Wednesday, October 22, 2014

Bear market will make you rich

We are into the final week of the October month and it seems forever since we last had such a volatility in the market. The month of October has historically been the most volatile month for stocks (such as the 1929 crash, credit crunch 2008) and it has proven itself right once again, at least this year.

I remembered the time I was in Spain while watching the Dow dropped over 400 points in a single day and I was watching the STI stocks dropped quite a bit as well, especially for oil and gas related (Keppel, Sembcorp) and commodities stocks (Wilmar, GoldenAgri). The brief correction keeps quite a number of people on the toes for quite a while, some panicking while the others are excited about an opportunity to put their investment funds to use.


Personally for me, I was hoping for a correction for sometime now. I see the stock market as a cycle where it goes up and down and it is only healthy that it did what it does because it will reverts back to the long term average mean, which keeps going up over time. Sure, my net portfolio worth might goes down during the correction, but having a cheaper market means I will use lesser funds to buy the same stock that will yield a higher dividends in terms of percentage returns. And to be honest, when you set yourself for financial independence, all that matters to you at the end of the day is cashflow cashflow cashflow, not networth.

Take a classic groceries example for a second. You had $100 to spend on groceries for the weekend to buy a couple of meats, fruits and some snacks and drinks for the party. Now, assuming that the supermarket is holding an anniversary and are dishing out discounts to the items you are buying, should you be happy or sad that the worth of your meats and snacks are now lesser than before? Of course, you would be ecstatic as it either means that you can buy more items with the same $100 or you can buy the same number of items with lesser amount of money. Fantastic either way if you ask me.

Here's the truth, a bull market will bring butterflies to your stomach and make you feel good on the outside but a bear market will make you rich over time. My plan is to reach financial independence by the time I am 35 years old and it all depends on the amount of cashflow I would have at the peak of the journey, so the longer the bear market persists, the faster I am going to reach my financial independence, all caveat taken. So while most people are worried about their portfolio, why not take the bear market as an opportunity to increase your exposure accordingly, focus on the business and reach financial independence earlier?

33 comments:

  1. Agreed! People closer to reaching their end of their journey might need to worry more about bears and protecting the gains that they have accumulated over the years. However, for those of us with a much further end point, a bear market is good for us!

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    1. Hi GMGH

      It appears that if we want to stay in the game we would be susceptible to these ups and downs. For those with plenty of time on their side this can only be a win win game.

      Delete
  2. the part about cash flow is very true.

    a person which lots of assets but no cash flow can only do that much unless that asset is unlocked to release the cash.

    as for bear market investing, it might get too scary for those to go in as in 2009 time, when no one knows where the bottom is and not willing to take the risk. The few brave souls who dared to take the plunge are richly rewarded for their bravery.

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    1. Hi Paul

      Thanks for visiting.

      You are right. We live by cashflow on a day to day basis so the amount of asset networth is only there to make us feel good but they are generally quite useless in other sense.

      A bear market is indeed scary but if we focus on the business there is no doubt that the stock woukd revert to the mean one day and it will be higher.

      Delete
  3. Hi B,

    Very true. Unless the fundamentals of all the stocks you hold changes all of a sudden (very unlikely), the revenue/profits are unlikely to permanently get reduced and thus, the dividends we receive will not reduce significantly. Helps in getting that peace of mind. =p

    Bear markets can make a person rich, especially if he has plenty of cash in reserves and brave enough to utilise it at the right time. Many doubled their holdings from 5 years ago.

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    1. Hi 15hww

      Fret not too much. Our portfolio networth might go down but it doesn't affect us in any way at all. If any I am now using lesser money to buy the same stock I owned. Perfect scenario.

      Delete
  4. Very true and that's the importance of holding enough war chest to take the opportunities...

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    1. Hi Richard

      Warchest are a very important tools. Salary and dividends can play as warchest as well.

      Delete
  5. Yes! It can.
    But for those after buying can't wait or don't have the capacity (cash flow) for the the market to reach the the other extreme boiling point, have to think twice. And who knows how many years that will be. 4 to 5 years is considered short. But i always sell too early one (kiasi ma).
    Especially for people like me (no HC anymore) has to be very careful about sustaining cash flow after investing in Bear market.

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    1. Please hoh! Bear market is still far ,far away. Unless a "Black Swan" suddenly appears.

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    2. Hi temperament

      Hahaha you're right. We are no way near anytime a bear market. But I would love at least a correction to come first, built up some dividend payer companies to give me more cashflow.

      If I am at a certain age I would probably want more fixed income to sustain myself. Stocks are roller coaster ride it can give us heart attacks sometimes.

      Delete
  6. What if your port folio values halves.. assuming a 5% yield you have to wait 14 years just to see ur money back

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    1. Hi anonymous

      I think youre getting it wrong.

      You are still concerned regarding the value of your assets while yield drops accordingly. In a scenario like that the yield usually increases so in real terms you wouldnt be that far off, assuming you can add them to your portfolio further.

      Delete
  7. the recent correction was a really good time to pick up stocks, especially solid blue chips like Kep Corp and Semb Corp which were trading at like 10-12 times earnings only
    like what warren buffett says, be greedy when others are fearful
    be a happy shopper when stuffs are trading at 5-20% discount ^_^

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    1. Hi Felix

      Ahh blue chip favorites keppel and sembcorp. I hvnt been able to add them but hopefully market drops will present an opportunity to add them soon. Happy Christmas 2014 this time.

      Delete
    2. Hi relix,

      That's the danger of investment, you have understand the macro economic factors impacting your companies before investing.

      Semb marine and kep Corp are facing a change in oil industry - us shale oil which permanently may cause the oil price to remain low.

      This is the underlying factor impacting oil rigs stocks....

      Delete
  8. Hi B,

    I guess there is two view points of a bear market. I personally have lost 5-figure sum during the 2009 GFC, yet I am eagerly hoping for the next correction to come around so thay i can buy more with less.

    It hurts to see your fortune dwindle in a bear market, yet i have accepted this is part of the game. Investing is all about taking calculated risk for that potential gain.

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    1. Paper loss or realized loss of 5-figure sum?

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    2. Realised loss. Because i needed the money to buy my house.

      Delete
    3. Hi S Reit System Investor

      Ahh 5 figure sum ouchh that youve got to realize losses like that.

      I think its inevitable that at some point my portfolio would suffer a 5 digit losses given the size of the portfolio but hopefully I wont be needing the money then and could add to them.

      Delete
    4. Good sharing and learning points for newbies.

      For Richard's Warning Signboard:

      Do Not Invest Those Sum of Money Which May Be Needed in 5 - 7 Years

      Delete
    5. Oh dear, my sympathy S-Reit System Investor.
      May i share i had lost at least twice 5 figures sum but don't offer me any sympathy. Why? Because i KK. i only can thank my GOD it's money i had made from the market.
      Now may be you know why i have such signature in VB.
      Go and read about my postings in Valuesbuddies.com

      Delete
  9. Good post but I do have to highlight two points which I feel are missing in providing a complete and well-rounded picture.

    A bear market only helps you to grow your wealth if you choose the right companies (emphasis added). Remember that it's no point averaging down on companies which do not have a competitive moat and may probably die out in the next recession. Similarly, we should also be careful of companies where too much optimism has been priced in, and when the share price collapses, you end up just paying for "baseline expected earnings". Growth would then only come from the investment return (i.e. growth in earnings and cash flows) and not from the speculative return (from an increase in multiple). Getting this wrong can be disastrous as you may never have sufficient margin of safety.

    Another point I'd like to make is that of dividend yield - suffice to say that during a bear market, most economies would be suffering from deep recessions at the same time (which is what precipitated the bear in the first place). Companies would mostly likely cut their dividends or eliminate them altogether. Therefore, it is not a given that a falling share price signifies a super-normal yield, as the absolute dividend would fall along with the share price, meaning that the market is already implying that cash flows may drop off a cliff. Falsely using the historical dividend as a guide to purchasing and expecting a supernormal dividend yield would lead an investor into serious trouble.

    Hope these are valid points.

    Thanks.

    Regards,
    Musicwhiz

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    1. Hi MW

      Thanks for adding your input.

      It's definitely a valid one. A stock that goes down because of the macroeconomic reasons may be different from the stock that goes down because of its own fundamentals. Sometimes, they can be interlinked and not so clearly defined, so investors can be confused and mislead.

      Dividends might drop because of the relatively poor earnings in that particular year, but tying back to the first point, if earnings do go back up when economy improves, then it will not be a worry for investors.

      Delete
  10. This comment has been removed by the author.

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    1. Sorry amendment.

      Perhaps that is why no financial authors recommend Pyramid down buying in a Bear Market, only Pyramid up.
      i admit i have not done Pyramid up in a Bear market. It is against my psyche.
      Actually i think all the financial authors are correct. Because at least you escape catching the falling knife. And most important the companies that never going to recover after the Bear Market. The worst case companies that go kaput.

      Delete
  11. I am looking forward to the coming bear market. It is the kind of pivotal lifechanging moment that you would look back upon in a decade and say damn I'm glad I did what I did buying all those cheap assets. Personally I believe it could be the ticket to retirement, if you load up aggressively on equities, about 2 years after the crash. I'm sitting on cash now waiting to do some serious portfolio work when price action has bottomed out and the market stops sliding, and begins to grind sideways. When our generation hits our 40's, what we do in this next recession will be what sets us apart from our peers.

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    1. Hi Ladykiller

      Those who have enough warchest is keeping their finger cross on a bear market ;)

      An opportunity is hard to come by :D

      Delete
  12. hi B,

    thanks for the good posts you've provided on your blog all this while. enjoyed the insights and the useful DYODD advices you have given. im just wondering about how the end of QE3 which shld come anytime now will impact the market overall. does it signal the beginning of the end and does that mean i shld probably wait later to collect trusts and reits at a more favourable price?

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    1. Hi anonymous

      As I was replying to you today the fed has in fact ended qe purchase. The market seems to be taking it positively as it signals a better economy than before. Reits hv shoot up quite a bit in recent weeks so you may want to play out between the sensitivity to each basis point of interest rate rises that has impact on the reits bottomline. Some reits hv a more fixed rate attached to their debt so it works out better for them.

      Delete
    2. hi B,

      thanks for your reply! correct me if im wrong as im still quite noob at all this. so that means if supposing the company has a debt due 2017, does that mean the company's debt interest rate will not be affected at all until 2017?

      Delete
    3. Hi Anonymous

      If the company's debt are in floating rate, then it might impact them when interest rates start to go up. Also, gearing (debt/equity) might also be impacted when the value of an asset goes down.

      If the company's debt is due 2017, it means their loans will mature by then and they will have to find ways to refinance after that.

      Hope it helps :)

      Delete

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