Don’t make the same mistake that I made 2 decades ago

For the calendar year 2018, the Straits Times Index (STI) retreated from 3400.91 at the close of Year 2017 to 3068.76 at the close of Year 2018. The absolute fall for the calendar year 2018 was more than 10%. It had defied the predictions of many analysts. Many of them were generally bullish at the beginning of Year 2018. By today, on the 1st day of trading for Year 2019, it retreated another nearly 30 points, -29.87 (to be exact). Surely, many players have been slowly but surely cashed out of the market as the market retreated. Even those with cash to spare were not willing to get into the market. Just as we know in economics, there were more sellers than buyers for year 2018. That, precisely, was the reason for the market to fall.

With each market fall, it flushes out some players. The unfortunate thing is market retreats and advances are never linear with time. They are never exactly predictable, especially over a longer of period of 6 months and longer. Market volatilities are due to the changing political, economic and social conditions that are thrown out into the market from time to time. Frankly who is able to predict what an influential political figure will say or act next week or next month or next year. Most of the rise and falls were due to some smart Alex out there trying to anticipate the moves of these people before things really happen. Unfortunately, time and again, it almost always sucks in new players and throw out some others as the market rise and falls in a falling trend. Many players, who were unable to take the market gyrations would have cashed out of the market, and stayed in cash in hope to fight for another day.

Let me say this. Market gyrations are not an easy thing to stomach, especially for those who are very watchful of the market movements. In fact, many are willing to take losses and leave the market instead of riding through the market ups and downs as sentiments get hazy. Along with the falling market, I am quite sure a number of us have this floating thought “I would rather take a small return of even 1-2% to protect my capital than to see my capital dwindling with time.” That precisely became the guiding principle that drives their action. So, instead of staying liquid after cashing out, they choose to put the money into more certain investments. They gladly put their money in longer term plans, such as fixed deposits and Singapore government bonds and even insurance plans that can only yield rewards (if there really are any), at least, 1, 2 years or even a few years down the road. I mention this because I happened to see some posts in social media lately. Some people seemed to have decided to take this course of action. Frankly, this was exactly the mistake that I made 20 years ago.  

STI was retreating for several years. It hit 805 in Sep 1998. It sprang back to 1500 by end 1998 and then to 1500 by end 1999.
STI from January 1997 to December 1999

For at least 2-3 years leading to the peak of the Asian Financial Crisis, the market had already been retreating. As a rookie who had never seen a long-drawn market retreat, I was holding out very hard in hope that the market would turn around. It never did. It was down and down. Then, suddenly, the stock market fall started to gain momentum, as the Asian Financial Crises started to bite. That was the time I caved in and sold out. Instead of holding the much smaller sum in cash, I put them in fixed deposits. That appeared to be the wisest thing to do at that time. Between a steep falling stock market and a high fixed deposit (FD) rate of 5%, it was almost a no-brainer to put the money in FDs. The reason for the relatively high rate was that liquidity was drying up as the neighboring countries were battling to stamp the falling value of their currencies due to massive currency outflow. Along with the falling currencies, stock markets were retreating at an accelerated pace. My naive thinking was this – one year is not a long time, and hopefully by then, the market would be calm again for us to re-invest. Meanwhile, we should let the money work hard for us by channeling it to an avenue that yield the highest possible return.  

It was a wrong move. While the cash was still in the FDs, the market was making a huge turn around. For the next three months (or around end 1998) after the bottom, it gained 50% (In fact, 50% was an understatement) – see diagram. What the hack! I had effectively traded off a 50% gain within 3 months for a mere 5% gain in a year down the road. From the low of 805 in September 1998, it zoomed all the way to around 1500 by the end of 1998.  Then, it gained another 50% from 1500 in the year that followed. So, by end of 1999, it was at 2,500, recovering all the losses that it incurred in the previous few years.

What were the lessons here? Cash is king during a crisis. So long as it is not invested, cash remains as cash. Cash is no longer the king when the crisis is over. Count ourselves lucky if we had sold out before a huge market fall. But we need to re-invest at the right time to make significant gains. In other words, we need to be right twice, to time the selling correctly and to time the buyback correctly. When it is too late, just ride through. It’s a matter of the survival of the fittest. In fact, consider to invest more if you have the means. You may have the last laugh.

Disclaimer – The above pointers are based on the writer’s personal experience. They do not serve as an advice or recommendation for readers to buy into or sell out of the market. Everyone should do their homework before they buy or sell any securities. All investments carry risks.

Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.