bsngpg

1. Review your capital allocation.

3. Are you prepared to buy the bargained deal?

2. Unwanted risk minimization. Can you sleep like a baby during major market crash?

In my case, points 1 & 3 are very real and practical, however I just cannot achieve point 2. In my opinion, whoever can sleep like a baby during a MAJOR mkt'g crash is not really involve actively in equity investment. An active investor would not be spare from any MAJOR crash. A rationale people would not sleep like a baby when mkt value have been halved, unless he is a saint. Maybe I am too ordinary and live in a small dwell, do not realize that there are many saints in the mkt'g. What do you think?

2015-05-07 20:40

lyo82

As my humble opinion, point 2 is actually related to point 1. An active investor is unnecessarily equivalent to someone who pours all or a large portion of his capital into the stock market. When market is doing well, of course everyone can sleep like a baby. Nevertheless during major market crash, a true value investor can still sleep peacefully, and to certain extent, happily--knowing that there are sufficient bullets(capital) for bargain hunting.

2015-05-08 01:18

bsngpg

Thks for the good comment.
My comment is based on my ACTUAL experience and my understanding after frequent reading and observation on surrounding investing community. Maybe I was wrong all along and I should one day jump out from my conformable well, and open up my mind about investment. Good luck.

2015-05-08 05:44

contemplator

I am very happy to see the comments from value investor. I am not a pro, I am just sharing some notion from the books I read. I can be wrong but I am willing to learn more new things.

Bsngpg: point 2 is risk minimization, it actually relate to the stock you pick. If your stock earned 50% more profit while the market crashed, will you sell your stock, will you panic? If my stock have solid rock financial position and earning power, I will just sleep like a baby.

The volatility of stock price don't not correlate with the value of the price. Value investors harness this discrepancy for margin of safety and profit (buying undervalued stock). Temperament control is very important for value investor and often the most difficult part, in this case i urge you to see the some youtube of Mr Charlie Munger about what you should do when the stock price dropped 50%. Don't forget to visit CM's Human Misjudgement article also. Reading does pay off.


Eg: will you buy TNB if its price dropped to a PE of mere 7? or vice versa.


About volatility, what Mr Warren Buffett wrote:
Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however,
currency-denominated instruments are riskier investments – far riskier investments – than widely-diversified stock
portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That
lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for
risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from
synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray.--BH Annual Report 2014.

If you know some of your stock is too risky-- chance to loss is greater than chance to profit or the magnitude of profit is too small for the risk, you should readjust your portfolio. Chance to get huge profit is when the risk is smallest. The risk-profit graph is not linear: a visit to Howard Marks's book (Co-Chairman of Oaktree) of is recommended.

PS: if i use margin to buy stock, i can not sleep like a baby no matter the market crash or record new high. Debts are cancer to your profit.

2015-05-08 10:46

contemplator

Lyo82: thanks for your comment. I agree with you.

In Warren Buffett's last 2 years letters to shareholder they pointed out that keeping too much cash is also a risk as what imposed by devil inflation.

In this article i do not say crash will happens soon. It will happens through. Wise capital allocation is warranted yet it is difficult. We have to calculate the proportion of cash to be kept in relation to risk of inflation and risk of staying incumbent.

I again want to promote the Intellegent Investor:
Prudent investor should revisit chapter 8 and 20 of The Intellegent Investor, I found them highly useful and enjoyable (many times)


The wisdom inside thrills me, tremendously.

2015-05-08 10:55

Kevin Wong

haha, investing is for the optimist and those who believe that markets over the long term...can only go one way, UP!
Or for those who ignore general mkt trends and sentiments...just concentrate on quality/growth/dvdnd/win names instead of trying to time, forecast, outsmart...mart.

Those who tries to predict market tops, will also try timing mkt bottoms too. Thus instead of buy low sell high, they instead ended buy high and sell...

For it is written, ""Those who observes the wind shall not sow, and those who regard the clouds shall not reap"".

2015-05-08 10:55

contemplator

Bsngpg: not all the investing community will sleep like a baby, it never will. Especially the one who use leveraged method to buy stocks, price dropping of 50% will make them sleep like a dead one (and they will actually hope they never get up).

Market is never efficient. (World is never fair also). That is central reason why value investing exists.

An add on to the risk minimization:
Notion from Howard Marks, you should analyse the inherent relation of the stocks you hold. During crash they may have the relation that make all of them crashed together.

2015-05-08 11:05

contemplator

Cash flow of this company? what is its gross profit margin, net profit margin, ROE, Current ratio, financial stability, owner earning, microeconomics, DCF value, reverse DCF value, integrity of management, how the business will be in next 50yrs? They are my sleeping pills during market crash

2015-05-08 11:10

speakup

what Rainy day? i only see Sun :-)

2015-05-08 11:44

NOBY

how (just like i repeat this sentence before). You need to:

1. Review your capital allocation. Have you prepared for a crash that will happens tomorrow? Is your cash reserve enough? Do you have appropriate temperament control whereby some of your holdings will have their face value halved?

How much cash should one hold in the portfolio ? Sometimes we must set a strict limit on this, not try to venture into investments that are we do not fully understand for the sake of making the cash work harder.... I have problem in this area... simply cannot keep the cash available in times of crisis.

2015-05-08 11:51

contemplator

Kevin Wong:
Or for those who ignore general mkt trends and sentiments...just concentrate on quality/growth/dvdnd/win names instead of trying to time, forecast, outsmart...mart.

Agree with you!

2015-05-08 12:37

contemplator

NOBY: in my opinion, no strict rule on that, but cash is essential for investor indeed. I will stay in my own circle of competence only, even that my money also not enough.

Capital allocation is very difficult and Warren Buffett is a master of capital allocation.

In my opinion, a value investor will buy the value stock with durable competitive advantage at discounted or fair price regardless of the S&P or KLSE. The amount of purchase, you will need to determine yourself. WB says that buying a stock is like taking a swing in baseball game just that you have the advantage of letting the ball pass. The magnitude of swing you should determine yourself.

All is about your calculated intrinsic value of the business and compare it with the price on sell.

You should calculate the risk VS benefit.

For my personal view of cash preservation:
1. I must have an emergency fund reserve (cash of course) that can cover my expense for 3-6 months (if i lose my job or a medical emergency arise etc)

2. I will maintain about 30% of my investment in cash form. It is not strict rule, however, because i will buy the stock if i found them undervalued. If I don't have 30% of total investment in cash if tmr market crash, I will get depressed.

Keep massive cash with low dividend will undermine its purchasing power due to inflation through.

Warren Buffett can decide 20 billion of deal in few minutes (in cash of course, not credit card), HOWEVER HE WILL PREFER TO HAVE HIS CASH SPREAD ON TABLE IF THERE IS NO GOOD DEAL IN MARKET.-- this refer to temperament control too.

3. Be THRIFTY. Do you know Warren Buffett has a car plate with name "THRIFTY" in his office?

4. Avoid nonconstructive loan. Never leverage to buy stock.


History should repeat itself but i also want to repeat (with an old man's tone): that a visit to Intellegent Investor's chapter 8 and 20 will pay off perhaps more that what i share here).

2015-05-08 13:07

contemplator

History should repeat itself but i also want to repeat (with an old man's tone): that a visit to Intellegent Investor's chapter 8 and 20 will pay off perhaps more that what i share here).

PS: not perhaps but definately more than what i share here.

INVESTMENT IS MOST SUCCESSFUL WHEN IT IS MOST BUSINESS LIKE-- Benjamin Graham

2015-05-08 13:53

Kevin Wong

I believe small investors should adopt the fully invested or be at least almost fully invested at all times method. If $250k is allocated in their stock portfolio, they should be buying monthly or quarterly until fully stock up within 25 months or so. Then they should stay invested for at least another 15 years. If they in their opinion spot better prospect names after been maxed up, can always replace or reduce their holdings to make way for that counter.
As for me, i'm fully invested since 2010.

What work for me may not for you, and vice-versa. No right or wrong, so long one is happy, harm nobody and $$$ coming haha!

2015-05-08 16:52

contemplator

Mr Kevin... Appreciate your sharing. I sort of agree with you... Different method of capital allocation should suit different types of investor well. As Charlie Munger said: avoid the man with one hammer syndrome.

2015-05-09 16:17