HOW TO THINK IN A MELTDOWN

Re-sending an old but evergreen Message!

Pls always bear in mind the following investor profile for all our equity funds, especially the last one:
• Aggressive risk reward temperament
• Medium to long term horizon
• Can withstand extended periods of market highs & lows in pursuit of capital growth

May we all find opportunity in these times.

Najib

Subject: HOW TO THINK IN A MELTDOWN

“Dear valued unitholder or investment-savvy surfer,

The current stock market meltdown has upset millions of Malaysians. That's why I'm taking this opportunity to communicate with you some of my thoughts on the entire issue of investing in the Malaysian market in general and in PUBLIC MUTUAL unit trusts in particular.

Let's step away, just for a second, from our specific circumstances for a more objective view of matters. We'll begin by looking at two key market truths.

FACT 1: Stock markets go up and stock markets come down. Then they go up again and come down again.

This cycle is as unceasing and repetitive as those of the four seasons experienced in cooler climes. Unfortunately, investment cycles don't adhere to the predictable, regular periodicity of summer, autumn, winter and spring.

Nonetheless, market cyclicality is certain. Many decades ago, well-known Wall Street speculator Bernard Baruch answered a question about the future movement of the market. He said, tersely, "It will fluctuate."

At a different time, Baruch also said that most facts arrive at Wall Street through "a curtain of human emotions".

In Malaysia, that curtain is made up of the fabric of expectations, disillusionment, candour, uncertainty and sometimes even fabrication. All of which makes what follows crucial to your continued survival as an investor.

FACT 2: When it comes to intelligent, profitable involvement in the market, you need to think for yourself. Lemmings that follow the masses end up in a watery grave.

As CONSULTANT of PUBLIC MUTUAL I love my job. I find it mentally stimulating and financially rewarding to pit my team's talents and resources against those of the rest of the market. Yet the truth is that each and every day I need to look deep inside myself to find my 'centre', to make sure that I am not deafened by the roar of millions of market players and thus lose my way.

And at the same time, I must make sure that I attune my market ears to the required sensitivity. I have to ensure that every important message broadcast by the marketplace is heard accurately. And, if possible, a little earlier by me than others.

In a similar way - if perhaps to a lesser extent - you too must remember that markets fluctuate. And to profit from those fluctuations you need courage, wisdom and stamina. Come to think of it, we're rather alike, you and me!

So, I'd like to outline my thoughts on what you should be doing in the midst of what appears to be a continuing bear market. John Bogle, legendary founder of the giant US mutual fund group Vanguard pointed out in a recent interview that "the economics of investing are great, the emotions of investing are terrible".

I know what he means. If you invest intelligently, either through direct equity positions - if you are capable of making such decisions wisely for yourself - or via unit trusts (hopefully PUBLIC MUTUAL's!), the long-term returns are great. The aim of investing is to grow your money significantly faster than inflation and taxes eat it up. Equities, based on more than two centuries of recorded data, are capable of doing so.

Yet the problem with human beings as investors is our common malady of looking only to the recent past to extrapolate the future. Then, when the recent past shows a steep decline - as both global and domestic markets have done in the last year - we turn too pessimistic for our own good. We often opt to bail out from equities entirely, never to return again.

But markets fluctuate!

And within Baruch's pithy phrase lies our economic salvation. Let me give you four reasons why you might want to consider continuing to invest in a sinking market.

First, risk is inherently lower as markets sink. You don't believe me? Well, then, mull on this. I know it is easier to join the crowd (of lemmings?) to invest when the market is daily setting new highs. The adrenaline rush you get from buying an investment when the KLSE CI is frothily pushing 1,200 points is thrilling.

That exhilaration is absent when the market plummets. It is far more difficult, emotionally at least, to justify buying when the market is sinking, volumes are thin, and everyone is at the sidelines; say, when the CI is dropping from 650 points to 600, perhaps on the way to 550 or even 500.

Yet within the context of a lifetime of investing, ask yourself if it is safer to buy at 1,200 points or at 600 points?

Not sure? Then let me ask you, is it safer to cavort on the window ledge of the 88th floor of one of our Twin Towers or to do the same on an 18-inch-high bench?

Bargains abound when prices are low, not when they are high.

The second reason to stay in the market comes with a proviso. You shouldn't have sunk any money into the stock market that you will need in the short-term, say, within the next 12 months.

The ideal way to invest in equities is with a 7-year (or upward) horizon. But for that to be possible, you must be constantly exercising sound financial planning strategies. Here are a couple you might want to consider:

Make sure your emergency cash buffer is funded and placed in a combination of bank savings, money market and bond funds. What's important here is not your return on capital, but the return of your capital! The buffer size will vary between 3 and 12 months' expenses, depending upon the stability of your salary-generating job and other income streams.

Also ensure you are diversified across asset classes and asset vehicles in a manner consistent with your risk profile - a blend of your intrinsic risk appetite and your extrinsic risk capacity. Your risk appetite is determined by your personality and level of self-education in equities and unit trusts. Your risk capacity by your age, proximity of investment horizons and health.

The third reason, dollar-cost averaging (DCA) has the potential to make you rich slowly.

DCA works best in a sinking market that allows you time to accumulate large positions before a recovery grants you the opportunity to profit from those patiently derived market positions.

And the fourth reason to keep buying now is that you understand yourself well enough to be able to sleep well at night despite market falls.

I spoke to a long-time PUBLIC MUTUAL unitholder recently who admitted he was becoming more and more cheerful with each fall in the CI. He is committed to a 20-year DCA programme and sees the present market weakness as a wonderful opportunity to build up a large investment gradually.

Now, allow me to help you put together a simple written plan that you can refer to time and again. It's aim: To help you maintain your own investment 'centre'. Just answer these six questions for yourself, writing down the answers:

1. What are my lifetime financial goals?
2. What are the pertinent time horizons associated with these goals?
3. Am I willing to either study to learn about markets for myself or at least get in touch with a financial planner or professional who is willing to teach me?
4. What is my investor risk profile? (Both books I co-authored comprising the Financial Freedom series contain an investor risk profile quiz that is easy to use.)
5. What is my ideal asset allocation?
6. What would need to happen in Malaysia or in my life for me to abandon my long-term plan?

I do hope you take the time to treat these half-a-dozen questions with the seriousness they warrant.

Radically switching tack, having spent time explaining why some, perhaps even most, of you should be actively buying in times of weakness, let me talk about those who should be selling out!

Here are four reasons to bail out of the Malaysian stock market.

First, you are in debt up to your eyeballs. I sincerely hope this does not apply to you, but if it does then you would benefit more from retiring expensive credit card and other consumer debt than trying to ride out the present market weakness. It might take a year or two for the markets to recover. In the interim you don't want to be servicing large credit card balances that are costing you almost 20% a year.

Second, your emergency buffer is not in place or your job is in jeopardy. Heaven help you if both those situations happen to be true right now. It is imperative then that you have sufficient cash on hand to be able to comfortably and readily handle near-term expenses. If you don't, then please liquidate some of your holdings to build up that cash position.

Third, you are utterly pessimistic about the long-term prospects of Malaysia. (I happen to disagree with you. I find great comfort in the long-range plans that have been put into action by the government, including the 2001-2010 Third Outline Perspective Plan (OPP3) that focuses on eradicating poverty and transforming Malaysia into a knowledge-based economy.) Despite my disagreement with the hyper-negative view, those who firmly believe the country is going to the dogs should NOT put in place or carry on with a DCA programme. For if your investment falls to zero, never to bounce back, a DCA programme will wipe you out just as surely as a lump-sum investment programme would. Such pessimists will want to consider emigrating.

Fourth, you can't be bothered to educate yourself on the workings of the stock market and long-term trends that hold true for all countries that don't utterly mortgage their futures for ill-advised short-term gains.

Most of you, I believe, will find my first set of four points (my reasons and methods to buy) more relevant to your perception of what's happening around us. You are the ones who join me in my long-term belief that Malaysia and the world will pull through. Eventually.

Civilisations rise and fall and rise again.

So do markets. Thankfully, for our wallets and portfolios, market oscillations here are frequent enough for us to profit from them several times in a long investment lifespan. In closing, you might find these words of the world's greatest stock investor Warren Buffett - who started investing at the age of 11 and who turns 71 this August - instructive:

"Be fearful when others are greedy. Be greedy when others are fearful."

Thank you for reading to the end. I wish you a long, profitable investment life ahead. We at PUBLIC MUTUAL hope you will either continue to afford us the privilege of propelling you on that journey, or allow us to begin doing so. “