Learning From 2016 Stock Crash

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25 Jan 2016 07:44 #22830 by observer2
observer2 replied the topic: Learning From 2016 Stock Crash
Joes,
What makes the stock market interesting is that both the investors as well as the stocks can be irrational at times. All of us learned from our experience and mistakes. One big lesson I learned is to move away from following the herd and be willing to have a change of mindset if what I am doing could not produce the desired results.

Investors with limited resources must always avoid being caught holding stocks at high prices (high end of bull market) or holding through the top of the bull market down to the bottom of the bear market. This is a heavy price to pay (in the form of opportunity cost lost).
Having a big “war chest” that one could tap upon during a big bear market has certainly been a wish and desire of many investors.
The following user(s) said Thank You: ClementLam

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27 Feb 2016 22:58 #22912 by observer2
observer2 replied the topic: Learning From 2016 Stock Crash
The STI has dropped from a closing high of 3,539 as on 15-4-2015 to a low of 2,649 as on Friday, 26-2-2016, a loss of 890 points (or 25.15%). According to Investopedia, a “BEAR MARKET” is defined as “a market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment to be self-sustaining. As investors anticipate losses in a bear market and selling continues, pessimism only grows. Although figures can vary, for many, a downturn of 20% or more in multiple broad market indexes, such as the Dow Jones Industrial Average (DJIA) or Standard & Poor's 500 Index (S&P 500), over at least a two-month period, is considered an entry into a bear market.” Based on this definition, the Singapore market may now be said to be in a Bear Market.

In a Bear Market, the prices of virtually all stocks regardless of blue chips, defensive or high dividend-yielding stocks, would all decline significantly to their lowest support level with some even going below their intrinsic value in a very severe sell down. Hence, investors would be well rewarded if they can learn to love the Bear Market and to take advantage of this rare golden opportunity to acquire many good sound stocks at a huge discount especially during a very severe market decline.

New millionaires are known to surface after every bear market. “Can I be one of them?” This is a question many investors may like to ask themselves.

History has shown that stock market cycles and stock investors (herd) behaviour never changed throughout the decades. The vast majority of investors are governed by the instinctive survival trait of fear (of danger or losing out to others) and greed (for quick easy gains or to gain more than others). Stocks become cheap when the herd rushes for the “exits” on fear, and expensive when the herd rushes in on greed for quick easy profits that others are seen to be reaping. Common sense tells us that it is wise to act contrary to the herd behaviour in order to “come out as easy winners”. In practice, this is easier said than done as we are going against our instinctive nature – Flight whenever grave danger on sight.

The small number of successful investors that are able to act contrary to the herd are usually those who understand market behaviour and have a positive mind-set. They have the courage and confidence to buy when news and market sentiments are very bad with most people dumping their stocks. They are well aware that the stocks they bought can easily become cheaper; and they are more than ready to buy more at cheaper prices.

The data below shows the decline in value of some typical stocks during the previous and current Bear Market: (figures within brackets denote the % loss in value from the market top)

2007 Bull Market Top: (11-10-2007) STI – 3,875
[/b]Closing Prices
UOB – $22.70
DBS - $22.50
OCBC - $9.03
Venture - $15.80
SGX – $15.90

12 Months After Market Top: (10-10-2008) STI – 1,948 [-49.73%)
[/b]Closing Prices
UOB – $14.80 (-34.8%)
DBS - $14.00 (-37.78%)
OCBC - $5.98 (-33.78%)
Venture - $5.00 (-68.35%)
SGX - $5.37 (-66.23%)

Bear Market Bottom: (09-03-2009) STI – 1,457 [-62.4%]
Closing Prices
UOB – $8.20 (-63.88%)
DBS - $6.45 (-71.33%)
OCBC - $3.83 (-57.59%)
Venture - $5.42 (-65.7%)
SGX - $4.02 (-74.72%)

2015 Bull Market Top: (15-04-2015) STI – 3,539
Closing Prices
UOB – $23.13
DBS - $20.95
OCBC - $10.86
Venture - $8.65
SGX - $8.59

10 Months After Market Top: (15-02-2016) STI – 2,607 [-26.34%]
Closing Prices
UOB – $17.85 (-22.83%)
DBS - $13.41 (-35.99%)
OCBC - $7.64 (-29.65%)
Venture - $7.78 (-10.06%)
SGX - $7.02 (-18.28%)

The % decline in value of the 3 banking stocks during the first 10 months of the current Bear Market appears poise towards matching the 12-month decline in their value in the previous Bear Market. Since the last Bull Market did not end with a new record high STI and the fundamentals of many stocks especially banking stocks are now much stronger, it is reasonable to expect a less severe decline in the current Bear Market unless a serious economic or financial crisis occurs. As each Bear Market is different in duration and severity, it should be interesting to see the further unfolding of the current one over the next few months.

QUESTION: For those waiting to buy stock at the lowest price, do they know where the market bottom is?
ANSWER: Absolutely positively yes. The reality is – Everyone knows where the market bottom is – AFTER HE OR SHE HAS MISSED IT. Hence, it is never a good option WAITING to buy a stock at an uncertain low price.

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23 Aug 2016 09:15 #23197 by observer2
observer2 replied the topic: Learning From 2016 Stock Crash
Much can be learned from the current global financial market behaviour that has confounded and confused many investors and experts.

Following the QEs, near zero interest rates and the massive company share buybacks, the US stock market has been moving towards new record high while the other markets, especially those of Asia and Europe, are struggling or in bearish market mode. The S & P 500 “VIX” (or Fear) Index is also at the record low end as on 5 August 2016 (similar level exactly one year ago) reflecting the general public optimism and confidence of the market. The belief that central banks will do everything to protect the market rally could also have contributed to such optimism..

Judging from the comments of many financial experts, it would seem that many US investors continue to buy equities at increasingly high valuations because they still offer better yields, compared to other asset classes. Driven by easy liquidity, the stocks are powered higher even as the earnings continue to miss, and regular downward earnings revisions seem to have no effect on the investors, who are clearly in a risk-on mode.

One does not need to be an expert to understand that market moves in cycle; and the stock market has moved from the low end [LOW RISKS/HIGH POTENTIAL REWARDS) of the cycle in 2009 towards the present high end [HIGH RISKS/LOW POTENTIAL REWARDS]. The Singapore market climbed to its highest point in April 2015 followed by the US market a month later. Since then, both markets went on a slide early this year, with the former sliding more than 20% into a “bear market” before recovering. The US market has just moved on to a new record high without the support of a robust economy and strong corporate earning prospects. Could it continue to climb higher? ANSWER: Most Certainly Can – if it has not reached its peak and turns into a bear market. Astute investors and traders can still find many opportunities to profit in such a time.

Below is an extract of some interesting comments [offering valuable food for thought] as made by one US Investment Advisor, Freedom Capital Advisors, on the current state of the US market:

Many market professionals are at a loss to explain the current environment that we find ourselves in today. The correlations of the past are no longer working and the trends we used to follow don't seem to work. Bonds prices are up, stock prices are up, and metal prices are up. What gives? This isn't normal. How does one explain this seemingly upward movement of all assets in the same time frame?

TINA, or there-is-no-alternative, is the current explanation given by many TV pundits and some so-called market professionals. The reasoning is simple: investors have to buy something because they can't keep their money in cash any longer at low to negative yields. If you think about the argument it makes a lot of sense, at least on the surface.

Every investor, whether professional or individual, has been forced to deal with the economic realities of a ever-decreasing yield in their traditional areas of investment. Some very high profile investment titans such as Tepper, Icahn, and others have even attempted to hedge, or even go short. Many have tried to stay out and remain cautious, as worries about moving out on the risk spectrum has been too uncomfortable. But sadly with time, many millions of individuals and institutions alike have been worn down. They can't afford to stay in cash and feel the need to invest in something, anything as long as it doesn't yield zero (or worse).
"There is no alternative" is uttered and the more it gets repeated the more complacent everyone gets. The whispers are out there "stocks/bonds/utilities/telcoms/etc... will go up because of TINA" and the markets are being lulled into complacency because it "seems" to be true. The fear indicator VIX is on its all time lows sub 12.

Make no mistake TINA has arrived, and she will continue to look good (until she doesn't). But be very aware that when TINA leaves, and she will, she will leave suddenly on those very investors that trusted her so much. So prepare in advance and keep alert to her departure.
There is an old saying that markets can stay irrational a lot longer than you can stay solvent, and it has paid over the years to keep this in proper context in all strange investing environments. Today's environment is no different. It would be arrogant though to suggest that people get out of every asset class and go to 100% cash tomorrow. Neither I nor any financial professional knows when TINA's going to go away, and furthermore, some assets might do surprisingly well when TINA's gone.

The key to navigating through this very confusing market is to 1) realize that TINA has arrived and 2) be skeptical of every investment idea. A healthy dose of fear should be applied to all ideas and each investment situation should be thought through carefully. Injecting fear into every thought will sharpen your focus and help mitigate the hypnosis that TINA brings with her.”

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09 Mar 2017 09:41 #23643 by observer2
observer2 replied the topic: Learning From 2016 Stock Crash
Warren Buffet is considered by some to be one of the most successful investors in the world and many would like to emulate him by following his ways.

The extract of an article below from John Hussmann - “The Most Broadly Overvalued Moment In Market History” is really a good eye opener especially to small investors who blindly follow Warren Buffet but have no deep pockets and patience.

“Last week, Warren Buffett himself made the jaw-dropping suggestion that the market was “cheap relative to interest rates.” Now, if you understand a century of market history, and Buffett’s own investment decisions over time, the most obvious conclusion is that Warren has been abducted and replaced by either an imposter or a highly sophisticated yet folksy robot.

My friend Jesse Felder has a simpler explanation, which is that Buffett strongly prefers not to disrupt the markets to the downside. In a piece titled Why Warren Buffett is So Reluctant to Call Stocks a ‘Bubble’ Jesse mentions the 2001 Fortune article and writes, “What you need to know about Mr. Buffett, though, is that he was eager to share this warning signal with investors only well after stocks had peaked. In fact, the Nasdaq Composite had already crashed by more than 70% before the words above were published. It’s true that he did make an earlier warning in Fortune but both articles were the products of the enterprising (or kindhearted - I’ll let you choose) reporter Carol Loomis who learned of Buffett’s private worries about the stock market and convinced him to make them public.”

Two years ago, as the broad market was about 10% below current levels, Alice Schroeder, who authored a book on Buffett titled The Snowball, also observed, “in private he has been more negative, at least with me, about the economy, money-printing, employment, than he is in public.”

Buffett has always expressed an admiration for the U.S. economy, and for long-term investment in the equity market. Knowing that every share of stock outstanding has to be held by someone at every point in time, he undoubtedly recognizes that there is no way for investors, in aggregate, to avoid market risk. My impression is that he has decided that he’s not going to be the guy who busts their bubble. To the extent that Buffett is now in the commendable process of divesting his holdings for the benefit of charity, one might even view his reluctance to rock this boat to be protective of that legacy - provided that investors aren’t encouraged by his words to take investment positions they can’t tolerate holding over the completion of this market cycle and for a very, very, long time thereafter.

For our part, we’ve always given more weight to a century of observable evidence than to anyone’s verbal arguments, even those who we hold in high esteem. Still, as long as investors are comfortable with expected S&P 500 10-12 year total returns of less than 1% annually, with likely interim losses on the order of 50-60%, investors are free to label this situation as “fairly valued” or with any other phrase they wish.”

Full details of this interesting article is available in the link below –

www.hussmanfunds.com/wmc/wmc170306.htm

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