Emotions in investing

3D rendering of yellow emoticons with different expressions

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”  Warren Buffett

“The market is a very emotional place that appeals to fear and greed” Walter Schloss

Greedy

After months of waiting, reading, and studying companies, I have started buying more bits of shares. I am glad that I have sold of Sun Hung Kai property shares when China Markets are peaking and subsequently sold half of my CapitaLand shares holding. My recent buy actions in late July and Aug 2015 include ISOTeam, Colex, Sarine Technologies, Super Group and Fastenal Company (US stock).

“Buy into a company because you want to own it, not because you want the stock to go up.” Warren Buffett

I am glad that I have bought some share of Fastenal as it is a company with a very good long historical financial performance, and its products eg. Threaded Fasteners fit the type which is resistant to technological changes (eg. dull, mundane, low cost and readily needed – the type that Warren Buffett and Peter Lynch would probably like). Of course, the company has grown to provide more products than plain old threaded fasteners.

I was tempted to expand my portfolio to include stocks of good companies in other overseas markets. At one time, I was thinking of buying Shimano or some Hong Kong listed companies which I have studied. There are much stronger companies beyond the list of companies listed in Singapore market. Also with the rising US currency, the US market seems like a good place to be in the near future. However, think I will hold for the time being. After all my war chest is not big, and the markets could decline further (creating better opportunities). Now I need to focus more on building up on my war chest and pace out the addition of small positions in the market. To put it simply – not to be too greedy.

I did not add on to my holdings in Golden Agri as I felt that the commodity slump would take longer to recover. The issue with cyclical stocks is that one can’t really value the company using earnings growth or free cash flow growth. Nevertheless, the price to book value looks extremely undervalued at the moment (P/B of Golden Agri is 0.3). There is just a lot of pessimism pertaining to commodities now – which can create a good buying opportunity over the longer term.

If you ask me if we are going into a long drawn recession of 40-60% contraction or a short and small 20%-30% bear market, I would be clueless. Are we coming to an end to the super bull which started from the 2008/09 financial crisis, and into a deep and long recession lasting 2 to 3 yrs? I won’t know.

My buying is base on the financial figures of the companies I buy, the intrinsic values, trailing PEG, price to book values, EV/EBITDA, ROE, narratives and outlook of the company etc. No one single metric determines my buying decision. In fact all these factors play a part in my decision.

I like to buy counters that are red (provided that their long term fundamentals are intact – which is why I stayed away from SMRT, SIA, and Golden Agri). In fact, nowadays almost all my counters are red, except for Vicom, Riverstone and Lyxor Japan 10 ETF. So been choosing which to buy most of the time.

My timing could be way off / bad, as the market could decline further and the stocks which I am holding or have just bought would also consequently go further south (catching a falling knife). Resign to the fact that I am not much of a market timer.

 

Fear

I find the VIX chart very interestingly (some call it the Fear Chart). The top chart is the 5 yrs chart, the bottom is the 10 yrs chart. Notice the sudden upward spike at the right side of the chart (esp. in the 5 yrs chart), after a long period of ‘calm’. Think we never seen so much’ fear’ since 2011 – of course the magnitude can’t be compared to 2008/09’s level.

Headlines nowadays are more ‘interesting’ to say the least.

Almost every other days I will read about the big drops in the Chinese markets (which affect markets worldwide). And most recently about the ‘Black Monday’ – Monday’s 8.5 percent plunge in Shanghai market. I start reading terms like Equity Bubble (namely the Chinese market bubble fueled by trading margins initiated by the Chinese Government, after the bull led by the property frenzy fizzled out, and the meltdown triggered by the surprise devaluation of the yuan on 11 Aug 2015).

Geez, even CNN has a website that measures Fear (click here). Technically according to the site, we are now in Extreme Fear. I wonder how they quantify emotions…..  (Remind me of the Yellow Lantern – which represent Fear, and Green Lantern – which represent Will power).

Numbers, financials can quantify … but emotions? I used to watch CNBC in the past, but in recent years I just felt that it is a waste of time.

“Try not to let your emotions affect your judgement” Walter Schloss

I find reading (about a company) provides a better way to think and evaluate.

“You have to invest the way that’s comfortable for you” Walter Schloss