Swapping in this (Bloody) Week!

Lava flows from the crater of Mount Mayon volcano during a new eruption in Legazpi city

I am sure you know what happened in the stock markets around the world in the last one week. The headlines on the steep drops and extreme volatility were seen everyday. For a moment, no one seems to care about the price of bitcoin anymore 🙂 … global investors have a “new” love. Furthermore, there are many blogs on what we should do in a downturn like this. There is even a blog that collects all these “advice” in a single page – click here. Most importantly, stay calm … but it doesn’t mean you do nothing!

Indeed, this (bloody) one week has reminded us that investing in equities will require us to stomach a fair amount of risk. It carries a real and significant chance of losing your hard-earned money. It is a useful moment to reflect if you can accept this risk and whether you are over-stretching your finance, e.g. by borrowing from margin to invest.

All of a sudden, doesn’t Singapore Saving Bond of meague 1-2% risk-free interest rate looks a lot more attractive?

I always remember this very useful advice given to me: “Only invest with money that you can afford to lose. Never borrow to invest.” … I have seen first hand how my relative lost his 5 room HDB flat in a stock market downturn and how it affected the life of his entire family, his self-esteem and confidence. So, do invest with care.

For some of the younger investors who are just starting out, like my friends MissNiao, Sleepydevil , this will be a valuable lesson and I hope this will not frighten them away from investing in equities or losing confidence in their stock-picks and analysis of companies. Such steep downturn will drag down every counter irrespective. Talking about this remind me of something that I usually do in a “steep downturn” that I have not heard many people talk about. That is to “swap” shares of companies.

Yes, I know we all feel that every company that we invest in are good company. But down inside, we know we do make mistakes in our timing and judgement. Even if we get everything right, the quality of the companies that we invest in are not equal, some of them will be inevitable stronger than others.

Over the years and having seen a few downturns, I have learned that in a shock, immediate and volatile downturn like the one we saw last week, it is the share price of the “stronger and better” companies that would drop more significantly, i.e. by a larger percentage. Surprising?? Maybe it is because they have a broader base of investors (not concentrated in a few big owners who tends not to sell), they are held by institutional players who may have the means to “short” the market first before the rest and buy back later or they have run up the most, leading up to the steep drop. Interestingly, the small/medium size companies tend to drop by a smaller percentage in comparison. But in a long run, we know that the bigger stronger companies are more resilient and will still be around to give us the dividend/income.

So, what I normally do will be to identify pairs of companies (usually in the same industry) in the market and then “swap” the smaller companies for the bigger blue chip companies.

Just one example of what I did – I swapped Cache for Ascendas Reit this week. I am sure many of you will agree with me that the latter is a much bigger company, has a superior portfolio (including their Australia assets) and with a super strong sponsor! Can you ever imagine Ascendas Reit collapsing? How about Cache? Enough said 🙂

On close of 2/2/18, Cache was trading at $0.87 while Ascendas Reit was $2.71. But by 9/2/2018, Cache closed at $0.845 while Ascendas Reit was $2.57.

Ascendas Reit dropped by a greater -5.1% while Cache was a smaller -2.87%. So, I decided to sell a significant portion of my investment in Cache and use the same amount of money to buy Ascendas Reit. All of a sudden, the quality of my portfolio improves 🙂 and all this was done without any further capital injection. But it did involve some transaction fees (say 0.3%*2).

Doing this within the “same industry” concept is an important one because technically, it means that they face the same industry risk and opportunities. It is difficult to swap a property company for a bank for this purpose – the risks that one takes on are fundamentally very different.

I have been using this “swap” approach for the recent downturn and also several downturns in the past. I can’t say it makes me more money for sure but it does improve the quality and resilience of my portfolio and gives me a better peace of calm in all the chaos. In a time of great uncertainty, you will want your investment to be safer and resilient and ensure they are still be around when the normal market growth returns. Furthermore, in a bull run, we know who is going to move faster 🙂

Hope this sharing helps you.

Hope the coming investment week will be kinder to us … but opportunities are always abound regardless … we just have to be alert and look harder.

Do take care folks and wishing all of you a Happy Chinese New Year!

With regards,

Warriortan

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3 thoughts on “Swapping in this (Bloody) Week!

  1. Hehehe.. I saw my name up there and thanks for the link!

    Nice swap you got there btw for Ascendas. Peace of mind is priceless!
    Looking forward to learning more from you in your upcoming post! 🙂

    Like

  2. Hi Warriortan,

    Thanks for the link up. It was a very interesting week for me. First time see all the stocks red in colour lol.. And what a coincidence that we were just talking about this 1 week ago. Hope that we will all be prepared for the real recession. 🙂

    Liked by 1 person

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