The market is always wrong

From The Star.

It exists to serve and not to instruct, it will not tell you whether you are right or not>

The rippling effect of the US subprime issue, coupled with the fear of high oil prices and political uncertainties have sent a lot of stocks tumbling to very low levels recently.

At the start of this year, when the market was touching a new high of 1,500 points, some fund managers predicted the market might go even higher.

However, following the recent market crashes, the KL Composite Index fell to about 1,150 points, a drop of 350 points within six months. Now, certain fund managers have started to predict the market dropping below 1,000points in the near future.

Most retailers cannot comprehend how fund managers can change their market forecast by 500 points within a six-month period. The main reason for this is the change in market perception.

Due to the impact of the issues mentioned above and the tumbling stock prices, the fear of weak corporate performance has caused some company owners’ to hold back on expansion programmes. This has resulted in weaker corporate results and panic selling on the stock.

According to George Soros, this phenomenon can be explained by the “reflexive process”, - the feedback loop where a change in stock prices causes a change in company fundamentals, which, in turn, justifies a further drop in stock prices.

He said perceptions change facts; and facts change perceptions. Hence, the drop in stock prices can cause further drop in the company’s stock prices.

According to Phillip Fisher, market prices are determined more by perceptions than facts. Besides, analysts like to place more weight on the short-term performance of a company rather than focus on its long-term prospects.

As a result, when the overall market is coming down, analysts like to lower the target-selling price of a company and increase the target-selling price when the overall market is trending higher.

Risk means uncertainty of outcome. The stock market reacts negatively to risk. Whenever the stock market has a lot of uncertainties, all stocks - regardless of whether they are good or poor fundamental stocks - will be hammered down.

However, we always believe crisis means opportunities. The recent drop in market prices creates magnificent investment opportunities. Even though the market may drop further as there are still a lot of uncertainties and outstanding negative news pending announcement, we believe there is great opportunity for long-term investment.

Warren Buffett believes that the stock market is manic-depressive: it always overreacts to positive as well as negative news. If the overall market sentiment is good, the stock price may surge sky high. However, if the market sentiment is depressive, the stock price may plunge to insanely cheap.

That is why Buffett said: “The market is there to serve you and not to instruct you. It is not telling you whether you are right or wrong. The business results will determine that.”

Hence, the key factor is to purchase the right business at the right.

We believe a lot of investors know which good quality stocks to hold for the long-term. However, they always complain these stocks are too expensive most times. As a result of the recent market crashes, some of these stocks have dropped to quite attractive levels.

Even though they may get even cheaper if the overall market drops further, we need to prepare ourselves by understanding the intrinsic value of the stocks and at what price we will start to accumulate them.

According to Nassim Nicholas Taleb in his book entitled The Black Swan, we should stop trying to predict anything and instead take advantage of uncertainty.

A lot of investors or analysts may spend a lot of time trying to predict the market bottom. We should not try to predict when the market will reach its bottom as we will never know until it happens.

The key thing is to focus on is whether we have already identified which good quality stocks to invest in when the market is getting nearer to the bottom. Instead of trying to catch the stock at the lowest point, we hold the principle that we would be happy if we are able to catch those stocks 20% from the low.

· Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.