Is market becoming overcrowded?

[newborn1000]

From past experiences, there really is an affect on forum activities during bull/bear markets..........

During bear markets, activity is v.low.........I remember joking abt it on various forums

Sometimes, old nicks disappear........like thailand hero, fortuna etc

[kazukirai]

Kazukirai-san, I really admire your courage for being able to stand up again after that horrifying day. Worse of all, its the eve of that collapse. Never forget that day ever. It looked as if the whole global financial system was coming to an end, and I was scrambling to get my close ones' insurance policies out of AIG.

Hi Arthur-san,

Thank you for your kind words. I think you over-estimate me. In fact, I was rather lucky that I was only starting out at that point in time. I had some savings and barely started working just a few months so in hindsight I was lucky that I didn't have much money to invest anyway.

If I started investing and working say in 2004, 2005 and had a much bigger sum invested, I think I might have been scarred both mentally and financially such that I swear off investing in equities completely.

In fact, on hindsight, I think I couldn't be luckier in the sense that I experienced what the bite of a bear market feels like and yet come through it doing relatively well early in my (hopefully) long investing lifetime.

But again, short term memories prevails and alot of the newcomers forgot about it or never personally experienced.

If your portfolio is profitable. Congrats. Check if some are overvalued. Most people overestimate their driving skills. But the truth is their driving skills are on the same par as their investment skills. (I included) That's why we horn each other on the road all the time.

Couple of advises I would like to share:
1. Check if any counters are overvalued now relative to P/B or P/E or whatever you wish to correlate to.
2. If you are holding penny stocks or worse, China penny stocks, think harder how to manage them.
3. Are you allocating enough for your emergency cash? Or even an opprotunity fund (a idea quoted by Dennis, ex-forumer)

I have nothing to gain for writing these out. In fact, I would prefer all the newbies to punt all their life savings in so that I could get my portfolio more profitable. Since the motive of this forum is to share and to educate, I am doing my part.

Now.. for the newbies part, do your homework and see if there's a need to rebalance your portfolio.

A statement I would like to share:
A bird in your hand is worth two in the bush.

Cheers.

Thank you for your kind advice. I'm sure many of us will benefit greatly from this. Couldn't agree more with what you say about many of us over-estimating ourselves like drivers in Sweden.

Talking about driving related analogies. I have a true story to share. I have a friend who's one of those road warrior types. Driving fast, braking hard, tail-gating. Those are his normal driving traits. And I always tell my friends that this friend of mine is a very very good driver! However, he's also gotten into his fair share of accidents.

Moral of the story? Even if you're the best driver, it doesn't help when there are many lousy drivers around and the laws of physics can't be altered. Can be applied to Investing I think.

---

I too get wary when I see the Handbook for Stock Investors hit the top 10 list for non-fiction books every sunday for several weeks at a stretch.

Is this true? Wow, I never realized it until you mentioned it!

This is very non-scientific because I haven't been keeping records but I realised it sometime in 2007 and even through 2008 I think. If anybody has this sort of observation for the periods leading up to the '97 AFC or the '00-'01 Dot Com Bust, please enlighten me.

Maybe must wait for him to release a new edition? Think there's one every one or two years. It kind of makes sense because only with more demand will they do a update and re-print. And the publisher is Rank Books which also does online sales which I guess they can take as a gauge as to whether to do a big enough reprint to flood Popular with the books.

On another note...I haven't seen the Handbook for Stock Investors on the list recently but...I noticed that there's been more titles on Property Investing for the layman released within the last 1 year...

[intellect]

This is very non-scientific because I haven't been keeping records but I realised it sometime in 2007 and even through 2008 I think. If anybody has this sort of observation for the periods leading up to the '97 AFC or the '00-'01 Dot Com Bust, please enlighten me.

Although it is non-scientific, it is true based on my personal observation starting from the '90s. I was also one of one who bought the investment guides when the market started to get hot.

However, based on my experience, this only signal the start of bull run/bear trap. The market will continue to get hotter. When it will crash is anybody's guess.

Additional note: Stick to the fundamentals and your investment will likely to be safe.

[Musicwhiz]

In my opinion, one of the ways to spot an impending runaway bull is when people start to think more about making money than preserving capital. This may look tough to spot on the outset but if one observes other stocks/shares forums more closely, one can notice the general tone of the participants. Talking to actual people about how they feel on making money or getting a decent return will also give some indication as to whether things are really heating up.

Personally, I've noticed more and more people looking out for "üpside"instead of protecting their downside. Perhaps we will see more and more of this in 2011.

[kazukirai]

In my opinion, one of the ways to spot an impending runaway bull is when people start to think more about making money than preserving capital. This may look tough to spot on the outset but if one observes other stocks/shares forums more closely, one can notice the general tone of the participants. Talking to actual people about how they feel on making money or getting a decent return will also give some indication as to whether things are really heating up.

Is this what they would call a self-fulfilling prophecy?

[nextwave]

In my opinion, one of the ways to spot an impending runaway bull is when people start to think more about making money than preserving capital. This may look tough to spot on the outset but if one observes other stocks/shares forums more closely, one can notice the general tone of the participants. Talking to actual people about how they feel on making money or getting a decent return will also give some indication as to whether things are really heating up.

Personally, I've noticed more and more people looking out for "üpside"instead of protecting their downside. Perhaps we will see more and more of this in 2011.

friends,

a bit of an educational and warning post for those of you that are not yet proficient in analysing companies ( actually this also includes many so called "analysts")


I am not usually a fan of small cap investing especially those in the SGX market given their low quality in general , out of curiousity i looked at some of the recent small cap IPOs small caps and was shocked to say the least! Absolute robbery!

let me take china eratat as an example (other more recent ones are much worse) to illustrate what i mean:

This fashion company sold its share to the public at 30cents which means the company was valued at IPO at 124m$ given 414m shares outstanding after the IPO.

Now, the first question a smart and sceptical investor will ask is how much did it cost the owners to own a piece of their company, diving into the DILUTION section of their IPO prospectus will reveal that a mysterious "hero win" comprising 2 gentlemen own 212m shares at a mere 2.2 cents per share or 4.6m for 50% of the company!!

another "sterling coleman" was given 37m shares for 40k or .1cent per share! pre-ipo investors a very strange group with names sounding like funds paid 22.5cents, however not looks to be kosher here as no fund worth its name would pay that price, not a single name can be verified, finally the biggest suckers the public pays the grand price of 30cents, in other words whoever paid this price was paying 124m for the company.

what did that the public get for 124m? let u take a gander at their balance sheet:

actually there is nothing to look at here! it is the emptiest balance sheet ever- in terms of fixed assets there is only 2.5m$ of PPE, the liquidation value of which is likely to be close to zero, current assets are full of "amounts due from xxx" type entries and a grand cash balance of 800k!

liabilities is meatier with short term borrowings of 8m$ which incidentally is equal to their entire 2007 net profits, so the IPO money will certainly come in handy, for some strange reason they also have a "dividend payable" as a liability of another 5m, which probably is a euphemism for shareholder loan or something of that sort

all this leaves the buyer of the company with a princely sum of 6m$ in reserves or a book value of 1.4cents per share (6m/415m share post ipo), this is as per the march 2007 audited results, the sept 2007 one seems window dressed for the IPO but even here the NAV is only 8m$.

Would you pay 124m$ for such a company? actually you would, this is a super company in terms of earnings in 2007 as per their prospectus they made 8m$ on equity of 8m so 100% return! warren buffett would kill for such a company!

anyway, i will leave the earnings tricks for another post, but let me finish by making a general comment here and a warning to "value investors" who get seduced by cheap small caps

don't make the mistake of thinking just because these companies have a high degree of inside ownership their interests are aligned with yours- THE TRICK IS THAT THEIR COST IS MUCH DIFFERENT TO YOURS , i just gave you the numbers for this company, look at any recent ipo and you will see that the owners got their stakes for a pittance all the owner has to do is "place " out 5% of his stake and he will make an obscene profit and would not care less if the company goes bankrupt, taking China Eratat's
example the owners of the company 2 gentlemen from "hero win" paid 4.6m for 212m shares or half the company which at IPO time was worth 62m, so they have multiplied their stake by 13X, do you think they give a hoot if the price of the shares dip 30 or 40%? they will simply place out a few million shares at even 15cents before the customery delisting because of "continued undervaluation"!

long post but hope you learnt something you are unlikley to find in analyst reports

cheers

[arthur]

Interesting line of thought Thanks.

[mrEngineer]

Thanks nextwave. Learnt something from your post

[Musicwhiz]

Thanks nextwave,

I have some knowledge of how the IPO market works, and used to do some pre-IPO deals; therefore I understand what you mean by the original shareholders holding their shares at very cheap prices. That is usually the case - when venture capitalists or private equity funds start pouring money into the Company, this would mean the new shares issued already command a much higher "value".

We have all read the classic story of "Confessions of an S-Chip CEO", about how numbers can be manipulated to give the appearance of a Company doing fabulously (as nextwave said - 100% ROE!) even though this is misleading as there may be channel stuffing or it may be entirely cyclical.

To keep this post short, investors should be wary of companies which come to market through an IPO during bullish times, as I am sure many S-chips did. Even if a company has a clean BS and nice FCF, it may NOT make a good investment for reasons other than the numbers. It may be qualitative and involve Management or other aspects, but value investors will do well to take a long hard look first before committing their funds.

Regards.

[kazukirai]

Great post Nextwave.
Best thing I've learnt today.