PAULINE YONG BLOG

Price Patterns of Stocks

2012-01-19T20:40:00.004+08:00

By looking at stock charts, an investor can spot different price patterns of stocks. Today I'll illustrate 2 famous chart patterns here.

Head and Shoulders
A head and shoulders formation, by its name, consists of a head and two shoulders. The left and the right shoulders represent two smaller rallies before and after the big head (big rally).

Reverse Head and Shoulders

Trend Reversal Point

Draw a line connecting the two troughs at the base of the head. This line is known as the neckline. When the neckline is breeched on the right shoulder, it sends a warning signal to traders that the price is going to plunge.

Similarly, for the reverse head and shoulders, we draw a neckline to connect the two small rallies beside the head. Once the price surge passes the neckline on the right shoulder, it indicates a positive move in the price.

In order for the trend reversal to materialise, the violation of the necklines in both cases has to be supported by an expanded volume at the right shoulders.

Double Top

A double tops formation consists of two peaks, like a Twin Tower. The two peaks may not be of the same height. The interesting part about this price pattern is that when the price is forming the second rally, its volume is lighter than before (the first rally). This shows that investors have lost their buying interest and the rising price may not be sustainable.

Trend Reversal Point

Draw a line at the bottom of the trough between the two tops as shown in the above. As soon as the line is violated at the right peak, followed by an expanding volume, the stock will experience heavy selling by investors.

Double Bottom

Double bottoms has a similar effect as the double top, but in the opposite way. Here, you’ll see two troughs with volume declining in the second bottom.

Trend Reversal Point

Draw a line at the peak between the two troughs. When the line is violated at the right trough with an increasing volume, investors are snapping up the stocks and pushing the price higher.

However, there is no guarantee that when the trendline is violated, the prices will move accordingly. Sometimes they are just a temporary interruption in the prevailing trend. It could be a false alarm, or whipsaw, for the trend reversal.

Last but not least, when you see a big chart pattern forming infront of you, its a warning sign that there is going to be a big price movement as shown in the chart below.

Happy investing,

Pauline Yong

Support and Resistance

2012-01-05T22:33:00.004+08:00

We often hear analysts talking about the support and resistance levels of stocks, but what are they? An easy way to look at it is that we imagine a support is like a temporary floor, whereas resistance is like a temporary ceiling.

To understand the concept of support better, just think of a ball bouncing on the floor. Each time the ball hits the floor, it will bounce back, hit the floor again…and bounce back again. When it hits the floor so hard that it breaks the floor (assuming the floor is fragile) it passes, or surges, right through it. In technical terms, we call it a violation of the support zone. Similarly, as the resistance zone is violated, the stock price will go to a higher level.

This brings us to a very important rule: Once a support zone has been violated, it becomes the resistance zone. Conversely, once a resistance zone is violated, it becomes the support zone of a price.

How to identify the support and resistance level of a security?

There are various ways to identify, today I'll show the 2 most common ways of identifying the support and resistance levels.

1. Trendlines

From the previous lesson, we know that trendlines are formed with successive peaks and lows joining together. From the chart below, we see the first trendline as the resistance line that the prices couldn't pass through it. The second trenline is interesting - it was the support zone but has been violated a few times and finally it broke down the support and became the resistance zone or line. Trendline 3 has the similar reaction too.

Tips: Draw your trendlines as accurate as possible. Try to connect as many points together as possible. In other words, the trendline must have the most 'touching' of the stock price.

2. Moving Averages

The common moving averages are: 20 days moving average for short term support or resistance level, 50-100 day for medium term support or resistance levels, and 200 day for long term support or resistance level. For a more experience investor, he or she may explore different days moving averages on different stocks. The objective is to find a nice 'fit' on the chart.

For example, in the diagram below, we run a 15 day moving average on the stock and it fits very well into the chart. When we say nice fit, it means every time the stock price hits the 15 day moving average line, it bounces away from it. Hence, this 15 day moving average became the support for the stock between February to May, and similarly, it the line is also acted as the resistance for the stock between May to July.

Tips: Run different days moving averages across the chart to find a best fit of line.

So go to ChartNexus and download the free software for practice!

Happy learning,
Pauline Yong

Trendlines

2011-12-28T17:22:00.003+08:00

Trendlines form the foundation of technical analysis.

They are constructed by connecting a series of peaks and troughs. While an uptrend is formed by joining successive peaks, a downtrend is formed by joining successive troughs. Trendlines may be horizontal if stock price is trading sideways.

For a beginner, try to use the "drawing tools" from the ChartNexus to practice on the trendlines, get yourself familiar with 'recognizing' the trend first, because later we need to use these lines to draw chart patterns such as triangles and rectangles.

How to tell whether it is a bull trend or a bear trend?

There are 2 ways: (1) Trendlines (2) Moving Averages

(1) Trendlines

Bull trend is when you see "higher high" of the peak. That is: you'll see the price forming a higher peak than the previous peak.
Bear trend is when you see "lower low" of the trough. That is: you'll see the price moving downwards, forming lower trough than before.

(2) Moving Averarages

Moving Averages is a technical indicator can be found easily in the charting software. The details I'll talk about it when I come to the Technical Indicator section. Here, I'll just talk about the application on trends first.

20 day moving average - this indicates the short term trend (< 4 weeks). That is: when the price is above the 20 day moving average, its consider short term bullish; and when its below, indicates short term bearish.
50 - 100 day moving average - this indicates the medium term trend (1 month - 9 months). When price is above the 50 - 100 day moving average, its consider medium term bullish; and when its below, it indicates medium term bearish.
200 day moving avearge - this indicates the long term trend (>9 months). When price is above the 200 day moving average, its long term bullish; and when its below, its long term bearish.

Homework: Try running the various moving averages on our KLCI and see what's the current trend?

Happy learning,

Pauline Yong

What is Technical Analysis?

2011-12-21T22:37:00.005+08:00

Starting from this week, I'll post some educational articles on Technical Analysis, so that we can learn together and use the knowledge for 2012!

What is Technical Analysis?

Technical analysis is the study of charts whereby we can make investment decisions based on the following assumptions:

(1) History repeats itself, consequently, past trends predict future ones.

(2) The price pattern is the sum of all the behaviours of the market crowd. Therefore, technical analysis tracks the psychology of the market.

While fundamental analysis helps us to study the financial health of a company, technical analysis gives us an idea as to the direction of the stock price. Very often, a techincal analyst can identify trend changes at an early stage, and act on it.

First we need to know what a stock chart is.

Stock Chart

A stock chart is also known as a price chart. It has two parts to it: the upper portion depicts the price movement, and the bottom shows the volume traded.

Next, we need to understand Volume and Price relationship. There are 4 types of Price-Volume relationships:

1. Heavy Volume with Rising Price

This is a healthy sign in the market. It tells us that there are a lot of trading activities going on and buyers are outnumbering sellers. When volume is heavier than yesterday’s volume, and accompanied by a price increase of at least 1%, it may be signaling a trend reversal from bearish to bullish soon.

2. Heavy Volume with Falling Price

This is a troubling sign as it shows that the investors are bailing out. When volume is heavier than yesterday’s volume, accompanied by a price decline by at least 1%, it could mean warnings and a possible trend reversal from bullish to bearish.

3. Light Volume with Rising Price

Light volume with rising price may indicate that the price is losing steam. The price is going to drop soon, as investors are not willing to pay for the rising price.

4. Light Volume with Falling Price

On the other hand, light volume with falling prices may indicate the price is bottoming out. Investors are holding on to their stocks rather than selling for lower prices.

So, investors should pay attention to signs of heavy volume in the market. Observe the volume together with price trends and you will see important signals sending out to the market crowd.

In addition, when you see a price rise or fall on light volume, it indicates that heavyweight investors are staying on the side lines—thus, it is not as significant.

Try to download the free charting software from Chart Nexus

And practice the 4 types of Price volume analysis on the charts, you'll start to see some lights in technical analysis.

Happy investing,

Pauline Yong

CIMB, Padini, Planitu

2011-12-10T13:07:00.005+08:00

In response to a reader's request, I'm writing this for sharing purposes only.

The followings are my personal views, there are for educational purpose, not intend for any form of advice.

Plenitude (RM1.99, PE 6.1, NTA 2.91, DY 4%)

Short term outlook: Trend:double top forming; MACD:losing momentum; Stochastic: turning down from overbought position; OBV: turning down but stabilising could indicate possible side way trend.

Medium & Long term outlook: Trend: down, bounded by 200day M.A. as strong resistance.

Padini (RM1.09, PE 8.5, NTA 0.43, DY 4%)

Short term outlook: Trend: sideways although it's above 200day M.A., because it dipped below 200d MA and emerged from it, hence it is likely to go through some consolidation phase before the next move.
Indicators: MACD, OBV & Stochastic shows signs of loosing momentum
Volume: low as price move lower, so its a positive note here as investors are still willing to hold on to the stocks, despite a shooting star on Dec 5th.

CIMB (RM6.89, PE 13.6, NTA 3.37, DY2.9%)

For CIMB I'll use Ichimoku to analyse. From the chart, CIMB underwent a steep fall in its share price since August. Currently, the price is moving into the 'cloud' (in blue), this shows some consolidation taking place. Short term wise (within 1 month), the price may move between RM6.60 - RM7.80, by end of Jan - mid Feb, there might be a bigger move, if the price move above the cloud, it is bullish, if it dip below the cloud, its bearish. Keep our finger crossed!

Above are just the technical aspects, and it's rather short term. For a bigger picture, we need to look at the industry outlook as well. For example, Padini in the garment manufacturing sector may face more weakening in profits due to global recession. As for Plenitude which is in the property sector might face similar situation when the property market cools down. Among the 3 stocks, I like CIMB most because I believe it is in an oversold position, the chances of a rebound is high in the short term.

Happy investing,
Pauline Yong

George Soros: When I see a bubble I'll buy, and I see a flaw in the bubble, I'll sell!

2011-11-29T20:35:00.001+08:00

Do You Invest Based on Your Intuition?

2011-11-12T22:20:00.003+08:00

"Do you invest based on your intuition, the fundamental or the technical analysis? This is a question posed by a 18 year old girl who attended my investment workshop last month in KL. I thought for a moment and answered: "Both technical and fundamental." Shortly after, I continued, "sometimes intuition!" I know when I said "intuition" it may discredit myself but I have to give an honest answer, because that's the way I trade - a combination of everything, technical, fundamental, psychology, market sentiment, feng shui and intuition!

Some people will relate "intuition" with feng shui or astrology as they belong to the non-scientific world which is difficult to explain. There is really no right or wrong answer when it comes to investing or trading, because investing is an art!

In the history of investing, there was one a famous investment guru who traded using geometry, astronomy and astrology. He is the legendary William D. Gann who invented the famous Gann Theory - a time cycle based technical analysis.

Gann was born in 1878 and died in 1955, he had witnessed the great depression, the World War 1 and World War 2, the ups and the downs in the stock market for 50 years! He could make prediction of the stock or commodity with the exact price on the exact date! In today's word, he was like a fortune teller, but loaded with strong financial knowledge. For example, in 1909 Gann made the prediction that the price of wheat would go to $1.20 by 12 noon on September 30th. On that day, at the opening, the wheat was selling below $1.08 and it looked as though his prediction wold not be fulfilled. In the end, the wheat did closed exactly at $1.20 at the end of the day!

He also successfully predicted the massive stock crash in 1929. In November 1928 in his annual stock forecast report , he wrote:

"This year (1929) occurs in a cycle, which shows the ending of the bull market and the beginning of a prolonged bear campaign. The present bull market campaign has lasted longer than any previous campaign in the history of this country. The fact that it has run longer and prices have advanced to such abnormal heights means that when the decline sets in, it must be in proportion to the advance. The year 1929 will witness some sharp, severe panicky declines in many high priced stocks....
.... First decline culminates around September 30th; then a rally making top on October 2nd, followed by a decline to October 24th; then a final top around November 2nd to 4th, followed by a big decline, reaching bottom around December 18th to 20th; then a rally to the end of the year." (Does this sounds like a fortune teller?) The stock crash started on October 29th 1929.

Despite having the ability to forecast, Gann emphasized on investment knowledge. He believed knowledge is power! He said: "The difference between success and failure in trading in commodities is the difference between one man knowing and following fixed rules and the other man guessing. The man who guesses usually losses. Therefore, if you want to make a success and make profits, your objective must be to know more; study all the time; never think that you know it all."

I agree with him totally! Although he was gifted in a way, he stayed humble and used his solid financial knowledge to confirm his prediction. We shouldn't rely too much on feng shui or astrology either in investing or in our daily lives. We must stay objective, equiped ourselves with the right knowledge, and most importantly, stay humble and always have the quest to learn more. With these positive attitude, success is on the way!

More on Gann

Happy investing,
Pauline Yong

Technical Analysis - Time Cycles

2011-11-07T19:50:00.003+08:00

Many of us have been focusing too much on the technical indicators and moving averages, and neglected one important aspect of the technical analysis - the time cycles.

Time cycle is the study of the TIMING of the market boom and bust, which tells us the timing of the event happen as history keeps repeating itself. According to one of the pioneers of cyclic analysis, Edward R. Dewey, "something out there in the universe must be causing these cycles (bulls and bears) ... there seemed to be a sort of pulse to the universe that accounted for the pervasive presence of these cycles throughout so many areas of human existence."

For example, take a look at our Malaysia GDP growth chart

From the chart, we can see that in the history of our Malaysian economy, the recessions were recorded in 1973, 1985, 1998, 2009, which is 12 years apart with the exception of 1998. In feng shui perspective, they all fall in the year of OX (1973, 1985, 2009) and Tiger (1998)!

I also discovered another horoscope that is prone for stock crash - the year of Snake. For one the Great Depression started in 1929, the year of Snake, subsequently we also have smaller crashes in 1965, 1977, 2001 and possible 2013? Is it coincidence or there is really something out there in the universe making this happen?

There was a Russian economist, Nikolai Kondratieff discovered this during the 1920's and published a book called "The Major Economic Cycles" in 1925. In his book, he noted the repeating behaviour of the economic cycle which is deemed capitalistic in the communist world, as a result, he was sentenced to death and died in a Siberian labour camp in 1938. Despite the tragedy, his work was recognised by people and his theory is known as the Long Wave Cycle or the K-Wave theory.

In the K-wave theory, there is a cycle of around 60 years divided into 4 seasons: Spring, Summer, Autumn, and Winter with each lasts about 15 years. For example the big cycles are as follows: (source from Wikepedia),

1. The first industrial revolution started in 1787 - 1842 (55yrs)
2. Rail Road and Steam Engine era 1842-1897 (55 yrs)
3. Age of steel and electricity 1897 - 1939 (42 yrs)
4. War and Post-war boom 1939 - 1982 (43 yrs)
5. Information Technology era 1982 - ?

As we can see if we add another 40yrs to 1982, it become 2022, which is 11 yrs from now. According to many analysts, they believe we're now going through the Winter wave of the K-wave cycle. How far is this theory hold true, I leave it to you to interprete. There are 2 more articles relating to this K-wave:

Article 1
Article 2

Happy investing,

Pauline Yong

Is Technical Analysis Important?

2011-10-13T22:34:00.004+08:00

To be frank, when I just started investing in the stock market, I thought fundamental analysis rules and that technical analysis is for short term traders. I was very wrong indeed!

Now if you asked me whether I prefer fundamental analysis or technical analysis? I'll say both! Under different market condition I'll apply them differently. For example, during the stock crash in August till now, I'm looking at the charts every day, I also focus on the macro economic news, but less on the corporate earnings because the published corporate earnings are historical figures that may still 'look nice' but its meaningless if you're at the market top (if that's your assumption).

However, during normal bull run from March 2009 to beginning of 2011, I focus more on coporate earnings than the charts because as long as the bull trend was intact, I do not bother so much about the daily fluctuations. While focusing on the corporate earnings, I pay special attention to EPS growth on a quarter to quarter basis. Most blue chip stocks have strong growth during this period, and so are their share prices.

As mentioned in my book, I Love Stocks, my favourite indicator is 20 day and 50 day moving averages to see the overall view of various markets in the world. Another technical indicator that I often use is the MACD, it is clear and absolutely suitable for our Bursa blue chip stocks.

Technical analysis is based on 2 important assumptions: (1) history repeats itself (2) the stock market is the sum of all behaviours of the market crowd. If history repeats itself, this suggest that by looking at charts, we may be able to forcast the future price movement!

Although there are over 200 technical indicators, but it's not necessarily to know them all. As the saying goes: when using the indicators, you should apply "KISS" rule, meaning Keep It Simple, Stupid or Keep It Short and Simple, which ever it is, having too many indicators will cloud your mind.

Having said that, that doesn't mean knowing one or two is enough to help you make investment decision which involved your hard earned money! The following is the list that most investors would look at:
1. moving averages
2. MACD
3. Stochastic
4. RSI
5. Bollinger Band
6. Volume average
7. Fibonacci retracement
8. Money Flow Index
9. On Balance Volume
10. Candlestick
11. Trendlines
12. Price patterns (Head & Shoulders, double top, double bottom)

What a list!

If possible, you may try to understand some of the famous technical analysis theories such as the DOW Theory and Elliot Wave Theory. I hope I'm not scaring some of you.

Knowing these indicators and theories is one thing, applying them well is another difficult task that requires certain amount of trading experience.

For me, I usually use fundamental analysis to identify the right stock and apply technical analysis to time the entry and exit for the stock. This way, I'm applying both and I'm quite happy with the results.

Happy investing,
Pauline Yong

$400 billion to help the US economy?

2011-09-22T07:39:00.004+08:00

The Federal Reserve said yesterday that it will shuffle $400 billion of its portfolio to try to drive down long-term interest rates and get the economy going. Is it going to work? I seriously doubt it!

The current economic situation is lack of confidence in the economy, in the government, and in the Euro debt crisis. Yields on U.S. government debt were already among the lowest on record, and investors drove them down further after the Fed announcement. The yield on the 10-year Treasury note, an indicator for mortgages and other long-term loans, closed at 1.86 percent, down from 1.93 percent the day before and the lowest since at least 1962. The US interest rate is already low, by lowering further won't make much difference.

If you look at Japan as an example, you will know this is not going to work for the American.

Focus on the revenue

There are actually two sides of the equation here that most economists do not see, the revenue side and the spending side that can drive the economy. However, because people are too used to the Keynesian and Monetary theories that focus on the spending side, they have neglected the most important source that can boost the economy - the revenue!

And how to get more revenue for the government? Taxation!

The US has the most millionnaires and billionnaires in the world, and the US has the most number of technology companies in the world that are rich source of tax revenue for the government. Even if the US government does not want to tax the companies, how about selling government bonds to these cash rich companies?

The following is the top 10 cash rich companies in US:

1. Apple
Market Capitalization: $330 billion
Cash Hoard: $76.2 billion Source.
2. Microsoft
Market Capitalization: $201 billion
Cash Hoard: $63.7 billion Source.
3. Cisco
Market Capitalization: $83 billion
Cash Hoard: $38.92 billion Source.
4. Google
Market Capitalization: $158 billion
Cash Hoard: $35 billion Source.
5. Oracle
Market Capitalization: $125 billion
Cash Hoard: $28.82 billion Source.
6. Siemens
Market Capitalization: $85 billion
Cash Hoard: $13.42 billion Source.
7. IBM
Market Capitalization: $188 billion
Cash Hoard: $11.76 billion Source.
8. Samsung
Market Capitalization: $92 billion
Cash Hoard: $9.04 billion [slightly dated] Source.
9. Intel
Market Capitalization: $102 billion
Cash Hoard: $7.73 billion Source.
10. Amazon
Market Capitalization: $81 billion
Cash Hoard: $6.3 billion Source.

If we total all those figures up, and this is what they sum to:

Total Market Capitalization: $1.445 Trillion

Total Cash Hoard: $290.89 Billion

So if I'm in the Obama administration, I'll suggest him to get more money from its own people!

Happy investing,

Pauline Yong

Why Keynesian Model Doesn't Work for the U.S. Economy?

2011-09-09T12:05:00.003+08:00

After the great depression, in 1936, John Maynard Keynes argued that should the government play a significant role to steer the economy out of recession through public spending, they would not have had a prolonged recession.

In Keynes' 1936 article, "The General Theory of Employment, Interest and Money", he argued that the solution to the Great Depression was to stimulate the economy through public spending such as government investment in infrastructure. Investment by government injects income, which results in more spending in the general economy, which in turn stimulates more production and investment involving still more income and spending and so forth. The initial stimulation starts a series of chain reactions, whose total increase in economic activity is a multiple of the original investment.

This is a wonderful concept and many politician applied this economic model through "stimulus packages" during the recent financial crisis, Barrack Obama for one is a firm believer who has trashed trillion of dollars into the US economy, Malaysia - RM60b, Australia - A$42b and many more. The results? These economies have a V-shaped recovery but looks like it's only temporary and many economists are projecting a double-dip recession. So what went wrong with this wonderful Keynesian model?

After Keynes passed away in 1946, Milton Friedman (Monetarist theory) criticized vigorously that Keynesian model did not work well post World War 2 and that Keynesian policy led the country into stagflation (high inflation and high unemployment), which they did during the early 1970's and further deteriorated in 1973 the oil crisis.

In 1942, during the World War 2, Keynes published an article, titled "How to Pay for the War", he suggested that the war effort should be largely financed by higher taxes and compoulsory savings, rather than deficit spending in order to avoid inflation. However, the deficit as a percentage of GDP was as high as 30% per year during that time under the hands of President Roosevelt which planted the seeds for the major economic problems the Americans are facing now.

People may have twisted Keynesian theory a little by saying it's not working but they did not understand that Keynes advocate prudent spending. What is not working is the lack of disciplinary action by the country leaders who are afraid of losing popular votes by taking the easy way out.

In any economic models, there are strengths and weaknesses. Personally, I'm the the follower for Keynesian model. Despite the fact that this model violates Adam Smith "invisible hands" theory which is essential for any capitalist economic system, but if we look around those successful economies, they actually have a stint in socialism!

Finally, in answering the question whether Keynesian model works for the US? Well, Warren Buffett has mentioned about tax raise, but I think maybe some forced savings like our EPF system maybe a good start for them.

Happy investing,
Pauline Yong

Secular Bull Market for Gold

2011-09-03T08:32:00.004+08:00

Secular bull market may lasts for decades. If you buy gold in 2001 and hold till 2011, the appreciation is 700% in 10 years! This is not much compared to the gold bubble in 1980. If you buy and hold gold from 1976 to 1980, your gain would be 850% as the gold price rose from $100 to 850 per oz within 4 years time. However, we must acknowledge that any market operates with bulls and bears. From the above gold chart, after the crash in 1980, the gold market was in a secular bear for 20 years!

What drives gold price? Besides the demand and supply, gold is a barometer for inflation, global currency devaluation or simply put, the public confidence of the state of the economy. In general, when people have lose confidence with their currencies due to over printing of money or inflation, paper money depreciates and many would turn to assets such as stocks, properties and of course gold and silver!

How far the gold price goes depends on people's expectations, politics, economic condition, wars and many factors. There are 2 groups of people here: the goldbugs or the gold lovers who believe that gold represents protection from economic and financial chaos, and political and financial conservatism and they feel secure to own some gold.

The other group is the opposite, they do not think gold is a good investment as they believe gold does not pay dividends, nor does it represent ownership in a company. It's value is strictly tied to what investors are currently willing to pay for it. As long as there are more goldbugs willing to pay for the price, the gold price will continue to rally until the price is so high that buyers are not willing to pay for the extraordinary price. Technically, you'll see the volume declining as the price rises at the top of the bubble and the gold price is deemed for a crash.

When will it be? Maybe next year, maybe 5 years later, nobody knows. However, if you see your friends who have never invested in anything but decided to buy gold suddenly, that's the sign! But for now, I know the sentiment about the gold is still bullish.

Happy investing,
Pauline Yong

The Bull Vs The Bear

2011-08-24T07:16:00.002+08:00

In a bull market, the market ignores bad news. In a bear market, the market reacted on bad new, not-so bad news, all kinds of news! In March 2009, the beginning of a bull, people refered to any rallies as bear rallies. They were in a terrible bear trend and couldn't believe the bear was over, so when there were some rallies, they called it the bear rallies!

Now, I see similar reaction here in August 2011, we have enjoyed a superb bull run for over 2 years, and suddenly the sign of the fear struck and we are now wondering is this still a bull? Whever investors start to have this thought and as their thoughts get stronger and stronger, these thoughts will menifest through self-fufilling which weaken the bull and finally give way to the bear!

By human nature, we always find ourselves in the state of denial and thinking that we are still in the same old condition as before. But evidence showed that even if we are in the bear trend, we won't realise untill several months later when we see that the stock prices testing for year lows.

Investing in bull market is easy: buy low, sell high! But investing in the bear market requires more skills because in a bear trend, companies get smaller earnings per share with gloomy outlook, and technically most stock are trading below 200 days moving average, all these discourage you to buy in a bear market. One way to overcome this is to buy your favourite stocks (preferably blue chip stocks with good management) in stages. It is important to invest through stages because you never know when is the bottom, so as the prices go lower, you kept buying. The key here is to overcome your fear by having a system in place so that you act as a robot rahter than a human!

Happy investing,
Pauline Yong

Stock Crash

2011-08-15T10:21:00.003+08:00

In the recent stock crash, he DJI had an unprecedented wild ride initiated on August 4th a crash of 512 points (4%)due to a downgrade of its long term debt by Standard and Poors. On August 8th, DJI shed another 635 points (5.5%) but on August 9th, DJI had a big jump of 430 points (4%), however, on August 10th DJI swung negatively by 562 (5%)points due to rumours that a French Bank might be in financial distress. As predicted, the next day a big swing to the positive side by adding 424 (4%)points.

In 6 trading days, 5 days had more than 400 points (or 4%) move! That was unprecedented and it definitely affected the stock markets around the world. Our KLCI had a sharp fall but compared to the regional markets, as usual, we dropped the least. But still, the damage was done to our stock market technically, as our KLCI is now trading below 200 day moving average, it could signify the beginning of a long term bear. By long term bear I mean 9 months - 1.5 yrs based on the past trends.

Currently, I can see an intense fight between the bull and the bear. Last week's event was a first sign of fear that the investors express it on the stock market after a 2 year bull run. Let's think objectively: (1) Have we seen any default yet by any of the U.S. or the European debt ridden countries? (2)The property market in Asia is looming but has it burst? (3) Interest rates around the world are considered low as we just recovered from a recession 2 years ago, so that's good for the stock markets, right? So what hasctriggered the crash on August 4th?

Some said it could be some political motive by the supporters of the Republican that they want to teach Obama a lesson by having a stock crash on his birthday. It's not uncommon to have this thought because the recent debt ceiling negotiations between the Democrats and the Republicans have exposed the weakness in the Obama's administration. Investors feel that Obama may not be able to handle well the current economic problems the Americans are facing, and that would hurt the U.S. economy which in turns affects the stock market negatively.

So the recent stock market crash has clearly send out a strong signal to the world that the investors do not have the confidence that the Obama administration can resolve its economic problems well, their historically high debt level may raise the risk of default by the U.S. government. Even without a default, the country is facing inflation problem and the depreciation of the US dollar may give havoc to the rest of the world.

For one, China would be in trouble since they are the largest holder of the American debt with more than US$1 trillion. And many central banks around the world will see their foreign reserves depreciate as the dollar depreciates.

In addition, the European countires like Greece, Spain, Portuggal and more seemed not committed in cutting their fiscal (government) spending, as they are afraid of losing the popular votes. So in the next 2 years, It won't be a surprise if I see defaults in governments in these countries.

So what to invest? I'm still saying the same old words: For short term investors, go ahead and take advantage of the market volatility, as for the long term investors stay away and wait patiently!

Happy investing!

Pauline Yong

Financial Planning Q&A

2011-07-28T14:59:00.003+08:00

Recently I wrote an article for a women's magazine - Citta Bella. Perhaps some of the questions addressed here are your concerns as well. Here's the article:

Q & A For Citta Bella

Case: 30-year old Single Office Lady

1. I have 20K, how do I invest my money?

According to your risk preference, you may invest in fixed deposit, shares or unit trust. Fixed deposit is the safest investment however it generates only 2-3% per year return. As for shares and unit trusts there is certain investment risk involved but the potential returns are much higher than the fixed deposit, in general the gains are usually around 7-12% per year.

For a 30 year old single office lady, you can tolerate much higher risk than those who are married with children and those who are nearing retirement age, hence I would advice a 25:75 asset allocation for you, which means you may put aside RM5000 (25%) in the fixed deposit and invest RM15,000 (75%)in blue chip stocks.

Asset allocation is how much money you put into different asset classes—the percentage of your assets that are in stocks, bonds, cash, real estate, and commodities. Believe it or not, the choices you make in this regard are the most important part of your investing. A good mix of asset allocation will enable you to achieve sustainable profits from the stock market over the long run.

I usually recommend people to invest in blue chip stocks as blue chip stocks are good investment, not only you can gain capital appreciation, every year you’ll receive attractive dividends from these companies. Some examples of the blue chip stocks are: Maybank, CIMB, Genting, and Public Bank. However, if you are not comfortable investing directly in the share market, you may choose to invest in unit trust from a reputable fund management company.

2. How much savings do I need? I’m a 30 yr old single OL (office lady).

Assuming your retirement age is 55 and you live until 75 years old, you should set aside minimum RM500 every month into your retirement fund preferably in stocks or unit trust which will give you RM1,500 every month during your 25 year retirement period.
After deciding how much we need in the future, now, let’s see how we can achieve our retirement goal. Many people have the wrong attitude towards savings, they will choose to pay their monthly expenses first, whatever the balance (if any) will then turn into their savings. Sometimes, they may have impulse buying on branded handbags or hand phones, and they will not hesitate to withdraw from their savings to purchase them.

The right attitude should be to pay into the retirement fund before any monthly expenses. In addition, you should try not to withdraw from the fund for any impulse buying. A good way to help you to achieve your retirement goal is to set up a unit trust regular saving plan with a reputable unit trust company with initial RM1000 investment, followed by auto-debit instruction from your bank account to invest RM300 monthly into an equity fund.

However, if you notice, I did not include the EPF into this retirement fund. The reason why I didn’t include is because most of us, before the retirement age, we have already used up at least one third for purchasing property, and the remaining upon retirement the money is usually used for children’s university expenses, hence, the remaining may not be significant. However, if you do have money left from the EPF that will be a bonus for you.

3. I love traveling to different parts of the world, but I’m afraid I might spend too much on trips and not saving enough for my retirement, what should I do?

As Malaysia is moving towards becoming a developed nation and our society is becoming more affluent, overseas trips has become part of our lifestyle. However, these trips are not cheap, they may cost up to about RM2000 to RM6000 per person. If we lose focus we may ended up spending too much and not saving enough for our retirement fund. My advice is that you need to be disciplined enough to set aside the required amount, say RM500 monthly for your retirement fund first, the remaining you may allocate according to your other needs such as your overseas trip. Hence, it is very important that we must have proper financial planning to safeguard our hard earn money so that our retirement goal can be achieved.

4. Medical cost is getting too expensive, is it advisable to get myself covered with insurance? What is the right amount for my insurance coverage?

Medical expenses are rising faster than the costs of any other service. They are climbing at rates that very much exceeding the inflation rate. On top of that, with the hectic lifestyle and bad eating habits, the chances of contracting terminal illness have increased tremendously in the recent years. Hence it is very important that everyone should buy a medical insurance for protection.

How much medical coverage is enough depends on the following factors: your ability to pay the premiums, your health condition, your family history of terminal illness, your debt obligations and your family commitments and other personal objectives such as whether you need some investment component in it.

In general, for a 30 year old woman with good health condition would need minimum RM200,000 for a lifetime medical coverage. However, if budget allows, you may consider increase your coverage through other add-on benefits such as hospitalization, disability benefits, income benefits, and regular saving feature in it.

5. I am still young, do I need to write a Will?

It’s never too young to write your Will. As soon as you have turned 18 years old, you may start to write your Will. What is a Will? A Will is an important legal document that contains your instructions and wishes for distributing your property and assets after you die. This document contains the names of the people you want to benefit, your beneficiaries, as well as details about your home, land, vehicles, bank accounts, investments, jewelry, artwork, and other possessions. Your Will also allows you to choose a personal guardian to care for your children if you should die when they are still minors. Your Will should be written carefully, correctly and in compliance with the laws of your state to be sure your beneficiaries will be taken care of when you are gone.

In order for your Will to be valid, and accepted by the court, it must be in writing, signed with your signature, and witnessed by at least two witnesses who are neither relatives nor beneficiaries. Otherwise, the court may not accept your Will, and it may be unenforceable. If your Will is found invalid, the court may distribute your assets as if there were no Will (or intestate), and the court will distribute your asset according to the Distribution Act 1958 (amended 1997) and it may take up to seven years for the whole process.

Margin of Safety

2011-07-12T12:04:00.003+08:00

"A margin of safety is achieved when securities are purchased at prices sufficiently below underlying value to allow for human error, bad luck, or extreme volatility in a complex, unpredictable and rapidly changing world." Seth Klarman

By far the most effective behavioural finance strategy which is highly recommended by many investment gurus is value investing. The virtue of value investing is that investors buy at prices that are already low, so there isn’t much room for further down play. I would like to introduce to you our "Father of Value Investing" - Benjamin Graham.

Benjamin Graham
Benjamin Graham, born in 1894 witnessed the devastation of the 1929 crash and has since developed resilient techniques that could be used by any investor. He popularized the examination of price-earning (PE) ratios, debt-to-equity ratios, dividend records, net current assets, book values and earnings growth. That earned him the name of the “Father of Value Investing”. He brilliantly concocted the ‘Margin of Safety” theory that has gained tremendous support across the finance industry. Graham defined margin of safety as the margin at which a stock can be purchased with minimum downside risk.

There are many criteria for Graham’s margin of safety investment approach, the most stringent is this: Purchase the stock with price not more than two-thirds of Net Current Asset Value (NCAV).

How to calculate the NCAV?
Net Current Asset Valuation (NCAV) is computed by total current assets less total liabilities.

Example – Calculation for NCAV
RM’000
Cash at bank 200
Debtors 100
Inventory 100

Total Liabilities 200
# of shares 100

Share price 1.80

In the example, given that the total current assets are RM400,000 and total liabilities are RM200,000, the net current asset per share is RM2 which is lower than the current market price. However, it is still not good enough as according to Graham’s criteria, the purchase price must not be more than two-thirds of the NCAV which is RM1.33. Therefore, we will not purchase the stock.

The margin of safety for this case is 26% (the difference between current market price and the conservative calculation using Graham’s criteria) which is lower than the minimum margin of safety of 33%. Buying at steep discount using the margin of safety approach can help to cushion the negative surprises in the financial market.

The above theory looks nice in theory but it is not very practical in the modern world now. Using this method, I can't find any good bargain because most of the companies have more debt than their current assets. But this method does screen out those companies with solid cash position in their balance sheet. Perhaps, we can improvise the strategy a little, rather than 2/3 of NCAV, maybe we can multiply the NCAV by 2 or 3 times instead.

Happy investing,
Pauline Yong

Herd Mentality

2011-07-05T10:27:00.002+08:00

“Although markets do tend toward rational positions in the long run, the market can stay irrational longer than you can stay solvent.” - John Maynard

Today I would like to share with you a mental bias that concerns every investor, which is known as "herd mentality". But before that, let's acknowledge that the phenomenon of the herd mentality can be useful in many ways. For example, research shows that although 5% of the animals in a herd know the location of the water source, the entire herd is able to find it. In our daily lives, we use this instinct to navigate to the exit in cinemas and crowded streets.

We have to admit that herding is our human instinct. Herding always makes us feel comfortable, and being the odd one out make us feel uneasy. We are programmed to feel that the consensus view must be correct one; and this mistaken belief has led to many disastrous decisions such as the “Four Dragons” and “Four Tigers Era” of the 1990’s where many investors who were initially sceptical ended up buying into the hype under the mistaken belief that not everyone could be wrong. And yet, most people were wrong.

Some researchers theorise that investors follow the crowd and conventional wisdom to avoid the possibility of feeling regret in the event that their decisions prove to be incorrect.

Fear of Regret
People tend to feel sorrow and grief after having made an error of judgment. Investors deciding whether to sell a security are typically emotionally affected by whether the security was bought for more or less than the current price.

For example, most investors avoid selling stocks that are making paper losses in order to avoid the pain and regret of having a bad investment. The mentality is: after all, it’s only a paper loss, as long as I don’t realise the loss, it doesn’t count!

In addition, investors have the mindset of “what if the price goes up after I’ve sold it”; hence they would rather hold on to bad stocks hoping one day it will turn into a star.

However, some professional traders even advocate trend following as their winning trading strategy. They would apply technical analysis to help them in identifying the prevailing trend and trade with the trend. The biggest pitfall of this method is that it ignores fundamental analysis totally.

Herd mentality can be for good or bad. It is not totally wrong to follow the herd, but we must know when to follow and when not to. The challenge is in making an educated guess about when a turning point will occur and developing a trading plan to capitalise on it.

Happy investing,
Pauline Yong