhamdulillah kini sekaran saya sudah punya segalanya,itu semua atas bantuan beliau.Saya sangat berterimakasih banyak kepada MBAH RAWA GUMPALA atas bantuan nomor dan dana ghaibnya,alhamdulillah kini saya sudah bisa membuka usaha kembali yang dulunya pakum karna masalah faktor ekonomi dan kini kami sekeluarga sudah sangat serba berkecukupan dan tidak pernah lagi hutang sana sini,,bagi anda yang punya masalah keuangan jangan sungkan-sungkan untuk menhubungi MBAH RAWA GUMPALA karna insya allah beliau akan membantu semua masalah anda dan baru kali ini juga saya mendaptkan para normal yang sangat hebat dan benar-benar terbukti nyata,ini bukan hanya sekedar cerita tapi inilah kisah nyata yang benar-benar nyata dari saya dan bagi anda yg ingin seperti saya silahkan hubungi saja MBAH RAWA GUMPALA di 085==316==106==111

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  2. Hi Richard,
    Wow, so many valid points in one blog.
    And there are some people who actually do look at history, but alas their perception of history extends back only about ten years. Which leads them to believe things like government bonds are save, the average recession is as bad as 2008 was, and that we're in a new 'normal' of high government debts and low interest rates which will continue forever.

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    Replies
    1. Thanks for ur comments. retail investors need to avoid epic failure. even without big success, we can accumulate wealth gradually. but must avoid epic failure in order to preserve capital to remain in the game. for me, if i made mistake, i cut loss once fudamental goes bad no matter how. if made right decision, i let the profit grow.

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  3. From July till now, the market really had lots of falling knives. Especially the O&G sector.

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    Replies
    1. Thanks for comments. Wait and see whether 2016 will continue the downtrend or revenge. Last drastic and panic drop is yet to come. When it does, time to shop.

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