Wednesday, July 14, 2010

When to buy?

I happened to see my buddy unicorn78's comments that he wanted to get some reits/divy counters but is not sure if now is a good time to get in. I gave that question a fair amount of thought because I've asked myself that question a few times too. So, instead of sharing with him alone, I thought it'll be good once I posted my views, the other more experienced market practitioners can share theirs in the comments.

As we learn more and read more about the market, I've no doubt that you'll definitely come across conflicting advice. One camp would say you should never average down your losses just to get out as it is more risky, the other would say you should buy more as the price gets lower to get a lower average price. Frankly, I've done both before. For longcheer, I averaged down as the price gets down until finally I can't take the losses anymore and cut off that gangrene in my portfolio at a huge loss. For HSBC, I average down and bought even more as the price falls, reducing a huge potential loss and it is now sitting around at breakeven level.

I think advice is one thing but the more important point in making the advice work for you is wisdom. You need to know when the advice is suitable. I believe all the advice works, given the correct condition. Thus, the hardest part is to know when to use which advice. So, that is my disclaimer for all my blog articles.

Here's what I will consider when answering the question of whether this is a good time to buy reits/divy counters:

1. For dividend yielding counters, I would want to look at yield of course. Once it hits a certain percentage, I would nibble a little. I never buy the exact number of shares I want in the first try, always in bullets. I've learnt enough in the market that there's no point timing the exact bottom - it's an exercise in futility. Follow snr bro's advice - buy slowly sell slowly. Depending on market condition (check TA), I'll break down the total batches in 2-3. Once I got in the first batch, I'll be a lot more stingy when entering the second batch, always preferring to look for the right TA set up before entering again, so you can say that my first batch is a test batch. Don't ever worry about transaction cost when buying in batches. I'll treat it as an insurance cost to prevent more capital loss than the minimum $25 paid for brokerage.

Personally, 5% is not enticing enough. There are banks preference shares that are a million times safer than reits/dividend counters with 5% yield. 7% is what I'm looking at. 10% (at suitable gearing) would be what makansutra would say, "Die die must try!"

What's the similarity between this picture and a 10% yield counter? Both have a "Die die must try!" stamp of approval on it

2. I find that reading up extensively before you buy can give yourself peace of mind when you are averaging down. The more you understand the situation, the more you can assess it and you can decide your course of action without fear. If I buy a counter which I did even know much, I wouldn't have the courage and conviction to buy buy to average down when the prices go down. So FA to me is just that - for the courage and conviction to buy when others are fearful.

Once you've read enough about the ins and outs of the counter, I'm sure it'll be easier to hold even when the market crash. In fact, I think you'll be wanting the market to crash to load up another bigger batch after your smaller tester batch.

3. The problem can be looked at in this way - if you wait longer, you miss out on the potential rally and perhaps several batches of dividends coming your way. Conversely, if you buy now, the market might crash and you might lose a lot of capital (albeit paper losses) but you get to have the dividends while waiting. Let's break down the problem:

a. Check the potential downside from the charts. Look at the possible support points. If the price is too far from support, maybe wait at support before buying a batch. Make sure the price at the support level satisfies the yield that you plan for. I don't compromise on yield because if I have to hold a dud for long, I would want to be adequately compensated for in terms of dividend.

b. How much is the upside? Again, look at the charts for possible resistance. Don't ever get near resistance level (unless you want to buy on breakout....I don't do breakouts anymore) because the possible downside risk to the nearest support might not be worthwhile.

c. How much dividend are you going to get? If you know your downside risk to the next possible support in (a) level and how much dividend you are getting in (c) plus the upside you might get from (b), I think you can get a risk/reward calculation whether to get it right now or wait. Especially useful when combined with the bullet system of buying any counters in batches.


AK71 said...

Hi LP,

I can identify with this article! ;)

Investing in such trusts is mainly about generating a steady passive income (cash flow) and to do this well, we have to look for low gearing, high yield and attractive discount to NAVs. These factors will ensure that the trusts' distributions are meaningful and sustainable.

Jeremy said...

Dear LP and AK71,
I agree with both of you as well. Investing being put simply is about assessing whether a company is an investment candidate based on it's quality of earnings or dividend yields. Two criteria comes into play, whether there is basis of consistency of earnings or dividends and whether the earnings and dividends are high enough to make it profitable for the investor.

To find out all these is to dig deeper into what the business of the company is about (fundamental analysis) and then forecast based on analysis whether the quality of earnings or dividends will continue to remain high or even improve higher in the future to come. So, there is nothing guaranteed in future about the quality of earnings/ dividends even as one has done substantial homework into the business as the business field is very fluid and dynamic to changes. However, doing one's homework beforehand is still important so as to forecast with some amount of certainty that the company of investment choice may continue to perform in future still.

Price to pay for the shares or units is equally important just that price is looked into only after one is certain that a company is of investment choice. As a value investor, I will attempt to estimate the intrinsic value of the company (based on discounted cashflow method) so that I know whether the current price is attractive enough to pay for it's shares or units. This exercise is again not foolproof as the intrinsic value one arrives at is only an estimate. So, a value investor still seeks to invest at a margin below this intrinsic value so as to get the best possible deal on the shares or units of a company.

I do not really do TA as I am similar to LP, always buying in many batches to average out the holding price. As long as my average holding price is well below the estimated intrinsic value of the invested company, I am satisfied already. As to when to buy shares or units, do it more often when pessimism in the market is highest when shares or units are drastically "deflated" in value.

In summary, a lot of homework needs to be done before deciding whether a company is a good investment candidate and also when to invest based on comparing pricing to intrinsic value estimate. However, the homework does not guarantee success since nobody can predict the future of a company to 100% accuracy. That being said, doing one's homework still helps to seive out the flowers from the weeds to some fair amount of certainty.

There are definitely much more things to learn on investing than what I mentioned. This is just a few simple basic things I picked up along the way.

Cheers :-)

Anonymous said...

Hi LP,
I'm a newbie, Can your please elaborate more about the preference Share that giving 5% to return per year.


Kyith said...

in singapore there is little sustainable companies to buy and hold.

that is my current view. the ones that have are expensive.

i would rather buy expensive things sometimes.

la papillion said...

Hi AK,

Haha, read your post before :) I think your criteria are very sound. If really pressed for time, I think based on your 3 criteria is enough to screen out a lot of counters :)

la papillion said...

Hi Jeremy,

Thanks for taking the effort to type out such a lengthy response :)

There really is nothing much more to add to yours as you've succinctly summarised everything so well :)

la papillion said...

Hi anonymous,

Read this post of mine:

It might be above or below 5% yield, depending on the price you buy at. Let's say "OCBC Cap 5.1% NCPS 100", it's only 5.1% yield per annum at the par value of 100. If the price now is above par value, you'll get lower yield.

la papillion said...

Hi Drizzt,

Expensive things might be of value, it might not be of value. Cheap things too :)

I agree. Expensive things definitely you can buy and don't buy all the cheap things thinking they are of value :)