Friday, March 30, 2007

Under-Reaction to Property Plays

If investors has certain biasness to over-react to certain situations like a single bad quarter, investors may also have some biasness to under-react to other situations. And recently, I discover my own biasness to under-react to a property play as I bought smaller stake in that property stock than I would buy if it is some other stock.

I do not normally buy property stocks due to my lack of understanding to value them in the long run. Or in other words, it is difficult for me to apply discounted dividends or cash-flow method to property stocks. In most local research reports, they would use a RNAV (Realized Net Asset Value, if I’m not wrong) to value property stocks. I recognize that I lack the understanding in properties to do an estimate of RNAV, so I generally do not buy property stocks until two weeks ago.

Around two weeks ago, I bought into Orchard Parade at $1.10 as I think that it may be a rare case of a property stock that I recognize as low-risk with good gains. There are two main reasons behind my thinking. One, Orchard Parade’s price is around two-thirds of its net asset value at $1.64 in its latest annual earnings announcement. This provides a certain margin of safety.

Second, I can see several factors that may lead the market to close up the gap between the stock price and the NAV. The most obvious factor is the very positive sentiments towards property stocks, especially property stocks with buildings in the city area. Orchard Parade owns a freehold hotel near Tanglin Mall. Another factor may be the possible further increase in the NAV of Orchard Parade due to increasing prices of properties in the city area.

Perhaps with Orchard Parade’s price rising to its current level, I may be suffering from a hindsight bias when I lament that I should buy more of Orchard Parade at that time. However, when I look at my average position size in my portfolio which is larger than my Orchard Parade’s holdings, I realize that I may have under-reacted or under-purchased Orchard Parade due to my biasness against property plays.

Nonetheless, I am unlikely to make any more purchase of property stocks due to lack of cash. Perhaps even though I recognize my biasness to under-react in property plays, I have not corrected fully for my biasness. In most cases, property plays will still be quite alien to me.

Saturday, March 24, 2007

Market Crying Wolf (or Bear)?

As this week passed, many people judged that the market correction is finally over. The STI has recovered to 3205 as at Friday 22 Mar 2007.

I am, of course like many investors, glad that the market has recovered. In this episode, I have hopefully learnt to withstand market volatility better and not to panic when disaster strikes again.

And as I have said before, it is quite fortunate that I returned to the market much faster than I would have thought, after disposing around 50% of my holdings. Yet, I have not fully recovered from the peak before the correction. Last year, it took around four to five months from the May-June correction before my portfolio return to the peak during April 2006. Maybe this year’s recovery may come sooner or it may not come. I don’t know.

When I look at the 2006 and 2007 correction, it may seem like a correction on hindsight. Or metaphorically, it is like the market crying wolf. Yet, as the story goes, sooner or later the wolf appears but when it appears, it is most likely at the most unlikely time. At a time when people think that the market is crying wolf again. And then maybe the wolf appears out of nowhere.

This happened before in the 1999-2000 US market, where after the 1998 recovery, investors believes that any dip is a buying opportunity. Until the bear strikes in Mar 2000 and then it takes quite a bit of time before people realize that the wolf has finally come.

As I review the current market recovery, I realize that I become more prone to believe in buying on dips and therefore, more prone to the market crying wolf trap. That is, failure to recognize the wolf when it appears or before it appears. On second thoughts, perhaps I have a better chance to recognize the wolf as I adopt a bargain value investing style.

Due to my bargain value investing style, it is possible that I may run out of stock positions or stocks to hold when the market is getting very expensive or bubbly. This may enable me to be better prepared when the wolf comes. Yet this hypothesis hinges on the bear striking when the market is at a very expensive stage, Else, I will be equally likely to be unprepared for the wolf.

Well, let the market takes its course. As at now, I am fully invested and it may be time for me to hibernate till May, the release of quarterly results.

Saturday, March 17, 2007

An put warrant loss, solace in Graham philosophy

On a certain day during last week, I have purchased a put warrant on STI when STI drops around 80 points. The original intention of the purchase is to hedge my portfolio. At the end of that day, I feel like a genius as my put warrants show a significant profit.

And in the next day, I was made to feel like a fool when I disposed my put warrants at a significant loss. As the US markets had recovered overnight, the STI on the following morning followed the US markets and jumped around 40-60 points. To cut the possibility of further losses as well as to remove the hedge, I dispose of my put. This experience or hedge set me back by around 800 dollars.

On further post evaluation of the put warrant incident, I figure that I am bounded to have expected losses in warrants if I am to invest or speculate in warrants. This is because I lack a strategy to derive positive expected profits in warrants. Assuming that the market is close to random and warrants are priced at a premium, my probability of wins would be around 50%. Losses are almost certain if I continue to persist in warrant operations. And given the leverage inherent in warrants, it would not be surprising if the warrant operations bankrupt my portfolio in due time.

This unprofitable warrant trade also shows me realistically that hedging may be costly. And it leads me to re-think on whether I need to hedge my concentrated portfolio or not, if my portfolio consist of no leverage. At this moment of time, I think that I may not need the hedge, after considering that my portfolio is based on value investing philosophy.

Furthermore, a re-read of a chapter in Benjamin Graham’s book “The Intelligent Investor” reminded me that a value investor would lose his significant advantage if he is to let the market prices dictate or affect his investing decisions. As such, according to Graham’s philosophy, an investor should ignore the market prices and at an opportune time, take advantage of the distressed or over-optimistic market prices.

On hindsight, I will suffer fewer losses in my portfolio at the present moment if I adhere to Graham’s philosophy when the market corrected two weeks ago. It may not be too late for me to adopt his philosophy now. Yet, I guess that if I have a heavily leveraged portfolio, Graham’s philosophy has to be abandoned.

Monday, March 12, 2007

Perhaps Too Panicky?

After a week, the market seems to have recovered with the STI at 3182. On hindsight, I may have made silly decisions to liquidate around 50% of my portfolio into cash. If I have not sold during the crash, probably my current portfolio would look better when the market recover.

At the end of last week, I have taken steps to re-build my portfolio by buying into the stocks I am still holding and a new stock holding. This somewhat relieves the pressure of underperformance when the market is or seems to be recovering. And today, I have further added on to my holdings. I’m not sure if buying now will be correct in the coming days or weeks.

It is very difficult to act on foresight and easy to evaluate on hindsight. I do not mind the heavy liquidation done last week as I would not have known if the market would continue to correct or not.

Furthermore, I do not believe in technical investing. Or to put in another way, there is no solid logical ground showing that technical investing will outperform the market over time. In any case, any brilliant performance in one period may just mean that the investor may be very lucky in that period or the investor’s strategy is very well-suited in that period. In the long run, however, it may be a different story altogether.

Perhaps, I am being to kind to myself in not re-examining my liquidation decision last week. And most likely, I would not liquidate as severely as I did last week when the next correction appears. Nonetheless, I believe that I should at least liquidate a little during corrections so as to take advantage of the low prices in other stocks if the situation arises. In addition, the liquidation would also help me in re-positioning my portfolio.

Yet, liquidation is costly as one can miss out the unexpected market recovery with certain transaction costs. Therefore, perhaps it may not be ideal to do heavy liquidation but a little liquidation may not be that useless or bad, after all.