Wednesday, 5 October 2022

Recession and Bear Market Thoughts- The Dugu Nine Swordsplay Theory (独孤九剑-破剑式)

I am writing this blog piece as I saw an "expert investor" posted on a public forum that a few months ago, he had already told his friends not to invest in SREITs as he anticipated a crash coming due to the relentless interest rate hikes by the Feds but they did not listen to his brilliant advices and assessment. REITs did crash in market price last week and our "expert investor" thus began mocking his friends and other current investors still holding on to REITs for not heeding his excellent foresight. Well, I call this 马后炮 in Chinese or in literal English translation, this is known as the "notorious knew-it-all-along phenomenon". This also smacks of asserting that one can always time the market perfectly.

1. Mini-rally on SGX during past 2 trading sessions from 4th Oct 2022 to 5th Oct 2022
There are some folks who looked at historical data and concluded that inflation will be as serious in magnitude as those previous hyper inflationary blackswan events causing interest rate to soar to double digit percentage soon. This in turn will also mean that all REITS will crash by at least another 50% in order for the distribution yield to rise sharply to compensate for the high interest costs. Many of them have thus sold off the majority of their REITs or totally exit their REIT investments to avoid further blood bath.

The mini-rally over the past 2 days serves as a very good illustrative example on how fast market sentiment may turn and retail investors who stayed out of the market may have suffered a huge loss instead by exiting the market at the wrong time and then buying back only at much higher prices which is a double whammy scenario.

So who is right and who is wrong then in terms of the future market direction? Is inflation really going out of control? Personally, I do not think so as I see the inflationary pressure for US tapering off based on the last CPI report. Of course, while inflation is gradually being brought under control in US, they have downloaded this problem to Europe and the rest of the world but I am optimistic that eventually, the respective central banks will be able to contain it. All countries will then reverse course and turn their attention toward fighting off a severe recession with expansionary monetary policies. Simply put, I rather not try to predict the market direction and just remain invested for now to avoid missing out on a sudden rally.

2. The Dugu Nine Swordsplay Theory (独孤九剑-破剑式)
An investment strategy that focuses on "timing the market" for purchases and exit runs contrary to one of the key principle in the "Dugu Nine Swordsplay". The essence of  独孤九剑 emphasizes that the only way to remain undefeatable is not to make the first move. Once a swordsman make a move, he will inevitably expose his own weakness and vulnerability. Similarly, for a retail investor who has been saving his investable capital and waiting for market crash, once he puts in his entire capital to exploit the market downturn, he will most likely make a huge profits from such a strategy. Notwithstanding that, the next challenging questions will be how and when should one exit his or her investments? Once one joins in the market, he or she will be subject to its volatility which includes future crashes.

Parting thoughts
I did not do much recently to my own portfolio (except for some minor switches of counters) and remain mostly invested. Most likely will start deploying some of my excess funds into the market in batches regularly over the next few months. 

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