World Economy: Six Investing Pointers during a Volatile Market

Singapore, 23 Sep. The recent turmoil in the markets has left investors unsure what to expect and how to react. The six points in this piece provide a rational approach to

Singapore, 23 Sep. The recent turmoil in the markets has left investors unsure what to expect and how to react. The six points in this piece provide a rational approach to investing during such turbulent times.

1. In the short term, things are very volatile, yesterday (this morning, Singapore time), the oil spiked a record $16 jump in a day while the USD dropped and the Dow Jones Industrial Index sank – all this because people have doubts about Paulson’s plans being able to pass through Congress. This is quite the opposite of last Thursday and Friday’s trading session where everybody was euphoric about the banking rescue plan.

How should we think and react to the market conditions? I am talking strictly in terms of the stock market, not the overall macro picture and the global impact.

2. In my last article (World Economy: Market Troubles can be seen as Opportunities), I compared the current market conditions against historical valuations, this of course, is predicated on the concept of “Reversion to the Mean,” meaning that markets like a pendulum will swing between excessive fear and excessive greed. And this overreaction will continue to occur around an invisible line known as the intrinsic value, and in this case, of the markets.

3. Over 60 years ago, the granddaddy of value investing, Benny-G (Benjamin Graham, but I think Benny-G sounds more hip), wrote about the concept of Mr. Market. Mr. Market is a buyer and seller of goods and everyday he will knock on your door to sell or to buy your wares. On certain days, he is melancholic and will sell you at a cheap price, and on other days, he is very bubbly and wants to buy your goods at a high price. Every day he will knock on your door. Of course, you can either ignore him or you can indulge him. And unlike a real person at the door, Mr. Market won’t feel offended if you do not buy or sell anything from him. Benny-G’s analogy is quite apt to the current conditions; we do not have to react to the market, but we can take advantage of it if we choose to.

4. A whole chunk of investors out there are macro traders, so folks like Jim Rogers, George Soros and even the late old Sir John Templeton are famous for their overall big bets. They play gold, currency, industry sectors, and themes (housing, emerging markets, oil etc). Even with access to technology and access to good databases, I find that this is stacked against the smaller retail investor (i.e. me).

I am sure if I lose vast quantity of my MBA tuition fees to this macro market, I will still not gain an edge against the pros out there. A case in point: Why causes the price of oil to go up or down? One year ago it was because of China and BRIC growth, six months ago, it was the dollar that went down which caused the oil price to go up (since oil is traded in USD), three months ago it was because of oil speculators’ price gouging the market, and one month ago it went down because the US, as the largest consumer of oil, was going into recession. And then how do you explain yesterday (this morning) where price spiked to $122 (from $91 last week) with the news of maybe the Paulson’s 800billion rescue package not going well ?

5. Rather than look at the macro picture and then try to spot themes in a top-down approach, it is perhaps a more interesting and rewarding to go via a bottom-up approach to pick individual stocks. The bottom-up approach involves actually doing homework like studying the financial statements, looking at business model, and then making an educated guess on the intrinsic value (not the share price!). And then once you have identified a basket of good companies to buy, wait.

6. So to take advantage of Mr. Market, I will compare my list of great companies that I want to buy against the current market price, and buy during time of great market distress. Will the price continue to fall or is it possible to time the bottom? Well, most of my buys do fall, and some will fall harder because of deteriorating business metrics (call it a permanent impairment); however, most of my stocks will rise over time because I bought them cheap.

Hopefully investors can learn from these tumultuous market conditions and come out all the wiser, and who knows, maybe richer.

Felix Eng, Independent contributor