Posted by: fathersez | December 12, 2007

“Horrors! Dow Jones dropped 300 points!” or should it be “Hooray, Dow Jones dropped 300 points” – An opportunity to stress test my investment philosophy

My stock investing skills and past record may be classified as a tad better than “losing my pants or taken to the cleaners.”  

The last couple of years, however, I have tried to instill some discipline and have enjoyed better results. However, these last few years have also been exceptionally good years for stock markets in general.  

I do not want to be lulled into the dangerous state of mind that I am a clever investor, and the recent stock market gyrations have given me an opportunity to sort of stress test my investing philosophy.  

The saying that when the DJ sneezes, the world gets a cold is true, at least in our part of the world. As I write this, our Malaysian Composite Index is down almost 1%. The Japanese Nikkei has dropped by 1.85%. 

Some time ago, I had written down my investment philosophy. As usual, this was after reading some book which motivated me, I think it was the Intelligent Investor, with parts from other books. 

I relooked at this, which goes :- 

a)    Value Invest – Buy when values are below intrinsic values, and sell when it is clear that values are overated,  

b)    Do not go against the main trend,  

c)     Always keep 30% cash in hand, 

d)    Never try to time the market and 

e)    Always buy with a margin of safety. 

Notice that I have not written anything about diversifying and all that. Well, like I said, I am a novice. 

Then I refreshed myself with some statistics. CNN listed the DJIA’s 52 week range as being from 11,939.61 – 14,198.10, a spread of 18.9%. Yesterday’s close of 13,432.77 had brought it down 5.39% from the high. Giving up about 30% of your gains, does not seem all that bad to me. 

I went through the history of the DJIA. Its biggest one day losses by points as well as percentages, reactions to world events, reactions during recessions etc. Yes, there are down years, but the long term trend is up. 

Then I read again, the famous reassuring story of Mr. Market, by Warren Buffet. 

What is going on in my mind now? 

1.                The main trend for the US may not be all that great. I cannot fully understand, why the bad mortgages given can result in so many billions written off by so many banks, and the “experts” are saying that it is still not over.  

2.                I do understand that the US is the world’s biggest customer, and the good old US population loves to buy things, even if they have to borrow. They can’t keep on borrowing and buying forever, though. 

3.                China, India and other countries like Vietnam are showing a rise in the growth of their middle class and adding a lot more customers to the equation. 

4.                My stocks whilst they are not amongst the bluest of the blue, were not exactly bought based on tips by my mechanic. I did do some research on the stocks before I bought them and I believe that the companies bought have reasonably sound business models whose revenues should not collapse in the event of a US recession. 

5.                I have no idea how the markets are going to react tomorrow, or next week or next month. Neither do I know if the US is going to go into a recession.  

6.                I do know that markets may rise, markets may fall, but the ultimate trend is up.     

So what should I do? 

1.    Am I losing sleep over my investments? This is a great test. I liked the way the Simple Dollar articulated his thoughts on this. Though there were a busload of comments for and against this, my stand is if it makes me lose sleep then I get out. Right or wrong, time will sure tell me. 

2.    Should I ask someone what to do? No, I have given up on this long ago. I remember vividly one of our local newspaper’s story quoting a Malaysian expert who had said that we should all buy stocks now, as they were “really cheap” or something like that. The next day, which was when the story hit the streets, stocks were given a pummeling like what my generation had never ever seen. 

Secondly, the huge Banks and brokers who are writing off gazillions in losses now, should have had more than their fair share of experts and “tools”. Look at where this got them.  

And thirdly, I must express my thanks to I Paid for this Twice Already, who expressed very succinctly my feelings on this. 

3.    There has been a huge amount of wealth arising from the oil prices boom. All these money should be looking for places to invest and things to buy.  

4.    Will I be able to live with the downside? If the markets plunge tomorrow, what will happen to me? Will it wipe me out? No, I think not. I may be walking around like a bear with a sore head, but I’ll live. 

I’ll wait and watch, and keep reading the blogs for the latest.  

PS:  The unit trusts (or mutual funds as some may call them) are left alone, and regularly invested on a “dollar cost averaging basis”. This post is only about my investment in individual stocks.     

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