My Investing Journey: Bull Markets and the Wall of Worry 2 comments

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Today we look at the STI at above 3100 and the SESDAQ at above 180, and we wonder: is the end looming near? There are many who worry about this every time the market drops a few percentage points, and quite a number among this many who have actually taken action on this worry ie. liquidated their holdings. There are others among this many who cannot sleep at night, as evidenced by the late-night postings at 3am or 4am on some of the online forums.

Without attempting to influence opinion either way, I think back to late 2003-early 2004 when I was struck with the same worry about how long the "great market" would last. From the pits of market sentiment in mid-2003 when SARS gripped the country, and sometimes even our omnipotent government, in fear and helplessness, a stealth bull had risen from the ashes and lifted the tide until fear turned to hope and then hope turned to excitement. From 1300 points in mid-2003, the STI was up to 1750 by October 2003 and the SESDAQ went above 120, from about 50 just four months earlier. The holding period percentage gain makes today's mature bull market pale in comparison.

In those days, technology stocks were the hot stocks. Cyclical and volatile, they are the first to boom in a recovery when capacity utilisation suddenly shoots up. The picks were Huan Hsin, Seksun, Amtek, Meiban, Allied, Surface Mount --- all suppliers to the electronics industry. Several of these had doubled within several months. As I looked at the newspapers every morning, I wondered how long the bull would last.

This is human nature. When something trends strongly and we benefit from it, we will wonder how long our good fortune will last. I was making good money in late 2003. It is the rational part of our soul begging to be heard; it is also our vanity telling us not to behave like those mindless masses who are bidding everything to the moon. Get a grip on yourself, the good times won't last! I am sure many others were also struck by this kind of thoughts, even those aunties and uncles who were beginning to talk about stocks again. After all, it was not even five years from the last crash, and memories were still fresh.

Anyway, I was then reluctant to leave the market because surely three years of bear had not positioned us for only a half-year of bull? Besides, my hand was strong; I never played margin (and probably never will) and so be it if the market decided it was going to be another sucker's rally. In short, I was damn gung-ho, even though market sentiment was obviously peakish (read my writeup on Allied Technologies: a good gauge of peakish market sentiment is that it can choose to interpret corporate developments in a totally irrational manner). Another thing that I recollect is scanning through the Shares Investment publication in January 2004 and finding few single-digit PE stocks even among the "Lowest PE" section, less than 30 I think, which is really low compared to the total number of stocks then on the market (about 600-odd I think). In short, sentiment-wise and valuation-wise, there were grounds for exiting the market to protect oneself. There was a perfectly valid wall of worry there.

Just for the record, the bull did fall off from that wall. The STI sort of stagnated in 2004 but the rot in the smaller-cap stocks, encapsulated by the SESDAQ index, set in as early as November 2003 and dropped steadily to below 90 by mid-to-late 2004 (there were also market dampeners such as corporate scandals and China applying administrative controls which added to the gloom). So, if one looks at the glass of water and chooses to see it from the half-empty perspective, he would have found incriminating evidence in the above intermediate market correction to prove his point that reading the tea leaves would have helped one to exit the market in October 2003 and hence capture all the gains and none of the subsequent anguish.

And yet, an ex-post (after the event) view is obviously hindsight trading (a new term I learnt on an online forum). What has borne out in the years since 2004 has proven that the long-term fundamental view was intact, manifesting itself in a broad-based, structural bull market that overcame the initial hiccup (which was what the early-2004 market downturn turned out to be) to drive on through 2005 and 2006. Suppose that the hiccup had happened only much later, say in early 2006: the market timer who'd exited in October 2003 would have missed out on a large portion of the secular bull market. That is the opportunity cost risk that cannot be avoided. Another issue, of course, is that of sector rotation. The tech stocks were the market leaders in the first segment of the bull market, pricing themselves to excess by late-2003; but as they fell in 2004, new sectors came to prominence, most notably the shipping (exemplified by NOL) and commodities sectors (exemplified by Noble and SPC); so rather than thinking of the market as a single bull scaling a wall of worry, one may instead imagine it as a horde of bulls that are successively stopped by obstacles along various parts of the course. The alternative, more sanguine market timer's task would then be to analyse which is the next bull to ride on when the current one gets stopped in its tracks, rather than choose to exit the bull race altogether.

And of course, it is quite likely that after making such a case for a long-term bull market scaling a wall of worry as described above, the market might just collapse tomorrow. :-)