Hear no evil, read no evil

“Many stock commentators are saying that stocks are cheap, dividend yield is high, time to buy.”

“A value investor should not be obsessed about short term fluctuation. Long term value is more important. Now is the time to ferret out the wheat from the chaff.”

“If it is because of a short term bull market that commentators recommend/ investors buy stocks, it is speculation. Those commentators need to be fired and those investors need to be educated.”

The above are some comments on my earlier posting titled “Short term bull, long term bear”. All the things mentioned by stock commentators and stock articles found in various media channels (newspapers, websites, magazines) contain some truth in it. In reality, most people just accept things at face value. But as value investors, we must be discerning on what we buy. Some stock commentators are sell-side analyst themselves, and one must be prepared to take what they say with a pinch of salt, as they need to sound optimistic so that their clients will continue to trade.

Stocks are cheap. They are cheap on what basis? Cheap because P/E is low and dividend yield is high? If you are just using the above 2 metrics to conclude that stocks are cheap, then I would say you are missing the point. Metrics are not to be used in isolation. It can give you a distorted view of the truth. For example, many China textile stocks in SGX are trading at P/E of 2-3. On this basis alone, some would consider them cheap. However, the P/E will tell you nothing about the state of the textile industry in china, which is now on the brink of collapse. Many companies have folded (including China Printing and Dye) and things are not expected to return back to normal in this year.

What value investors should buy in times of panic are quality companies with a widely recognizable brand name, consistent positive cash flows, low debt and having a business model which serves a niche market. Textile companies in the commodities trade certainly do not fit into the above description. More often than not, the dividend yield that you see are based on historical payout, which indicates nothing on the amount and stability of future earnings of that particular company.

I agree that value investors should not be obsessed about short-term fluctuation. Value on individual companies can present itself at a different period of time. They need not appear in sync with the lowest point of the STI. It is not my intention to dwell too much on the daily ups and downs. The point I want to bring across is that I don’t see much catalyst for the stock market as a whole to go further up within the next 2 months. Do not forget that nearly half of the STI is made up of local banks. All will announce their lower earnings in February and we will find the January and Obama effects disappear quickly over the horizon. The upsurge, which we have observed in the past few months, can be classified as a bear rally. Bear rallies are not new occurrences. In the market downturn during the USA Great Depression, bear rallies also took place that sent the index up by 30-40%. There will be many false starts before the real bull run starts again.

For those who must invest, I would suggest dividing your money into four equal portions and start buying stocks once every 3 months from Q2 onwards. This dollar cost averaging method of purchase should be complete in Q1 next year. In this way, the cost price is spread out and the chances of suffering a loss after investing in a stock is lower.