The market has been volatile for since 1st August 2011 mainly due to the economic problems in Europe and US. STI has hit the 52-week low on Monday, 26th September after closing at 2654 points. The problems in Europe would take time to solve and the volatility may continue for some time.
It’s the first time since I started investing in June 2009 that I’m seeing so much fear and uncertainty in the market. What is my position currently? I have sold off some overvalued stocks like Super (sold in June) and sold off silver (in August) and cut loss on Hock Lian Seng (in Sept). I have also reduced my positions in First REIT and Starhill Global REIT. I’m holding onto certain positions like Kingsmen, Vicom and STI ETF as I believe they are still undervalued. The P/E ratio of the STI market is around 8 and I’ll holding on to it even though STI is on a downtrend.
I don’t want to liquidate all my positions and buy-back later with the use of technical analysis. There are two reasons for this.
Firstly, I do not want to time the market. One cannot predict accurately the macroeconomic issues and the effect it would have on the stock market as there are too many complex variables involved. The Asian markets have dropped more than the DOW even though the liquidity problem is not in Asia. The debt problem will take time solve but I’m more comfortable holding onto my positions as the dividends I receive in the meantime will cushion my paper losses. After the problem is over, the stocks will surely recover as they are fundamentally strong companies. I’m “loading up on my bullets” (saving up cash) to buy my companies at a cheaper price should prices plunge. I’ll average down if I have losses of 15% or more and will buy in batches instead of all at one go.
Secondly, even though the overall market may fall, some stocks will not fall as much or may even rise (it’s rare). These stocks are usually the defensive counters. So, it’s futile to sell and buy back later as I may be hurting my returns.
As an investor, it is somewhat important to keep up with the economic news and know where the world is heading towards. However, you should not let any negative news affect your investment decisions and make you emotional. Keep out the noise and focus on business fundamentals. By focusing on the fundamentals of the company you are holding on to and by knowing the intrinsic value of the business, you will do much better by not selling off your stocks prematurely and hurting your returns. Keep a long-term view of your stocks of more than five years (as businesses take time to grow) and remember that “what goes down, must come up” (provided the companies are fundamentally strong). In the long run, earnings drive the value of a company and reversion to the mean will occur. The fear that is gripping the markets now will turn to confidence after some time and markets will rise again. Also, always keep some cash and don’t be fully invested, ever. Save up a certain percentage of your salary every month. This kitty will come in handy when valuations drop after a temporary negative news of the economy or your company.