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How do I view the plunge in the DJIA and what is my plan?

Sunday, January 26, 2014

With the recent plunge in the DJIA, some could be feeling unnerved. Unless these people have invested with money they could not afford to lose, there is no reason to feel uneasy or is there?

Well, you know what they say about a market climbing a wall of worries and going down a river of hope. In plain English, it simply means that nothing goes up or down in a straight line.

After hitting a high of 16,576 on New Year's Eve, the DJIA has plunged to 15,879 yesterday. That is an almost 5% retreat. Now, a correction, by definition, could see the index retreat by almost 20%. More than that would be bear market territory. So, 13,260 on the DJIA? Wow!

Intuitively, it seems to me that there would be support at the 14,700 to 14,800 level.  That is about an 11% retreat from the top. Of course, this is just my bowling ball talking to me and it could just be another gutter throw. Always dreaming of strikes, I am.

Let us come back to Earth and see what this tapering business is doing.

Well, it is going to reduce the rate at which liquidity is being added to the economy. Notice that there is no tightening yet. Very important. There is still more money being added into the system but at a slower rate. So, to say that liquidity in the system is being reduced is incorrect and alarmist, even.
Then, there is concern that China could be experiencing an economic slowdown and this is also not something new. Plenty of Chinese GDP growth is from a red hot property market. It has been said that this is probably unsustainable.

However, the Chinese government has plenty of reserves and is able to do a lot more, if required. In fact, they just injected more money into the system last week.

Of course, people are also concerned about interest rates rising and, maybe, rocketing through the roof. Well, it could happen one day but it won't happen in the near future or for a considerably long period of time.

The Fed has indicated that interest rates will be kept near zero for an extended period unless it sees much higher inflation. We have to remember that the U.S.A. has a gigantic public debt burden and higher interest rates would make debt more expensive for them to service. Why would they want that?
Now, if we scale down and look at businesses, do we foresee companies operating as usual? Or do we see them going bellies up? I am sure that some businesses will suffer and talks of how property developers are having a hard time have made their rounds. However, it is also noteworthy that property developers have much stronger balance sheets now, generally. They might not do as well as two years ago but they would certainly still be in business.

Of course, there will be businesses which will still do well, tapering or not. Will the government cancel the plan to double the MRT lines by 2030? Will people stop consuming sugar and palm oil? Will people stop using their credit cards? Will the banks stop lending money? Will companies stop renting business spaces, industrial or commercial? Also, will people stop eating curry puffs? OK, I couldn't resist the last one. My bad.

These are just some questions that I randomly generated and I think it is safe to say that businesses will still be chugging along. A bit slower or a bit faster, they will chug along. Those with competitive advantages or which are experiencing an upswing in their business cycles will probably do better.

However, the same could not be said for their stock prices and this is where we have to remind ourselves of the difference between value and price. As stock prices fall and values remain unchanged, the stocks are becoming more attractively priced.

So, all else remaining equal, a correction is good for investors. In a nutshell, we get to buy more for less.

Of course, the next question is when should we buy?

All of us want to buy at the cheapest. Who wants to pay more? However, I will be quite happy to buy cheaper and, if possible, much cheaper. If I managed to buy something when it was at its cheapest, I would have to give thanks to the Goddess of Mercy or Tua Pek Gong. Maybe, to be safe, I should just thank both.

This is where a little knowledge of technical analysis is useful. I would use it to help decide on entry prices. Very importantly, remember, it is about probability, not certainty.

For example, I believe that banks will do better in an environment where interest rates are higher. So, a correction in their stock prices could see supports tested. Where are the long term supports for DBS and UOB, for examples.

The 100 weeks moving average for DBS is currently at $15.40 and for UOB, it is at $19.80. So, if we should see those prices tested, I could buy some. Some, yes. Pace ourselves. Don't throw everything in, including the kitchen sink. What if the supports broke?

Of course, if we should ever revisit price levels seen during the Global Financial Crisis a few years ago, I hope I would be brave enough to throw in everything, including the sinks (yes, why stop at one) and, maybe, the bathtub (which I do not have). In case you are wondering, chances are I won't be brave enough. Just being honest.

Things could change in the future and it could be things that we have no control over. What is the point of worrying about things like that?

Know your own circumstances and your own abilities.
There are many ways to cross the seas.

What we have control over is to ensure that our investments are fundamentally sound and that they will continue to do what we expect them to do. Since I am primarily invested for income, with a shopping list in hand now, I am quite happy to be paid while I wait.

Related posts:
1. Have a plan, your own plan.
2. When to BUY, HOLD or SELL?
3. Be comfortable with being invested.
4. Be fully invested in the stock market?
5. What should I do when I am down 25%?
(If you can't convince yourself "When I'm down 25%, I'm a buyer" and banish forever the fatal thought "When I'm down 25%, I'm a seller," then you'll never make a decent profit in stocks. - Peter Lynch)


Musicwhiz said...

There is always something to worry about, so why fret? If we don't take a long hard look at the businesses we own, then I'd argue that one should start to sweat under the collar. Valuations going lower means that a buyer of long-term values would stand to benefit. That's not a bad thing as most of us will be net buyers during our productive working lives until we decide to retire.

By the way, I think a correction is defined as a 10% draw-down while a bear market is defined as 20%.


AK71 said...

Hi MW,

Yup, a 20% plunge in prices would be considered bear market territory. Anything less is still considered a correction.

So, I said "a correction, by definition, could see the index retreat by almost 20%. More than that would be bear market territory." No?

Looking forward to more comments from you. Always a pleasure. :)

E H said...

The perfect storm in the coming weeks?

1. Feds meet
2. ICBC lets China Credit Trust fold
3. US debt ceiling

I dread to see what happens...

Ben said...

You mentioned DBS and UOB? Any thoughts on OCBC?

AK71 said...

Hi E H,

Bad news are a value investor's friend. No? ;p

AK71 said...

Hi Ben,

I left out OCBC deliberately because their bid to buy a stake in that bank in Hong Kong is going to be very demanding on their resources. I am not sure that they got the timing right too. When in doubt, I stay out. :)

Ben said...

I think many people think the same way too. Thanks for the reply AK!

AhJohn said...

Peter lynch speech (Chinese version), good to remind myself what can make money.

AK71 said...

Hi Ah John,

I didn't know there is a Chinese version. Haha.. Thanks. :D

Tien Song Chuan said...

Yes. Old Chang Kee share price did quite well recently. Congrats!

AK71 said...

Hi Tien,

Thanks. :)

I guess the very low liquidity has got something to do with it too. People who want to own the stock will have to buy up as hardly anyone wants to sell.

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