Should I Buy Stock Now? (Part I)

Is This The Right Time?

God know! The obvious answer is god know! But yet this is the most frequently asked question from my friends and colleagues. The prices of most companies are quite cheap now as compared to end of last year. For one thing, I am currently sitting on an unrealized loss of approximately S$10,000!!!

“I thought you are a guru?”

Firstly, I never claim that I am a guru; I am still learning. Secondly, even the experts can also bankrupt let alone suffering losses. Let me share a part of the story from the Romance of Three Kingdom ( 三国志 ) with you. After retreating and avoiding Cao Cao’s (曹曹) attack, Zhuge Liang (诸葛亮) finally decided to defeat Cao Cao once and for all at Chang Jiang (长江) – with the help of Dong Wu (东吴). To persuade Sun Quan (孙权) to partner with Liu Bei (刘备) to repel Cao Cao’s forces, Zhuge Liang presented his strategy that guarantees success.

All the ministers contributed their fair share in trying to topple Zhuge Liang's plan. One of the ministers countered his proposal by asking Zhuge Liang – “if you are that good, can you explain why your forces were defeated and escape from Cao Cao’s forces until you reached Jing Zhou (荆州)". To this question, Zhuge Liang answered, “there is never an undefeatable army in this world. Being able to protect our people, to bring them along until we reached Jing Zhou is already a great success paving the road to greater victory. We won the heart of our people; this is the greatest victory".

In the War of Chi Bi (赤壁), Cao Cao lost nearly one million soldiers thus equalized the three forces in the Central. We called it 三国鼎立.

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And lastly, my losses does not affect my daily life at all. In fact I am planning for a holiday next month. Yes I am upset but the loss will not upset my life. The reason is simple - I didn't gamble and the companies I invested in have reasonable fundamental plus yield.

The Threat

I will not beat around the bush. IMHO, the uncertainty in US economy is very real and probability of a recession seems to be getting higher. US consumer confidence is dropping and we just don’t know how deep this subprime problem is. So for anyone who claimed that US recession will not affect us is telling the biggest lie – our products exported mainly to US and Europe. China and India is not big enough (does not have a large stomach) to replace US demand. So how can someone say taht it will not affect us. Economic downturn will cause the stock market to clash which recent correction (since end of 2007) is already bad enough. And I think that it’s about time for the bear to sleep.

And not forgetting that oil price still hovers around $100 mark. One of my friends who is current working in a fund house believes that high oil price is “OK”, i.e. not a concern. I totally disagreed with his views even though he is working in a fund house and I am not. Why? Because I have commonsense. Like my lecture used to say, “commonsense is the least common human attributes. High oil price will increase production that will ultimately pass on to the end consumers. And so the workforce will demand high pay rise to cope with high living costs. And when labour costs went up, businesses will……. The whole chain effect, if uncheck, will finally explode. I mean it has to be.

Reported in Business Times dated 20 Feb 2008, MAS MD Heng Swee Kiat said that a sharp and deep recession in the United States will hit Asian economies. The following is an excerpt of the newspaper report.

"Wading into the debate on whether Asia has de-coupled from the US, Mr Heng said the region has significant links with the world's biggest economy through trade, investment and finance. Only if these linkages are significantly weakened can Asia be said to have de-coupled from the US, he said yesterday at a fund management conference.

Still, the short-term outlook for Asia remains generally positive barring any sharp deterioration in the global economy, he noted. The current forecast is for Asia ex-Japan to grow at a fairly healthy pace of around 7.8 per cent in 2008, one percentage point lower compared to last year."

So Is It The Right Time To Buy Share?

In my opinion, you should shun away from the stock market until the sky is clear. However, personally, I don’t think it is going to be cleared this year. There may be bull-trap but I have no faith that all this economic problems can be completely resolve this year. Having said that, and unfortunately, you also can’t place your spare cash in the bank. I strongly discouraged you from doing so. For many years, local banks have been giving out pathetic interested rates; rates that are below the inflation rate. And now this problem compounded with inflation rate at all time high. Putting large amount of spare cash in whatever bank account will ensure that you suffer a lost in money value.

“I’m still waiting for your recommendation.”

I propose three options to maximized your returns:

1) Pay up whatever debts you have as much as possible. In times of high inflation, where money value eroded, clear your debts with all your spare cash unless you know of alternative investments that yield even higher returns with calculated risk. For example, try to pay up your car loans or housing loan as much as possible if the financial company allows you to do so. Let your creditors deal with the high inflation problem.

2) Transfer your spare cash into the CPF. Thereafter, you can move some money from the Ordinary account to the Special account. The Special account gives out at least 4% rate currently and is meant for retirement planning. However, remember that by doing so, your spare cash will be locked up in the CPF.

3) Buy high yield and fundamental stocks but this requires strategy. Although the stock market is quite risky now, there are still a few fundamental stocks that give out good and presumably stable dividends yield. One such group of companies is the REITs.

In my next sharing, we will look at some of the REITs that look attractive. Before I close, just to give you a hind, Suntec REITs looks attractive to me.