Friday, September 23, 2011

Market Crash... buy more or cut loss?

Last few days, we saw the market having fun, crash like crazy, people panic selling like no tomorrow. Yesterday we saw US Dow Index down by 283 points, at the time I write this notes, it's down by another 350 points, Dow Index currently stand at 10,774. Many investors force to shake out in this volatile market with one of question in their mind, if the market go down further, should he continue to average down, or should he cut loss?
To a new investor, he will confuse, as many will suggest to “Cut Loss”, whereas, someone might say, no, it's time to buy more so that you can average down to reduce the cost. I think in order to do the right thing (let do not care if this's correct way or not), one must understand what's the purpose or intention when he bought the stock. Is it for short term speculating purpose? Or is it for long term investment purpose? Also, he may want to find out if the share he bought is mean for speculate or investing grade.
You should “Cut Lost” or sell first and think later if you fall under the below categories:
  1. Initially you just plan for short term to earn fast money, but something reverse happened.
  2. You can not afford to lost more that 5% of your principal.
  3. You believe the momentum theory which say that something hard to move, if move hard to stop.
  4. You are more to Technical Analysis which say that once the support line is break out, the share price will move down to next level
  5. You do not understand the company, don't know what they are doing, basically know nothing about their profit record, so better cut first and regret later
However, you can average or buy more if you believe the below:
  1. You have proper long term plan and strategy for investment.
  2. You are prepared if tomorrow market close for few months and you fund is stuck there and you can still sleep well and enjoy life.
  3. You believe people are fearful and you want to be greedy to buy cheap now
  4. You like the Fundamental of a company and it's a 5 star investment grade.
  5. You know the company well and have done enough home work which lead you to believe that their earning is proven, consistent and having room to grow
Every trade is a new separate decision, it got nothing to do with previous trade. "Average down" is not to be used as a reason to reduce cost. For me, if I bought a stock and it's share price went down out of my expectation, I will sell first if it's a speculate stock. Especially when I read the news on the Edge yesterday, one of the title read, "Swee Joo is to be delisted on 26 Sep 2011", just think if someone own this stock without cut loss at 5%, it will become a total loss now.
If the stock I bought is an investment grade, I will not cut loss. However, I will not average down either, instead I will use my investment style which I feel safer in the way, see my previous post, Buy when price down or when price up?

It's a waste of time to ask why the share price going down, as there are simply too many reasons. It's better to know your position, intention or purpose of investing and the condition of the target company.

Saturday, September 17, 2011

Do you like the stable market?

In natural science, the balance environment always see something like this:
Electron = Proton, or what we say, Positive is equal to Negative.
Similar in stock market, if nothing happen:
Buyer = Seller
In this case, technically the stock price will remain the same all the time. (this is boring ya, just imagine if a stock just remain the same price today, tomorrow or next year) Once a while, some kind of news will spark the imbalance, like what we faced in 2008, the financial crisis which caused few big banks to meltdown, making seller more than buyer. Sometimes, the seller became panic and want to sell stock like no tomorrow and dump the share price at what even price.
Recently, market seem to encounter the similar imbalance again. It's full of negative news every where. It remind me of one famous quote:
It's a mistake to sell something worth 1 dollars for 50 cents with the hope to buy it back at 30 cents.
It's also a mistake if you refuse to buy something worth 1 dollars which now sell at 50 cents because you believe that it will drop further to 30 cents.
It's definitely a mistake if you buy something at 1 dollars if it only worth 50 cents with the hope to sell it above 1 dollars.
It's time for value investor to act and use their wisdom again.

Tuesday, September 13, 2011

What cause the share price going down?

Every day, share price change up, down or stay side way. What cause the share price to change? In fact, nobody really know the answer, even the experience traders.
Some special event, like financial crises, those experience know share price will go down, but they can not predict how much it will go down and when it will end.

If you treat share as “goods”, most probably the supply and demand cause the share price to change. More buyer will create higher demand, then the price will going up. In the normal circumstances, demand = supply, hence share price will stay flat. In the event if the market is full of negative news, it create more seller, meaning supply more, the price is under selling pressure and tend to move down.

The funny thing is, share is not something necessity, it's not something everybody need in daily life. Today's buyer can become tomorrow's seller. If a country spark a war, everyone will become panic as because they only want to hold cash. This will hammer share price to become historical low.
There are many events such as politic, economy, investment opportunities available, currency change, company's profit and loss status, inflation and interest rate will give impact to share price. All these will give marks to a share price, be it positive or negative marks. Since every thing is unpredictable, hence, predict the market's moving is a waste of time.

Share market is a big ocean, it's full of jaws and crocodile, don't ask me who they are? They could be you or me or any business men. Times come, the business man would like to press down the price to force you sell him at low price. Some other time, the business man would raise the price to ceiling high in order to sell you at high price. Investor need to act like a business man, investment is actually similar to doing business, price is what you pay, value is what you get. Sell to others when the price is high and buy from others when the price is low. If you can do that, then your journey of life is full of gold along the way.