Saturday, March 15, 2008

Bottom Fishing!

My Dearest MooMooCow,

Yes, stocks have retreated a lot and I can see where you are coming from when you said you wanted to go value investing or bottom fishing for some stocks.

However, do realise that you do not really have to buy stocks at their bottoms to make money. Bottom fishing is dangerous simply because in the markets, bottoms takes much longer time to form than tops. A stock could be cheap at 10.00. It could even be cheaper at 9.00. And it could be much cheaper at 8.00. How? Average down mah, so says the super investing sifu (most kung fu sifu dies in the movies). Since at 10.00 it is cheap, at 8.00 you should average down by buying more! Yeah, and then the stock goes down more to 7.00. Well at 7.00 the stock should now be super cheap. Buy even more? And at 6.00 it could be extremely super cheap. And I could go on and on how cheap this could get. The obvious question is do you have enough capital to buy the stock all the way down?

And what if your stock selection is flawed? By buying the stock at each single step down would ultimately mean that you just had multiplied your flawed stock selection or investing mistake all the way.

Of course, you would argue that how could the great cow could have flawed? Well, stocks are usually deemed attractive based on what it would earn in the future. Hence, you make your earnings guesstimation on how much this business would earn the following five or ten years.

The next five or ten years? So long? Are you kidding man?

Well you wanna be a buy-and-hold long term investor yes?

Value investing, yes?

Here's a simple explanation. Take a stock that I blogged recently. Maybulk. Commonsense would suggest that a higher BDI would indicate higher charter rates and it should ultimately equate to higher profits for Maybulk, yes?

However, this index had been really volatile. Back in Jan 2008 I blogged the following post. Update on the Baltic Index. Look at the Baltic Dry Index chart from 1985 to 2007. On that chart, it indicated that the Baltic Dry Index had been under the 2000 level from 1985 to 2003. Then things really picked up in 2006-2007 when the BDI soared past 11,000. But the index swiftly plunged to 5600 back in Jan 2008. And it had rebounded past 8600 early this weak but the last few days, the index again corrected swiftly, falling back down to 7972.

Mighty confusing?

Now if you want to buy-and-hold this stock for the long term ( or forever) than surely it make sense that you need to have a guesstimate on how much the stock would earn say the next five to ten years.

And for Maybulk, it's future depends so much on the BDI. As mentioned, the index had been so rather volatile the past few months. So the key issue is do you know what the fair value of this index now? Is it 5600? Is it 1100? Is it 8000? or is it 3800?

And how much would you guesstimate the index for the next five or ten years?

If we do not have a reasonable answer then how would you know that whether your investment now in Maybulk is considered cheap? Would it even make sense?

Last but not least, please do not bottom fish based on how high the stock price traded recently! That isn't bottom fishing from an investing perspective!

Remember bottom fishing if practised wrongly could and would cause severe damage to one's personal wealth and health!

Especially when one employs an aggressive average down approach while bottom fishing!

Average down is so rather risky. Well, if the markets are kind, then you would look incredibly smart when the market recovers shortly after you had averaged down. But life is never always kind. Sometimes we could be correct but the markets can be so un-kind. Sometimes we are simply wrong and averaging down simply mean multiplying the mistakes!

Yeah some say, tommorow never die!

Some say die another day!

Some simply say die faster!

Stephen Chow says

or would you prefer Madonna?

ps. any tipsi?