Profit from the Panic
After a few peaceful months, one incident has added some spice to the market. On 10th August 2017, the rising geopolitical tension rattled the global financial markets after U.S. President Donald Trump intensified his warnings towards North Korea’s missile threat, sending US stocks to the biggest loss since May. Many experts claimed that if the war happens, it would have ‘big consequences’ around the world.
Interestingly, the threat subsided after a few days, the US dollar rallied and companies’ shares that were panic sold bounced back quickly.
So, did they profit from the panic, or panicked to lose profit? Let’s discuss about how to face an imminent crisis but before that, let’s see how our portfolio fared on 16th August 2017:
By referring to the table, since its inception in November 2015, we have gained 285% returns until 16th August 2017, which is an improvement compared to last month. So, if there is another geopolitical tension happening, how do we handle it? Let me share with you how I handled it this time, so that you may consider using it to your advantage:
1) Realise that any uncertainty is an opportunity
While the market is always jittery due to geopolitical tensions, it is the best time to buy valuable companies at discounted price. So long as it is a one-time event (terrorist attack, air crash, epidemic and so forth) and does not affect the company’s fundamentals, the panicky reaction is always temporary. Once the market becomes sober, investors will rush in to buy.
2) Be prepared
As a human being, we tend to have fear when facing uncertainties. A good way to overcome fear is to be prepared, especially when the event could possibly happen only one-time. So, how do we prepare? It consists of three steps.
First, put all the good quality companies in a watch list. Once the market is panic, you will know which one to buy. Since good companies are normally not cheap, the best time to buy is during unusual time, such as during crisis or perceived crisis, as it’s the only time people will panic sell.
Second, get ready of some cash. Not matter how good the market is, always have spare cash as opportunities may arise when you least expect it.
Third, aim for the right price. You may derive the right price based on valuation, such as PE ratio or PEG ratio, or strong support level based on technical analysis. In our case, Comfort (2127) has been in our watch list, and if it drops to 0.915, it is sitting at a strong technical support. For valuation, we find 0.9 is attractive for the company’s promising expansion plans, net cash position and bright global gloves outlook.
3) Act and Monitor
If the price falls to your desired level, buy, even though you may feel uncomfortable. To continue Comfort’s case, it has hit our desired entry price and we sold 12000 shares of Kawan at RM4.75 and switched to 60000 shares of Comfort (2127) at RM0.92. The new cash level is now RM26225.
But this is not the end, for we don’t know if it’ll continue falling. Therefore, we need to know how much we can afford to lose and set a loss-cutting point accordingly. In this case, we set a loss-cutting point at RM0.87. If it doesn’t hit this point, we will hold it.
As you can see, untoward events do not happen every day. When it happens, it’s best to remain calm and profit from the panic. As Warren Buffet says, “Be fearful when others are greedy; be greedy when others are fearful.”
Binyuen is the founder of BY Enrich Resources and the author of ‘Life beyond the Comfort Zone’ and ‘Profit from Share Investment’. His books are available in major bookstores in Malaysia, Singapore or online http://www.teybinyuen.com/profitfromshareinvestment