Tea with STE: How I stage and apply my war-chest in current volatile market.

This is another guest blog from fellow early retiree, STE:

 

I guess everyone would have their own strategies or methods to use their war-chest in hoping to get the best return from the market.  Since our “war-chest “ is quite limited , sometime we may face the problems of using up the war-chest quickly and seeing the share price keep dropping from the last purchased . Here , I’m not trying to promote the “market timing “ in hoping to get the lowest price before market swing upwards. I always think that “time in the market “ is much more important that “timing the market “ as we may see the power of compounding if we stayed long enough in the market .

But remember ,trying to “timing the market “ in short time frame e.g days , weeks or even months … is speculative in nature rather than investment .  What I am trying to explain is more on ‘spotting the stage of market cycle “ in much more longer time frame to increase our “odds “ in winning the market .

Can we really catch the “bottom “ of market ? My answer is definitely NO .  As I mentioned before , nobody will be able to tell you where will be the market heading in coming months or when will be the “bottom “ of the market . Investing is about “probability not certainty “ , we can’t tell where the stock market will be performing in months ahead  but we may be able to use valuation base on “statistical terms “ in estimating the current market cycle and base on that to calculate the odds of winning the market in our bet .

In general , we may be using different types of methods in applying our war-chest ,, some may be using 52 weeks high-low or fundamental valuation of PE / Div Yield / PB value etc.

Each strategies having their own merit since there is “ 100 ways to skin a cat “ ..but sometimes , in such volatile and irrational market ,,, price can be lower than 52 weeks ( this is problem of “anchoring the price “ ) ,, and valuation base on Div Yield may appear if price dropped drastically e.g case of Noble or Semcorp Marine for low PE…

For me , I would look at “market valuation “ and then mowing to “stock selection “ ie from “macro to micro “ kind of analyses . I will be using the “trend analysis “ which shown the long term trend of index by plotting the chart using “linear regression “ concept . If you still remember , I have mentioned 2 very important concept in my previous post :

//quote//
My investment philosophy is simple. We only need to know two things:

1) Margin of safety
2) Mean Reversion

// unquote//

Market always move in cycle and reverting to mean , using “linear regression “ , we may plot a long term “trend line “ of any stock index and by using the trend line , we might be able to see the current stage of market in long term “market cycle “.

Please refer to these link to understand more about :

< Linear Regression >

http://www.investopedia.com/articles/trading/09/linear-regression-time-price.asp

< Mean Reversion>

http://www.investopedia.com/terms/m/meanreversion.asp

 

Such trend analysis also being used by few prominent investors/ bloggers e.g Prof Chan Yan Chong in his so call “ Chan Channel “ .

 

Now , let’s look at the “ Linear Regression “  trend chart  base on data downloaded from Yahoo Finance : since 1987 .

 

Note :

Red line represent the long term regression line for STI index.

Green line represent the +/- 1 SD from the regression mean ( covering about 68% of the market price swing )

Yellow line represent the +/- 2 SD from the regression mean ( covering about 95% of the market price swing )

One may notice that , in the long run ,, the trend line will be in upward trend and this represent the market value increased due to increasing economic activities / company business expansion which eventually translated into profit and price .

Base on this chart and statistically speaking , I should be more “aggressive “ in applying my war-chest when index hit “green line “ or -1 SD at around 2500 level and be “very aggressive “ when it hit 2200 level at yellow line ( -2 SD ) .

Well , these two lines is not the “definite “ bottom … as quoted below :

 “Markets can remain irrational longer than you can remain solvent.”
By John Maynard Keynes

 

For sure , nobody know and Index can go below 2200 , but that will be the time where “value “ appear when market been beaten down a lot with “fears and panic” all over the news and TV .

“Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.“ by Warren Buffet.

Easier said than done , we really need good discipline and patience in such volatile and uncertain market .

Investing has always been tied to emotions same as shopping, eating, and other areas of decision making. But if we can understand these impulses and use emotions to our advantage, we might be able to shorten our journey to achieve financial independence.

I am using my war-chest by applying the buying strategies base on above to increase my “odds “ in winning the market .. how about you ?

Remember, stock have always come out from the crisis, and again , quoted below from Warren Buffet and time will tell the story eventually ….

“Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”
- Warren Buffet

 

 

Disclaimer :

Any stock or strategies mentioned in this article is just meant for illustration purposes and not recommendation to buy or sell. Readers are advised to conduct their own independent research into individual stocks before making a purchase decision. In addition, readers are advised that past stock performance is not indicative of future price action.

You should be aware of the risks involved in stock investing, and you use the material contained herein at your own risk.