Wednesday, August 15, 2007

Emotions, Emotions, Emotions

Market participants, or rather human beings, are really suckers when it comes to investing in the markets. In almost all kinds of transaction, people look to buy cheap and sell expensive. When you buy a fridge, you look to buy it during some sale or discount. When you sell your car, you ask for S$5,000 above COE valuation.

But when it comes to the market, people look to buy when the prices are high, the higher the better, like now. And when prices nosedive for 2-3yrs, people become totally not interested, like in 2003.

This is the result of two powderful emotions at work: Fear and Greed.

Fear is a much forgotten emotion nowadays except during 1-2 weeks when the markets stumble a bit (like last week). During 2000-02, when the markets entered a full-fledged bear cycle, it was a sight for sorrow. Finance stories made headlines like only when the editors need to choose whether it's "Dead Kitten on Toa Payoh Road" or "NOL stock price made new low". IPOs that came out almost always nosedive. Soon pple got so disappointed, nobody participated anymore, which made it worse. There was a general fear of the stock market bcos many pple got burnt.

As the bleeding continues, fear spreads even further. At gatherings, none of your friends, colleagues, acquaintances talk about stocks, or investment anymore. It simply hurt too much. If you said your job was an investment analyst, they go “Oh ok.” And move on to another topic. You can smell the fear of words like “stock” or “investment”.

Only value investors were very active. They were buying up all the cheap and good stuff, like during the Great Singapore Sale! But somehow, most pple really become suckers during those times. i.e. they fail to buy when it’s cheap.

In today’s market, Gordon Gekko’s good friend has taken over. Well, Gordon Gekko is the guy who quoted, “Greed is Good” in that hit movie and then won an Oscar! I heard he is coming back for a sequel to the 1987 blockbuster Wall Street.

So greed has taken over today’s market. The guys who got burnt in 2000? Well most of them shunned the markets until maybe yesterday, then decided to join the party bcos everybody around them is talking about it. But entrance tickets are not cheap now. What about the grandmas? Maybe they will join tomorrow.

Of course, there are also lots of newbies who have not seen the bloodshed the last round. And they have the all important role of Ra-Ra-ing this whole party. Haven’t we all heard how that young punk made a ton of money buying some stock and bought himself a Ferrari? So greed is all around now but maybe we have not seen it grown full blown just yet.

During these times, it’s always hard for the value investors. Some wished that they had bought more during the good old days of 2003. Some are thinking whether to sell now, but if the market keeps going up, then they lose out again. So as you can see, Greed spares no one, not even value investors. The same goes for Fear by the way.

It is an art to be able to judge the greed barometer of the market and decide if the peak is reached (vice versa: to judge if the market has reached maximum fear which will mark the bottom of the bear market). If you can do this, you are on your way to great success. But most old timers would advise against that. Hence they advocate the good old buy-and-hold strategy. As they say, it is futile to try to time the market.

As for me, I suspect the market hasn’t reach maximum bullishness just yet, so there may still be some upside from here. Forward PER of the STI is still ok at 15-16x, but it’s hard to buy anything now. The margin of safety is not there anymore. In this game, it’s only worthwhile to buy during the Great Singapore Sale. But somehow, most pple buy AFTER the Great “GST” price hike (of 200%). GST here stands for: the Great stock market Surge of 200% rally Tax!

PS: STI in 2003 was 1200, it rallied roughly 200% to 3600 today!

See also: Fear and Greed

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