Offshore, bank or telco stocks, which were glitter with success in the last few years, are seeing signs of precipice decline in one of the most difficult times since the last GFC.
Since the start of the year, blue chips such as Keppel, Sembcorp Industries, Sembcorp Marine, Singtel, Starhub, M1, DBS, OCBC and UOB are all having their stock prices battered down. Sembcorp Industries during the peak in Apr 15 was priced at $5.25, but is now lingering less than halve at $2.23. Keppel suffers the same fate with high of $10.42 in Sep 14 and now sensing bottom at $4.77. From rallies to peak during periods of 2Q-3Q, 2015 to seeing a drop of between 25-36%, the local three banks were not spared lightly either. Even the usually reliable two telcos - Singtel and Starhub are seeing significant declines of 20% and 22% respectively, with M1 being hit hardest diving close to 40% since its peak early last year.
What if you are the unfortunate one who buy into even these “normally safe” blue chips during their peaks of 2013/14/15? What should you do now? This can be particularly worrying in a period where even famous and most successful investors such as Ray Dalio and George Soros are warning of an impending crisis ahead.
The biggest worry is to keep doubling down on your so-called value stock that your single stock is now so big that it is more than 30% or even 50% of your entire portfolio.
In fact, there is nothing wrong with having a heavily tilted stock, as long as you know stock so well and is confident of its value over the long term. Just as Warren Buffett put it,
"My view is that an investor is better off knowing a lot about a few investments than knowing only a little about each of a great many holdings."
With that in mind, you should actually average down your value stocks strategically and patiently over time. By doing so, you ignore the erratic behavior of the market volatility and focus on the fundamental / value of the business over the longer-term horizon.
Sell my losers? Admit my mistakes!
Counter-intuitively, consider that you already started losing sleep and have grave doubts on the fundamentals of a stock you own, then you better spend time doing more intense research. If your thesis is proven right, put a halt to averaging down immediately. Logically speaking, you should consider selling the stock at a loss immediately, in order to find better alternative investment. Rather than have your money hoard inside a potential long-term loser. Admitting your mistake takes a lot of courage and this is what divides the mediocre from the skilled.
If you do not need the money now, and if the stock you owned is a cyclical stock, which you are very confident that the uptrend will return, then it is perfectly fine to hold on to the stock for now. One reason why you should sell is also probably because you believe the stock will sink further down, and intend to buy back the same amount at a cheaper pricing later. PS: this tactic is comparable to trading then!
Adequate diversification not diworsification
If Warren Buffett’s philosophy of concentration is not your cup of tea, then you can turn to Benjamin Graham and Peter Lynch who suggest diversification. In my theory of diversification, I will try to limit my biggest holding to be less than 30% of my equity portfolio. The exception is when my biggest holding is my stalwart pillow stock, which I am so familiar with and confident of.
With diversification at the hindsight, it can be disastrous to fall into the trap of buying too many companies in the same industry/sector. Furthermore, while diversification is good, there should be adequate but not excessive diversification.
“This might mean a minimum of ten different issues and a maximum of about thirty.” - Benjamin Graham
Otherwise you can always buy into index / ETF funds, which is one very good way of diversification too!
Diworsification is the phrase made famous by Peter Lynch in the investing classic “One Up On Wall Street.” By Diworsification, Lynch is referring to companies who attempted to diversify their business and by doing so, dragged down their overall returns. This is often a common mistake made by individual investor too.
Last but not least, do diversify into different asset class outside just equitiy alone. Aside from stocks, you should own cash, bonds, precious metals, and properties (if possible) at any one time. Learn how different asset class can hedge against each other during difficult times. Ray Dalio's All weather fund is proclaimed to have this risk management, resilient characteristics. Yes, as the name suggest "All Weather"!
Eat slowly, be patient and don't get indigestion
When you attempt to average down or diversify your stocks, remember to have patience!
Stock market climb the stairs but take elevator down. It can plummet fast beyond your control, but make sure you do not dish out your cash as fast in tandem too! Do not be so “Kan Cheong”. This is exactly what happened during the start of the year, when many committed this erroneous act. The last thing you want is to dispense all your cash at the onset of a decline, where the bottom is nowhere in sight, any sooner. You can also refer to my earlier post here, providing further explanation.
Sunk cost fallacy
This is the fallacy when you have price-bias on a stock and keep averaging down on a plunging stock, not because you are confident of its value in the long term, but because you feel the need to make back your paper losses. This is known as sunk cost fallacy, and is best explained by my blogger friend Andy of Tacomob! Refer to his well-written article here.
Andy also quoted Phantom of the Pits, the trading legend,
“Accept the fact that losses (ideally small ones) are part of the game of trading and investing. The most likely long-term winner is the person who is the best loser.”
I will end with Peter Lynch 12 advices on the most silliest things people say about stocks extracted from his famous book “One up on Wall Street.”
12 Most silliest things (dangerous) people say about stocks
1. If it’s gone down this much already, it can't go much lower anymore!
2. You can always tell when stocks hit the bottom!
3. If it’s gone this high already, how can it possibly go higher?
4. It's only $0.1 a share, what can I loose more?
5. Eventually they will always come back!
6. It's always darkest before dawn!
7. When it rebound to $1, then I will sell.
8. Conservative stocks don't fluctuate much!
9. It's taking too long for anything to ever happen.
10. Look at all the money I've lost. I didn't buy it!
11. I miss that one, I will catch the next one!
12. The stock's gone up, so I must be right or the stock has gone down so I must be wrong.