Test of resolve

The blue-chip index, the Straits Times Index, ended the week at2,723.30, capping its losses with a small 9.83 point increase. With many companies having their market capitalisation wiped off, surely one may ask, the downside is now very much limited and it is probably time to bottom-fish.

However, many who have started to invest during the recent bear-trap where the index rallied to around 3,200 points on renewed hopes that the sub-prime crisis was nearing an end only found themselves surprised by the magnitude and velocity the index came tumbling down, the exact way it went up. Its recent lows were levels last reached 2 years back in 2006.

Now has come the time for investors to truly test their resolve and their belief in the investing methods that they have espoused. Value investors, most of whom pride on their belief in investing based on a "margin of safety", have found themselves falling into a value trap. This occurs when a stock price falls, and falls, and falls.(quoted from the Business Times, 20 Aug 2008). The margin of safety rule has not been that safe after all. Now, the 'value investors' who have gone through the market in the previous years and found themselves sitting on handsome profits might have seen most of them wiped out. The question now is, of course, that whether value investing still works for them or not, or rather, if it even works for them in the first place. Most types of investing would have worked anyway in the bull markets which ended not too long ago. But for now, the volatile swings in the markets have most investors embracing the motto for now, "buy into weakness and sell into strength". This tactic seems to have done well for most investors at this moment of time, and could probably entice a few into adopting similar strategies.

But for those who have kept faith with value investing, this appears to be tough times indeed. To see the other investors pulling ahead and earning profits may not be the best kind of medicine to swallow at this point of time. But before one decides to adopt a change of strategy, please do consider the following: in the past 15 years, large-cap value funds have had an annualised return of 8.66% whilst for the same period of time, large-cap growth funds have progressed 8.03%(Morningstar). Note that this period of time includes the '87 stock market crash and the bursting of the Internet bubble.

Now, some may question, but the '87 crash was a steep one, and the Internet bubble was not exactly the best times for growth stocks. The sub-prime crisis has seemingly been a never-ending one, and the ones who have stuck their heads out to proclaim the crisis near to an end have had eggs in their faces. Detoxifying in itself is a long and ardous journey, and value investors could have underestimated the length of the unfolding of this crisis.

For now, those of us who have managed to escape relatively unscathed either through skill or luck, should take the time off to decide if each investing style previously adopted is suited for you. For now, I stick with my faith. Let's take all in good stride and that if Mr Market decides to go berserk any further, do take this chance to capitulate on more opportunities. And pray.

I shall try my best to look at individual companies very soon.