I am happy to publish another blog post by a fellow investor and one of ASSI's more prolific guest bloggers, STE:
“Creative Destruction”
and
The
Business Cycle
“Millions saw the apple fall, but Newton was the one who asked why.” By Bernard Baruch .
“The
stock market is the story of cycles and of the human behavior that is
responsible for overreactions in both directions.” By Seth Klarman
We have seen market move and swing
viciously since mid of last year due to event such as “Yuan devaluation “ , “Oil
and Emerging Market crisis “ , “ China’s Debts and Shadow Banking issues” and the recent one “ Brexit “.
All these event has created huge market
volatility and because of investor’s psychology swing together with these
market news … we have seen the index swing up and down wildly.
One need to always remember that “"Psychological create 90% market”as
quoted by Andre Kostolany.
Whatever things involving “people “ … it
tends to be “ chaotic and messy “ , for me .. stock market looks like this :
Nowadays, Stock Market became more
intricated and complex due to fast moving news by click of second and much
intergrated / connected world by IT revolution in recent years.
News move in Nano-second and always being “magnify
“to attract viewers’ attention or increase subscribers …
Some of the event may have long term impact
on the market but some are just “ noise “ which affect the stock price in short
term … but even for those major event , remembered that market always move in
cycle and “mean reverting “ eventually .
Joseph Schumpeter, an “Austrian Economics “
coined the phrase of “ Creative Destruction “ and also
written great books like “ Business Cycle “ / “ Capitalism ,Socialism and
Democracy “.
According to him , “Creative Destruction is
the essential fact about capitalism “ and he gave example like “ blacksmith being wiped out by factory , the car
superseded the horse and buggy, and corporation overthrew by proprietorship “..
And by Wikipedia , according to Schumpeter, the "gale of creative
destruction" describes the "process of industrial mutation that
incessantly revolutionizes the economic structure from within, incessantly
destroying the old one, incessantly creating a new one". If you are interested on “Austrian School of
Economic thought” , you may refer to this link .. https://en.wikipedia.org/wiki/Austrian_School and further reading on works from “Austrian
Group of Economist like Ludwig
von Mises and Friedrich
Hayek .
Same for other crisis , eventually , people
will need to move on and market will not even remember those crisis e.g Oil
crisis in 70s , Asian Financial crisis , Dot-com bubble and the latest GFC
caused by Housing bubble .
Look at above chart on Dow Jones since 1884
,, market gone through many cycles and even with 2 “world war “ and various bubble
& panic . GFC in 2008 may become
insignificant if we look at this chart in long term …
BUT ,,, one may argue that as investor ,,
we may not have such longer time to go through the market …well , that’s fair
enough !! One may need to look at shorter time frame and react to our own investment
cycle / need accordingly.
For me , as per previous blog post , I will
only use one chart and react to it
accordingly to adjust my portfolio allocation from time to time. That’s the “
Linear Regression Chart on market and Mean Reverting concept “ , by doing this
, I hope to avoid buying high when market is in “euphoria “ and taking
advantage on situation when market is in panic and over-react.
As rules of thumb , we must also avoiding
those “highly speculative and hot stock
“ in the market and be realistic to our “ expectation of return on investment ”.
Also , as I mentioned before on the
“Fallacy of Indexing “ … when we talk about long term index return of 8-10% …
it is base on average of very long time
frame … in shorter time frame ,, index could swing by +/- 20-30% easily .
There is also “ survivorship “ biases on
the stock component in the index… for those stocks who have destroyed by
business cycle and lack of innovation (e.h NOL/ Noble ) been taken out from Index and new one being added . I guess this is also part of the process of
“Creative Destruction “. When the old one being destroyed and disappear in the
Index , the new one being added and continue to create value for the Index.
“ Crisis = Opportunities “
If we look at Singapore’s context ,,, market has also gone
through many cycles with up and down … if one could take advantage on one or
two of these crisis ,, it could really shortern our time to achieve F.I.R.E.
< I have not added the latest event on
BREXIT ,,, it may turn out much more serious or may not in the list at all … it
is anybody’s guess . I think>
< Credit goes to one of the bloggers who
have created this table , which I have forgotten from where I got this >
For the past 20 years , market have corrected
more than 9 times which have resulted negative return of -20% to -62%. This is
to show that how often and crisis prone our market is.
“ Linear Regression and Mean
Reverting “
My investment strategy for coming years
remain the same …where I will take advantage when stock index gone down to 2500
level +/- and start to accumulate war chest again when stock rebound from that
level . Please ensure to keep some cash
buffer if index went down to 2200 ( which is equivalent to crisis level in
97/00/08 ).
As mentioned earlier , market will be much
more volatile due to “flooded liquility
“ couple with psychology effect due to “market NEWs ( noise ??) “ .
Let’s tighten our seat-belt and ready for
this “bumpy ride “ !!!
< Dividend update >
"Do
you know the only thing that give me pleasure ? It is to see my dividend coming
in …" John D Rockefeller
YES! This is most important event for
investors who have invested for “passive income “ ….regardless of market
volatility ,,, dividend income continue to flow in …
Total dividend collected for 1st
Half 2016 = $102,426 . (my
methodology of calculation is different from AK as I did not include the
privitazation return from Saizen as “dividend “ ,, instead , I would treat them
as “ return of capital “).
** Total dividend increased substaintialy
in 2 Qtr 2016 due to more investment in 1st Qtr 2016 on some of the
blue chips by taking advantage of the market turmoil during early 2016 . Also,
partly contributed by better div from Accordia Golf Trust.
Lastly , allow me to re-quote below which I
have quoted before : by Warren Buffet in 1999
Stock have always come out from crises “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.”
After year 2000 , stock market have
experienced another 2 major crises i.e Dot-com Bubble in 2000 and GFC in 2008 …
but yet .. Dow Jones stand at above 17,000
while watching at the episode of BREXIT crisis unfolding .
Happy
Investing and stay focus on your Long term
Investing strategy, hope & wish all could achieve F.I.R.E soon!!
Cheers!!
---------------------------------
AK:
"What does F.I.R.E. stand for? Make a guess. I did and got it right! I so clever. Ya, I know. AK is so shameless! Bad AK! Bad AK!"
Related post:
STE's investment strategy.
Posts
Bloggy Award
