Sunday, October 8, 2017

Another Unique Method - Bottom Fishing

How should a regular retail investor hedge against a raging bull run? If you feel the market is going to turn and you don’t want to SHORT, what can you do?

I am generally a LONG only investor managing a very low 6 digit portfolio figure. I don’t SHORT and I also don’t know how to short.

I have the belief that Mr Market is slightly overheated. However, even if I think it will crash, I still believe in staying vested rather than timing the market. This is because over the long term, I DON'T KNOW WHEN MR MARKET WILL CRASH.

(The joke is on me. I always felt that 2017 will crash, but look at how fast it has rise! Lucky, I continue to stay vested.)

I have the opinion that there are many other retail investors out there with the same thoughts. So I hope sharing of this method will enlighten them.

Do note that I have spoken about this method before in this post before. But since the bull run have been very strong, I like to emphasize on this method again.

I call this method “Bottom Fishing”.


1) Find Counters at 52 weeks Low Share Price

Basically it meant that you invest in the counters that are at their 52 weeks low share price, coupled with a variance of up to 5%.

This is also based on the assumption that for a counter to hit its 52 weeks low share price, it is already at a very low price. In the event Mr. Market decide to crash, the counter may not fall as much as compared to other counters.

Furthermore, the 5% variance is for the investors to have more selection.

2) Check the 52 weeks Low Share Price Against Share Price Over The Last 3 to 5 Years 

After finding a list of counters at 52 weeks low share price, the next thing I normally do is to check the general trend of the share price for the counter over the last 3 to 5 years.

If the current share price is also close to the lowest share price over the last 3 to 5 years, then I believe that in the event Mr Market crashes, the counter will fall even lesser than expected.

3) Find Out the Reason/s Why The Counter is at 52 weeks Low Share Price

For the 3rd step, it is important to understand and evaluate the reason or reasons that caused the counter to fall to its 52 weeks low share price. Thus, you will need to read up on the counter as much as possible to understand why the share price has fallen so much.

At this point if you are uncomfortable with the counter, MOVE ON.

4) Check For Any Possible Catalyst Or If The Counter is Fundamentally Strong

Once you understand why the share price has fallen to its 52 weeks low share price, you should also check whether if there is any form of catalyst for the share price to rise back in the short term. If not, do also find out if the counter is fundamentally strong (I normally uses the Ultimate scorecard to check on its fundamentals).

It is only after you have done with all the checks, and you are satisfied with the answers, then you can buy the counter.

I personally believe in this method and I did that once with the REITs (Read here).

In a way, this method works better for REITs because of the following:
  • Its share price is generally range bound unless it did some right issues or its tenant cannot pay.
  • In addition to the low share price for the REIT counter, the dividend yield provided more “buffer” if the share price continue to falls. For example, if the dividend yield is 5%, that means your counter will be able to fall 5% more since the drop in share price can be covered by the dividend.
  • Finally, for REITs, its business model is rather stable. Their revenue is rather predictable and their balance sheet is reasonably strong due to their huge fixed assets. I believe there is also a guideline on the amount of debt a REIT can take on. Thus, this limited the debt a REIT can take on if it becomes too aggressive.
Therefore, if you also have the belief that the market is slightly overheated and you want to take some precaution, you can also try out this method.

If you are interested to know more about The Ultimate Scorecard or Full Analysis, do visit the Fundamental Scorecard website for more information! Do sign up to get the latest scorecard of all the SGX counters now!

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