Don't dig a bigger hole! (2)

Further to my first article on the above topic (http://fusioninvestor.blogspot.com/2008/10/dont-dig-bigger-hole.html), I have received several email comments and replies, but there is one email reply which stood out in its length, with thought-provoking contents, and may be interesting to retail investors, that I would like to share with you (after receiving the author's permission last night).

Please feel free to leave comments at the end of this article, or the chatbox, although, leaving a comment at this article would allow the original author to check the comments later.

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Seng,

I came across your blog accidentally and noticed one interesting topic, “Don’t dig a bigger hole!” I do agree with some points but not to others. Let me share some of my past experience, since I have went thru 1 bull market (1992-93), 1 bear market (1997-98) and recently bull run (2006-08). The question of digging bigger hole or not is all depend on which counters one buying or plan to buy. Record shows that at least 25% of company listed on bursa disappear after 10 to 15 years. Counters like Taiping, Tongka, Omega, Yaohan … and many others which famous at one time all disappear from Bursa today. So those own these kind of co. if not cut loss, had been making very severe loss.

However, if one choose a solid co. and have some sort of monopoly and can be sure that it will continue with it’s business for next 10 years, then the current weak sentiment would be a good time to buy. I will choose TNB as one of counter for this discussion. The reason why I choose TNB is because I have full history record, beside it meet above condition and also my friend was ex TNB staff who bought with Pink Form (IPO).

I was a Dealer during 1992 bull run market. Market was so hot until KLSE reach 1200 – 1300+ in one year time. TNB surged from $6.50 (IPO $4.50) to highest record of $20.00. Then suddenly one day it drop to $15.50 and I advice my friend to sell, but he refused as market rumours it may rise to $25 again. One week later, TNB closed at $10.00. (if one sold at $14 or $15 will consider good deal) My friend sold his TNB at $8, three months later after market drop significantly. However one year later, TNB trade between $7.00 to $10+ and this seem that the decision to sell at $8 was not good deal.

There was one client (Mr L), who started to buy TNB at $9.00 (only small portion). When TNB drop to $8.00, he bought some more. When it drop to $7.00 he bought again but with more lots than before. That time I don’t understand the pattern of this buying method, but later noticed he actually use Cost Average Down method. On 1994 to 1995, people seem to forget about 1993. TNB up to $12+ again and Mr L disposed all TNB after holding for 1 and half years. The question here, is Mr L buy at $9, $8 & $7 consider digging hole?

Now we look at 1997, it all started with currency crisis. On one day morning, rumours came from Thailand and spread over to all Asia countries. During that time, we noticed a group of fund managers start to create panic environment in the country by keep on selling and caused KLSE comp index drop 40 to 50 points in 2 days. We as dealer know what’s happening and their intention. One week later, market started to feel the panic and fall ever more. Add to the worse, Ringgit kept on falling against USD. Some of our clients were so panic, worry and start to dump shares at any price available. One of my clients called and ask if value of share can fall to Zero?

TNB started to fall from some where around $10+. Some clients start to collect at $8, some at $7. One month later, the closing price was $6.50. Then Mr L started his buying order at $6.50 with minimum lots. Some clients who started to buy at $8 or $7 start to give selling order. Still recall, I was told by them that they want to cut loss, as the market not moving in their favour. This was a very funny situation, you know, as a dealer, we saw someone buying and someone selling the same counter. Of course, I can not tell them Mr L started to buy, don’t sell. After all, we want more business to earn commission.

The following few months, Mr L continued place “buy till done order” at $5.50, $4.50, $4, $3.50. The last order I received was Aug 1998, where he put buy order at $2.50 and it was done with $200K, the most compared to previous order. On 1 Sep, 1998, ex PM Mahathir announced several action and economy stipulated package, including peg Ringgit at 3.80 / USD and arrested Anwar. Market suddenly reversed and surged 100+ points. TNB also surged from $4.50 to $5.60. The following day, it closed at $6.40. Very few clients who cut loss earlier bought it again at $2.50 or even $4.00. Also, they have no chance to buy back as the market turn was so unexpected and fast. Question here, is Mr L digging hole? Or if he did not do that, he had no chance to buy at $2.50 as none of us know when was bottom reached.

I am not sure what’s the trigger point for Mr L to buy at $6.50, in fact, I did check with him, but he say it’s just 6 sense. But base on the previous price, seem he actually started to buy when price fall below 50% or more, with Cost Averaging Down. On 2001/02, Mr L, started to disposed TNB with price range $10 to $12 after holding for 3 years plus.

Actually, among all clients who actually making money was less than 10%. Most of them are traders, especially day trade. We like those traders but don’t like Mr L, after all, Dealer want to earn commission as well. But Mr L seem to be in the top list and he do it in very relax way.

All the above happened 10 years ago and Mr L had agreed for me to disclose the above matter to others. However, don’t ask me if Mr L start his buy order today, as this is private and confidential. (Last week we noticed Warren Buffet made announcement say he started to buy America stock, I am not sure what the intention. If you announced to public that you intend to buy something, would you still get it cheap?)

The current market situation is more or less similar to 1997’s financial crisis except it trigger by US. The different I can see is More Internet Trading compare to 1997 and our Interest Rate did not surge to 11%. Also, now Composit Index Counters allow Short Selling and the change of political climate, which I think may give certain impact to overall market.

In the extremely bearish market condition, one should buy low and later (2 years or more) sell with handsome profit. If one would to follow Mr L, he must choose the right company. But we may not know when’s the bottom, that the difficult part, even TA is also hard to tell. The 1997 bear, we saw KLSE closed at lowest of 200+ points. Or one can wait till TNB fall to $2.50, but we don't know if this can happen or not.
Just share my thought.

Cheers!
V

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My quick comment:

My guess is that Mr L is probably not the typical chatbox "chatter" who chats here everyday, glued to the screen the entire day, and plays intra-day / contra.

For such a person where trading is not a full-time job, the risk of being out of the market when the stock market recovers is greater. The Asian Financial Crisis recovery was relatively fast, and if you hesitated too long, you run the risk of missing the upside move. Also retailer psychology is such that when the current price is higher than the previous low price, majority will hesitate. That hesitation is normally costly.

However, as a TA practitioner and student of past charts, there are always early warning signals for example, when one looks at the daily candles. You won't catch "the bottom", but you should still be able to catch say 40%-80% of the uprise depending on your skill and level of monitoring. This assumes an above average trader psychology too.

Mr L's approach is an investing approach with little monitoring. It is unclear if all his stock investments is in just 1 stock (TNB), or is diversified. It is unclear what proportion stocks are to his entire net worth. I seriously doubt someone like him would have put his entire net worth into just 1 stock, nor would I consider the latter a prudent practice. It is important to note that when you bet on just 1 stock, the choice of stock is super-critical, unless you don't mind losing money over a prolonged period. And the psychology of that investor, having first bought at say $6, only to see it drop steadily to $5.5, $5, $4.5, ... and finally down to $2.5 ... and still not panic ... - do NOT under-estimate what sort of mental toughness is required to see this happening on a daily basis, especially when we see our $1 million investment shrunk to just less than $0.5 million for example, or $10 million shrunk to just $5 million ... etc. These sort of mental toughness probably does not exist in abundance, although those who has made it to millionaire status and beyond would most likely have undergone similar test(s) to their mental toughness previously.

The author's letter contains many interesting snippets such as "Record shows that at least 25% of company listed on bursa disappear after 10 to 15 years. ", and "Actually, among all clients who actually making money was less than 10%. Most of them are traders, especially day trade. ". Personally, I haven't done the statistical studies myself on Bursa, so, treat these as "anecdotal" for the moment.

There are other parts of the article that is worth commenting, but as time is short, and trading is about to commence, perhaps we can discuss later.

Again, I would like to take this opportunity to thank the author for sharing.