In investing, buying is only one part of the equation. And it is usually the easier part. The other part is selling.
A common question I have been asked by investors is that since my approach to investing is business-centric approach, at which point will I take profit from a company that I have invested in?
I will usually explain that I have a few trigger points on which I will take profit on the investments, and the trigger points are:
- Diversifying into unrelated business with no real justification.
- A change in company’s direction.
- Valuations run ahead of its fundamentals.
- Total change in management due to takeover or other possible reasons.
However, I must admit I am not a good “profit taker” and many a time I didn’t manage to take profit when I should, due to my belief in staying invested in the market.
However, there is another view on when to sell, which is taking into consideration the direction of the market.
There is one investor whom I have had the honour of getting acquainted with, one who has a successful investing record by paying attention to “market sentiment”. His name is Mr. Mak Tian Meng.
Mr. Mak started his banking career in Bank Negara Malaysia at the Bank Inspection Department in 1963. He found inspiration in stock market investments after reading a book written by Nicolas Darvas (1920-1977) entitled “How I Made $2,000,000 In The Stock Market.” Mr. Darvas was a world-famous dancer and self-taught investor. In his view, Mr. Mak said that since a dancer could make $2,000,000 in the stock market, he didn’t see why he could not make a small sum of money in the stock market as all he wanted to do was to make a sum of RM100 to pay for a servant’s monthly wage. So, he took up the challenge and started investing with an initial capital of RM2,000.
When he started buying shares in the stock market, he was nicknamed “odd-lotter” as he had insufficient money to buy a “round” lot, which was 1,000 shares. However, he was never discouraged by the sneering or negative remarks by others.
He made his first million by the age of 33 and over the span of 50 years, was able to make a tidy sum of money and retire from active employment at the age of 47.
Mr. Mak’s strength lies in the use of both fundamental and technical analyses in investing. Being a practitioner of Chinese martial arts, he has always said that knowing and applying the “soft” and “hard” hand techniques (comparable to technical and fundamental analyses) would enable a martial artist to succeed in a fight better than one who uses only one technique. To him, fundamental analysis provides the investor with facts and figures to evaluate a company’s financial strength before investing, while technical analysis enables him to study the technical behaviour of the stock over a period of time, a short number of years or a long period of time, before making his entry or exit points.
His acumen is also in sensing the top and bottom of the stock market. According to him, the most important thing to note in technical analysis is the “power of the PRIMARY trend, which defines the broad market, whether it is BULLISH or BEARISH. This will enable an investor to stay on the right side of the market.
When Pacific Mutual Fund was established, Mr. Mak, owing to his experience as an investor, was invited to be an advisor to Pacific Mutual by Tan Sri Dr. Lin See Yan. A demonstration of his experience was seen when he successfully guided Pacific Mutual through the chaos and disaster of the ASEAN Financial crisis.
At that time, leadership and experience were needed to hold the fund managers together and he provided both. At the height of the financial crisis the local stock market fell 1,010 points, or 79.5 per cent, from 1,271 on 25 February 1997 to 261 points on 1 September 1998. He sensed the opportunity to buy when the market nose-dived to below 300 points although the whole market was panicky and in selling mode.
He was one of the rare contrarians to call a buy in the market amidst extreme gloom.
At the lowest point, or bottom of the primary Bear market in September 1998, the funds were left with RM300 million from the peak of RM700 million in 1997. Despite the sharp fall in the value of the funds, Mr. Mak did not panic but was very calm. He did not push the funds to cut further losses near the bottom of the market although conventional logic was to take losses at the height of fear and despair.
In fact, with the limited amount of money available in the funds, he pushed the funds to invest in banking and technology stocks under extreme oversold conditions.
His advice finally paid off when the market staged a sharp rebound after hitting the low of 261 points post-implementation of capital controls.
A lot of stocks rebounded strongly and the most outstanding ones were the technology stocks.
Eventually, in the year 2000, the funds recovered back all its losses and the market value of the funds jumped back to above RM700 million in a matter of 18 months.
Mr. Mak’s experience in the stock market is truly invaluable to all investors. He has often stressed, “Never look at charts only without studying the fundamentals. Technical [analysis] can only help you up to a certain point.”
Mr. Mak’s reasoning on why despite being very strong in fundamental analysis, one cannot ignore technical analysis because:
“Charts give you a broad perspective of market trend and financial history. No market ever goes up [in] a straight line.
History always repeats itself, but the details are never the same. The Great Financial Crisis of 2008-2009 is almost a repeat of the Great Depression of 1929-1932. The former is caused by the sub-prime crisis and the latter by severe unemployment.”
He has also often said that technical analysis reveals the psychological state of the market.
“In charting, the analyst must understand two fundamental facts. That is, the end of a Bull market is the beginning of a Bear market and the end of a Bear market is the beginning of a Bull market.
The market will move within the cycle of greed, hope, fear, and despair. These are the four human emotions that rule the market. At the cycle of greed, there is euphoria or extreme optimism. When the correction starts, investors will be hopeful of a rebound. When there is no rebound amidst loss of hope, fear sets in, and as the market continues to fall, fear gives way to panic and despair, at which stage of the cycle, the Bear market ends. From this stage a new Bull market is born.
During the despair stage, this is where you can see blood on the streets and there is so much pessimism that this is the best time to accumulate stocks.”
Having a conversation with Mr. Mak on investments will inevitably bring you to some of his philosophical views. A few of these are:
“The stock market is the best place to learn the Universal law of impermanence. As what is quoted by Lord Buddha in the ‘Sutra of the Wise and Foolish’:
All component things disintegrate,
What rises must fall,
All meetings end in separation,
What is born must die.
That is why no market will go up forever.”
One of the most common “disagreements” that I have with Mr. Mak is that I am a proponent of long-term investing, whereas Mr,Mak will say that one needs to examine at what age a person begins to invest in the market.
“For novice investors, a trading strategy should be adopted. Trading does not mean jumping into any stock that is going up. Trading means investing in a stock with good fundamentals, then cashing out and realising the capital profit when your target return is achieved.
Why? Because if investors adopt a buy-and- hold strategy, their capital will be tied up and they will not have the flexibility to invest in other companies when the buying opportunity arises.
Once you reach 30 to 50 years of age, when you have built up sufficient capital, investing should be considered “serious.” This is because at this stage of your life, you have to minimise the chances of making a serious mistake.
Once you go beyond 50, investing money should be considered “sacred.” This is because you can’t afford to lose money and so, one must invest in very safe stocks.’
The best lesson that I have learnt from Mr. Mak is this:
“Whether to buy and hold or to trade, it really depends on your financial position. Do you have money or don’t have money? If you don’t have much money, trade a small amount. If you have money, then you can afford to sit on a stock and wait.
And when I again countered that I invest in good quality companies, he made this remark:
“Big bull and bear markets are international in scope. If the whole market is bearish, no single company can go against the falling tide. Even the strongest stock will be affected. Take the dotcom crash, for instance. Although the crash started at the Nasdaq market, it spread to the Dow Jones Industrial stocks which declined sharply as well.
Not many investors can be like Warren Buffett. He chooses very good companies and these companies generate very good income for him. And when the downturn or crash comes, he has all the firepower to invest confidently in a big way. Do you have it?”
The last statement is painful, but somehow there is a fundamental truth to it.
Next week, we will explore the common corporate exercises undertaken by listed companies.