Beware the risks, buy only if you see value

[Musicwhiz]

I feel he's not saying much - basically his advice is to decide on whether you are bullish or bearish, instead of focusing on the businesses of specific listed companies.

The Straits Times
Jan 29, 2012
SMALL CHANGE
Beware the risks, buy only if you see value

By Aaron Low

For most of last year, as the stock market was hit by waves of volatility, I was quite content to stay on the sidelines, preferring to hold cash rather than jump in.

Many investors were happy to see the end of 2011 as they turned to welcome in 2012, the Year of the Dragon in the Chinese zodiac - hoping it would bring them the prosperity that had eluded them in the previous year.

It seems they got what they wanted.

Since the start of the year, stock markets have rallied, thanks to renewed hopes of the impasse in Europe being solved, the stronger economy in the United States and the possibility of another round of quantitative easing.

The Dow Jones Industrial Average hit 12,660.46 points on Friday - a touch below the heady 13,000-point highs seen in early 2008, just before the financial crisis struck.

At home, the Straits Times Index has been one of the star performers in this part of the world, rising by nearly 9 per cent since the start of the year to 2,916.83 points, a three-month high.

Indeed, there seems to be a sense of optimism these days - a stark contrast to the situation just a few months ago, when the markets were whipsawed by the crisis in Europe.

The big question for the ordinary investor on the street is whether the markets have bottomed out and the bulls are back for good.

Some of my friends are wondering if they have missed the boat and they are getting panicky about jumping on now.

I don't know the answer to this question (if I did, I would be spending money on it rather than writing about it) but there seems to be something not quite right with the current rally.

For one thing, not much has really changed since the end of last year, except maybe a resetting of the dates in the calendar.

Yes, there are tentative signs of a recovery in the US, with the economy there growing by a strong 3 per cent in the last three months of 2011.

However, even as that happened, the US Federal Reserve sounded a warning bell by promising to keep interest rates extremely low until 2014 - which suggests that not all is well.

In addition, Fed chairman Ben Bernanke said he was prepared to embark on another round of bond buying to help create jobs in an economy that has an 8.5 per cent unemployment rate.

Even though quantitative easing can boost stock markets, the effects are not permanent.

One asset manager, Hermitage Capital chief executive Bill Browder, recently called the loose monetary policies in the West nothing more than a case of keeping global equity markets on 'life support'.

Likewise, Europe is still struggling with mounting debts. And ironically, countries there are being hampered by the very austerity measures that many expected initially to provide a panacea for their debt woes.

As Phillips Securities analyst Joshua Tan wrote recently in a note: 'If we ask ourselves what economic story is guiding the outlook, we have to be sceptical.'

Given these great uncertainties, the risks seem to outweigh any potential rewards that an investor could gain in the short term.

Instead of jumping on the bandwagon, or getting worried about missing the boat, I still prefer to hang to my cash and to buy only when I see value in the companies I watch.

After all, prices are temporary but value is permanent.

[Bibi]

I thought the reason why stock ran up high is also because the data in China shows there is no hard landing?

[dzwm87]

There are lots of reasons I guess. It can be macro factors or even systematic reasoning.

For instance, at the start of each year, some investment funds have more liquidity to purchase stock (after cleaning up their portfolio at the end of last year). This can drive up stock prices as well.

Essentially, what the article said is true. "After all, prices are temporary but value is permanent."

[Temperament]

{Instead of jumping on the bandwagon, or getting worried about missing the boat, I still prefer to hang to my cash and to buy only when I see value in the companies I watch.
After all, prices are temporary but value is permanent.}

Unquote:
i beg to differ. The value of a company is never static and is reflected in it's daily price by Mr. Market.
The current price may be over value, under value or fair value and may be reflected in it's dividend yield too. You only can find firesale value of a company after and during a severe Bear Market. At any other time, it's very difficult to find a bargain. But do you have the guts to buy during this "frightening time of the market?" Most people don't. Sometimes, i lose my guts too.
Another words, the fundamentals of a company may or can change with what's happening in the next moment in the world. And that's why not only you have to keep monitoring the company but also the world. That's why insiders of a company have all the advantage of the market and they are not suppose to trade before company's news is in public domain. But do you think insiders always follow the rules and regulations? If so, no rules and regulations are needed.