Total Pageviews

Saturday 5 May 2012

The tulip-bulb craze, the dot com bubble, and my folly

October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.

   – Mark Twain


In the movie 'Wall street: Money never sleeps', the tulip mania is referenced where Gordon Gecko tells Jake the story of the first measured market bubble. At the peak of the tulip mania, people would barter off their assets such as land and jewels to obtain bulbs which they believe would make them even wealthier. A rare Violetten Admirael van Enkhuizen bulb was sold for 5,200 guilders which was more than the annual income of a wealthy merchant.An option market for tulip speculators emerge where traders can leverage on their investments to increase the potential rewards as well as the risks. As expected, the tulip market crashed utterly. Bulbs, that were priced at 5000 guilders a few weeks ago were worth only 1/100 that amount. Eventually, most bulbs became worthless and were sold for no more than the price of a common onion.


In the early 2000s, the internet bubble burst. Between 1998 to 2000, price-earning multiples of stocks in the NASDAQ index that had earnings soared to over 100. For no particular reason but the market's insanity, a mere name change of companies to include dot-com or dot-net will allow their stock price to increase by 125 percent greater than that of their peers. When the bubble popped, over $8 trillion of market value vanished into think air. It was as if a year's output of major economies such as Germany, England and Russia had completely disappeared. Blue chip companies such as Amazon saw a 98.7% decline in their stock price from a high of 75.25 in 2000 to a low of 5.51 between 2001-2002.


The two above mentioned events are but only 2 of the many bubbles that happened across history. My point is not only to show how prevalent bubbles are across history, but how humans nature hardly change. I myself, have previously fallen prey to the greater fool theory - a belief that when I buy something, its not because its worth the price but because I will be able to sell it at a higher price to a 'greater fool' based on market optimism and market momentum. 


In December 2011, I thought I had realized a trend in the market which I could capitalize on. From almost all of my past observations of patterns and trends, it seems that HSI would always follow the trend of DJIA. It reflects the sentiments of investors. If they see that DJIA is doing well the previous day, they would be confident about the market and would put their money into the HSI market. With that, I came up with a strategy to purchase the HSI call warrants the moment Hang Seng market opens should DJIA do well the previous day. With a 10% appreciation, I would sell it off immediately with some gains. And if I were to repeat the process, I could make quite a lot. On 12 Dec 2011, I bought 9 lots of HS18600MBC120130 based on DJIA's spectacular gains on the previous Friday. But I was proven wrong at the end of the day, where I went into the reds. Instead of divesting it on the day itself, I decided to go against the rule I set for myself and held it overnight. The situation did not improve and I sold it at a 50% loss on 30 Dec before it will eventually become worthless should it expire out of the money. The story did not end there because 2 days before it expired, the market rebounded and I could have break even if I had sold it then. But who would have known, just like how I wouldn't have known what would happened the next day. 


I learnt a lot from this particular incident. Not only do I have to be disciplined, but I also figured that my investment methodology was wrong. I became a staunch believer in fundamental analysis and I believe that I should only buy into a company because it is undervalued. The other school of thought is technical analysis which determines a buying decision by looking at charts and past buying trends in stock prices and volumes. But from my experience, I simply do not see how last week's price change or yesterday's price change and bear much relationship the the price changes this week, and so forth. The fact is, we won't know if we might end up as the greatest fool instead. We cannot foresee if we are going to be the buyer of the most expensive tulip bulb in the world and only to sell it for the price of an onion.



Currently, my portfolio contains 3 companies. Adampak, Kingsmen and First Reit. All three have been chosen based on detailed fundamental analysis which include looking at its financial reports and researching about its business model. I do not expect myself to get rich quick by investing in this manner. But this approach assure you that your risks is minimized. This is not a sure win approach, but out of the 10 times, I might be wrong 2-3 times compared to the higher chance of making a mistake via technical analysis. As I get better and improve my skills, I will further reduce the chance of making a terrible mistake in my analysis. Patience is key, because it might take 2-3 years or even more before the market realizes the value of the company and start correcting the price. 


In my next post, I will include an analysis of Adampak. Currently, a private equity firm is acquiring its shares to delist it. As of yesterday, I have submitted the necessary documents to divest it off my holdings. My next post will also cover the reasons as to why I decide to divest it.

2 comments:

  1. Sir, I don't know if you remember me, I was one of your men from your 1st batch of recruits. Nice blog you have here!

    ReplyDelete
    Replies
    1. Hi Wei Han, of course I do. Thanks :) So what are your plans? Which uni are you enrolling into?

      Delete