I used to have this thinking that if one adopts the "buy and hold" strategy, our returns are superior due to the compounding effect.
While this is true, however, due to the complex world that we are living now, things can be unpredictable at times when the bear market comes. Your gains are wiped out completely or if not, in great drastic effect - for instance S&P downgrade of America AAA status causes worldwide markets to panic, the fear of a double dip recession, just 3 years after 2008.
When this happens, your equity (i.e. stock) can be way under your average/last purchased price when the indices fall. Unless your pockets are deep to average down, otherwise the emotional and mental aspect can impact you to a certain degree, no matter how much you try to convince yourself (hey, humans have feelings eh?). You start to see paper losses. You tell yourself it's temporary - after all market will shoot up. You start to seek advises from Professionals or re-affirm yourself that you are right in keeping that stock.
After all, your time horizon is long term and such temporary effects are secondary. The problem is, how long are you able to last?
Usually, cyclical based companies are affected greatly.
For example, NOL (Neptune Orient Lines) posted positive earnings during their quarterly reporting season. Previously, the company faced huge losses. In this short span of time, the market sentiment turned positive and thus causing the price to go up more than SGD$2.00 per share. Now, due to the situation of overcapacity and high bunkering cost with dropping freight rates, NOL share price is trading about SGD$1.10- $1.13 per share (last week prices). NOL management warns that they will incur FY losses should the environment remains bleak. In a sudden turn of event, analysts paint a negative picture, reminding retail investors about the danger lurking ahead.
I did not sell NOL based on the psychological aspect when sentiment could have overrided my rationale but I place a "hold" call as I forecasted the shipping business would improve in the next few years - 2013-2014. On hindsight, I could have sold and bought back lower at a cheaper valuation against my last purchased price.
Which is better?
I missed the market euphoria of NOL completely and have to wait for the next up cycle, which I think could be in 2013 onwards.
Thus, I ask myself this question - "I think I should have sold earlier when the price went up, instead of waiting for my TP (target price) on my forecasted period. I can buy back at a much cheaper price. Now the tide turns over me!"
It was lucky that my last average price of NOL is SGD$1.56 per share. My "buy and hold" in this instance can't possibly work out this far or perhaps I may be wrong.
The objective of the money game is to earn a profit and move on to other projects. So, I have to painfully bite the bullet, steer forward and anticipate the turnaround of the industry. In any case, I am prepared to average down NOL if needed, that is the price falls below $1. When the good time comes, I will sell all my NOL shares.
How about short term liquidity? Will it be possible to earn some amount of cash in passive terms while riding on the market volatility?
Yes, asset allocation is necessary. But do you wait till the dark clouds loom, your Advisor rings you and you start to manage the circumstances?
I am not sure about you but for me, my "mixture of antidotes" shall consist of:
(a) Dividends - to earn passive income when times are bad. It's doing great now!
(b) Capital gains - appreciates over time, taking a contrarian view at times
(c) Short term trading if there is a opportunity (money in pocket!)
Hence, I have separated my mixture to include 2 types of shares:
(i) Dividend paying
(ii) Growth - for example, property
I learn to be flexible and maximize opportunities in the stock market. We can stick to our investment principles, know our risk horizon and plan the time period. However, no one will compensate you when unexpected events occur.
Worse, you have to fork out more monies if the company issues rights to raise cash, that is if you do not want your holdings to be diluted.
My flexibility here is to try my hands in short term trading and in this instance, I have traded Noble Group for some short-term profits. At the same time, I have my Keppel Land shares for the longer term investment - will sell when the next property cycle goes up the trend, historically a 7 years peak and 7 years trough.