Buying Shares---My Views for 2016 and 2017

 

A perfect storm started right from the beginning of 2016. On 4th and 7th Jan 2016, the Shanghai Composite Index fell by 7% on those days and trading were automatically halted for those two days. As the China stock market went into a free fall, the Global markets dived. Panicked selling mauled the stock exchanges from New York to London to Singapore. The carnage was massive. This reminds us of the Black Monday of October 1987, the Asian Financial Crisis of Oct 1997 and the Sub-prime Mortgage Loan Crisis of Oct 2007. Going forward, 2016 and 2017 are going to be very volatile years in the stock market.

 

Is the world going into a Bear Market? In the Jan 23rd – 29th 2016 The Economist on page 65 stated the following:

 

         BEAR markets are triggered, by conven­tion, when share prices fall by more than 20%. So the widespread stockmarket declines on January 20th took Tokyo's Nik­kei 225, London's FTSE 100 and France's CAC-40 into bear-market territory (see chart), since all had declined at least that much since their highs of last year. Mind you, another old saw is that bear markets do not end until prices pass their previous peak; on that measure, the Nikkei 225, which is less than half its 1989 high, is still caught in a 26-year-long bear run.

The rich world is not alone in its ursine infestation. China's CSI 300 index is more than 40% below last year's high. The FTSE All-World index, having breached the 20% mark, ended down 19% on January 20th. Indeed New York, although hit hard that day (the Dow Jones Industrial Average fell more than 500 points at one stage, before rebounding a bit), is one of the few big mar­kets not to have entered bearish territory.

Among the primary causes of the sell-­off is worry about China's economic health, despite the latest GDP numbers, published this week, that were in line with forecasts of 6.9% growth. Investors fear that the real numbers are worse than the offi­cial data suggest, and see the sharp fall in commodity prices, particularly oil (see page 17), as evidence for the hypothesis of weaker Chinese demand.

In a sense, equity markets are only catching up with the bearish implications of moves in other markets, such as the rise last year in corporate-bond spreads (the in­terest-rate premiums paid by riskier bor­rowers). Higher spreads usually reflect fears that more borrowers will default in the face of adverse economic conditions. Investors have also been rushing for the perceived safety of government bonds, with the yield on ten-year American Trea­suries falling back below 2%. In June it was nearly 2.5%.

Forecasts for global growth thiss year are being revised down, as they have been for the past few years. The IMF has cut its esti­mate from 3.6% to 3.4%. World trade has also been worryingly sluggish, with volumes falling in the first half of 2015.

So far manufacturing appears to have been hit harder than services, with indus­trial production in America falling in each of the last three months of 2015.. But a wide range of companies are facing a squeeze in profits. Macy's, a retailer, IBM, a computer ­services company, and Shell, an oil giant, all recorded big declines in their latest re­sults. Overall, the profits of the constituent companies of the S&P 500 index in the fourth quarter of 2015 are expected to be down by almost 5% on the same period a year earlier.

Part of the sell-off in global eequities may reflect this reduced outlook for profits. In a recent survey of fund managers by Bank of America-Merrill Lynch, more than half expected profits to decline further over the next 12 months. Cash now makes up 5.4% of portfolios, the third-highest lev­el since 2009. But fund managers are not as bearish as they might be: a net 21% of them have a bigger weighting in equities than usual and only 12% expect a global reces­sion in the next year.

Some also blame the Federal Reserve for pushing up interest rates in December. To the extent that monetary policy, via both low rates and quantitative easing, has pushed up asset prices since 2009, the fear is that tighter policy may drag those prices back down. But the stockmarket decline may be altering the outlook for monetary policy, too.

Back in September, when the markets were suffering another tumble, the Fed stepped back from a rate rise, citing fears about a slowing global economy. Judging by the futures market, investors think the Fed will take fright again: they are now ex­pecting it to raise rates only once this year, when previously they had been expecting three increases. ­

 

 

The question every investor needs to ask is --- To buy or not to Buy shares.

 

The standard advice is Buy low and Sell high to make a profit. What this mean is that you Buy when others are Fearful and Sell when others are Greedy. Times when you can Buy Low are when the Headlines News are really bad and the economic situations are turbulent and uncertain. People are scared. They panicked and they just want to get out of the stock market to go for other types of investments. At such times, you must have already made your decisions and calculations before hand so as to know What to buy and at What price.

Buy the shares that you have decided ahead and ONLY when ALL the conditions below are satisfied:

 

1.   Buy at Bargain prices or Discount --- Why? So as to have some Margin of Safety.

2.   Buy Big amount --- Why? It is difficult to find a bargain

3.   Hold for 5 to 10 Years --- Why? To allow for market fluctuations

4.   Buy More when market goes down further --- Why? You are Investing not Speculating

5.   Don’t borrow to buy --- Why?  To avoid being forced to sell

 

When all the above conditions are met, allocate (bet) heavily one’s hard earned money in Shares rather than in Fixed Bank Deposit. It is a Mistake if one doesn’t load quickly and big. Why? Such conditions do not come often and wouldn’t last long. Shares snap back quickly and when one isn’t prepared and ready to buy at such times, one misses the opportunity.

 

No one knows for certain when the bargain prices will be at their lowest and one cannot wait. Thus it is necessary to buy the shares as their bargain prices go down. See examples below from Warren Buffett:

        

         When Coca Cola got to where it was attractive, for seven or eight months we bought every share of Coca Cola we could. We bought what, on the old stock, 23 million shares, we probably bought that on 150 trading days, that’s 160,000 shares a day. You gotta do it when the time is right to do it.

 

Wall Street reacted as though Wells Fargo were a regional savings and loan on the brink of insolvency and in four months hammered its stock price from $86 down to $41.30 a share. Wells Fargo lost 52% of its per share market price because essentially it was not going to make any money in 1991. Warren responded by buying 10% of the company— or 5 million shares— at an average price of $57.80 a share. [33% down from $86]

 

Capital Cities/ABC Inc. fell victim to this weird manic-depressive stock market behavior in 1990. Because of a business recession, advertising revenues began to drop, and Capital Cities reported that its net profit for 1990 would be approximately the same as in 1989. The stock market, used to Capital Cities growing its per share earnings at approximately 27% a year, reacted violently to this news and in six months drove the price of its stock from $63.30 down to $38 a share. Thus, Capital Cities lost 40% of its per share price, all because it projected that things were going to be the same as they had been the previously year. (In 1995, Capital Cities and the Walt Disney Company agreed to merge. This caused the market to revalue Capital Cities upward to $125 a share. If you bought it in 1990 for $38 a share and sold it in 1995 for $125, your pretax annual compounding rate of return would be approximately 26%, with a per share profit of $87.)

 

All these advice are advocated, in one way or another, by John Maynard Keynes, John Kenneth Galbraith, Philip Fisher, Warren Buffett and Charlie Munger in the links below:

 

  1. Buying Shares---My 2016 Summary from Charlie Munger
  2. Buying Shares---My Summary in 2014 Full Version
  3. Buying Shares---My Summary in 1996 and later