Warning: Incoherent post with main objective of thinking aloud
I think I have a plan until when I asked myself this question, then I realized I have many nagging questions and thoughts, so I thought I pen it down and hope it crystallize my thoughts. You can stop reading now if you are looking forward to a coherent post.
My plan is simple, has enough cash to buy in bear and enough equity to sell in bull.
The % part is also simple. Assume STI historical peak of near 3800 is a peak where I would want to hold only 20% equity, then if it crash 50%, and STI is at 1900 I should have 80% equity. In between the two, it can be tiered, but I feel there is no need to allocate a fix % to it.
The nagging question is with STI 3300 and 60% cash with the cash proportion increasing in a few months time, I don't think I am too far off from this rule, but I keep seeing companies that have already fallen close to 50%. such as CDG and SIA engineering (Close to 40%). I also realised I tend to pull the trigger when the fall is more than 30% from its peak. Sometimes too early, M1 and Raffles Medical are 2 examples, although 1 is sitting on loss and another on profits. So how to i reconcile individual companies with the broader market of STI of mainly banks and properties. (>50%).
There is this inherent dissonance within me. I know low tide cause all ships to sink somewhat, although high tide doesn't lift all boats. So should I really just wait for the Durian season to come? All in all, I have already missed 3 companies that turn out to be baggers. Although I have since came up with a rule of trailing gain. However, the wait for "durian" season nagging feeling is becoming a distraction and it seems clear to me I do not have a convincing investment plan. There are also days which I want to sell even more of my counters just to increase cash. This cannot be right.
Maybe the crux of the question should be the proportion of cash to be tiered according to STI or individual companies? Why should my cash be tiered according to STI since it is 50% on banks and properties. There are other sectors. Obviously this incoherence will affect my conviction.
If tired to individual companies, then there is another problem. There are tons of companies, how to allocate "cash level" then? If it is a hybrid of both broader market and individual companies, again it unclear which is which and each get into the other way. Look, if STI is marching upwards at 2700-2800, I seriously don't think I will sell my winning counters. It is precisely that they are 3100-3200 level, that I thought I should start lightening my equity weight and miss a lot of "profits"
Another possible alternative is to continue to with what I am doing and accept that 20-40%profit is acceptable. But hey, that doesn't seem coherent with let winners run, also how many good companies can you find in Singapore.
Maybe I should forget about cash level and buy as and when I see companies with potential growth in the next 1-2 years. But then again, that seems incoherent with risk management..
Thinking back, a rising market lift different boats, in this tide, banks and properties are sexy. But a falling tide (The most recent black monday), I remember seeing almost all companies falling, although banks have it worst. So I do think falling tide is more "evenly distributed" to most companies, and hence the risk management of cash allocation should stay.
Within the cash allocation, It is Ok to conduct guerilla tactics for companies that might have fallen perhaps more than 30% but with potential growth or turnaround stories. How then do I prevent myself from selling too early, if those guerilla hits happen to be correct?
Even if I accept the above preposition, I would have just settled on the buy and sell decision in a rising market. e.g. Buy when I see companies with growth in the near term but has been falling in price. Sell with a trailing stop when it hits above 20% gain.
Another question props into mind. I did saw the growth potential of MIT. (The new leases, etc)I even calculate the entry price of $1.7 would be fair and I even accepted that its OK to buy a few bids higher than that. Also, this is the first time I told myself its ok to buy more at higher price than my initial buying price of $1.48 to accumulate for future growth.
However, that growth in DPU that I calculate would happen also cause the price to keep going up. When it was 1.78, I thought well, it is coming soon. But it just went up, up and away.
Maybe it is ok to let good possible ideas pass if it didn't hit our target price? Ok, I answered this part of the question myself.
So, in a rising market, as long as cash is not stretched, it is OK to buy companies with growth, regardless if the companies has fallen from its peak of more than 30%. It is about growth. Either pure organic growth or turnaround stories with a mix of cyclical plays.
Let me see if I remember my own rules for cyclical plays. It should be alpha company, doing well, and the general market conditions to point at bottom conditions. Whatever I think should be entry price, take another 10% cut.
If I see recovery in earnings in the near term with reasonable valuation in terms of current dividends yield and conservative sustainable longer term yield, I also buy, regardless if the company's price has fallen or risen.
Yes, I should stick with the cash allocation call with the general STI as a risk management tool, since when the tide goes out, almost all boats fall and I am not superb in stock picking.
Now... The buy part in a rising or falling market is coherent
How about the sell part?
In a rising market, maybe slightly straight forward, allow a bigger margin when allocating advance orders either in the head or platforms. What happens if the price goes up together with the broader market? Assume STI march towards 3400 or even 3500. I think I will start to get nervous, if I am holding to 15-30% profits of recent guerrilla tactics of buy, such as silverlake and RMG, do I sell?
I think I am quite clear cut when the fundamental hypothesis of a company do not pend out as i planned, I sell quite ruthlessly. I sold Parkson, reduce Lee metals, Singpost etc when the numbers do not support the hypothesis I have in mind.
But it is not so clear-cut with RMG. I actually intent to average down slowly as I assume short term weakness in their expansion plans, although I seriously think they can manage their expansion costs. But now that the price has risen and the market is going up too, so I take profits so as to hold more cash? If I don't sell, the rule of less equity and more cash in a bull will not hold. Or should I just have a simple profit protected mechanism even if targeted profits is not hit in a rising market?? But if I sell simply because of cash conversation risk management, and the story unfolds according to my hypothesis, then I am also an idiot isn't it?
Selling is the tough part.
You see, when the numbers proved that I am wrong in my hypothesis, I have no problem selling, cut loss or taking profits. But I have been sitting on many unrealized losses during black Monday, although the hypothesis has NOT been proven wrong. I am glad I didn't sold ST engineering, A-Reit etc as the numbers did not show deteriorating numbers.
So i buy when market is falling, and hence the equity increase. But when numbers show, sometimes it is too late.
When the market is going up, you cannot have enough equity although I should have less, when the market is going down, you cannot have enough cash, although you should have less.
But It is damn scary buying in a down market. I know, I bought Sembcorp Industries with an average price of 3.8. You might think what is the big deal? It is... In practice, I told myself I should start accumulate at 2.5, I didn't even buy at 2.4. I dun have my balls. I sold half when it rebounded to $2.75 instead.
Theory works only when you have the guts to make it work. Had I av down at 2.4, I could be laughing now. SO I do think I need a more robust sell plan beside being shown in my face that the numbers are not working. To be fair to myself, the hypothesis of Sembmarine of zero profits is wrong, but when it is proven wrong, the price has plunge so much...
So should I have a circuit breaker? The what is the circuit breaker? 20% cut loss, regardless of numbers? Then I would have sold ST engineering, A-reit, MIT and many more for a song. 20% cut loss also contradict accumulation at bear, when things are supposed to be cheap.
Any company can fall. Just buy ETF? muahahhahahaha
Selling at profits is the easier part.
Selling to cut loss and buy back later? Then when buy back? The magic percentage is arbitrary, isn't it? Or sell on news of disruption? Maybe examples would include disruption of business. In a falling market, which sector is not disrupted?
I think I am getting something.
Sell when the qualitative hypothesis is not working or there are other risk considerations not taken into considerations, regardless of rising or falling market.
Cash ratio is about risk management in generally and thou should not based my buy and sell decisions on overall market conditions as long as the cash reserves is generally aligned to market conditions. With a rising market nearing to the peak, reduce the spread of advance order. With a falling market, buy only when "growth' can be calculated/projected and not simply because can "average down" le.
Buy and sell based on analysis of growth or the lack of. Keep Cash proportion based on the general market, make sure the two ideas don't get mixed up and fudge.
So simple and I keep going round and round. If the market cause the price to plummet but operating numbers is still strong, wait for bigger MOS to average down.
It is clearer for myself now. If you are still reading, Please accept my sincere apologies.