Portfolio return: 20% Alpha + 80% Beta

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Stock market had rallied from 2003 to end of 2006, during those years my portfolio return is up 25% - 35% per year, after 3 years of investment my portfolio is up 80%. At that time I thought I am as good as Warren Buffett; I am sure many investors thought the same way too during the 4 years bull market.

With recent market crash, a large part of my past profit had been given back to Mr Market.

Portfolio return: 20% Alpha + 80% Beta
According to academics, portfolio return is made up of 20% Alpha and 80% Beta. This means that if the investor is a good stock picker, he will be able to attain the 20% portion. But if the overall market is going downturn, his return may still suffer in the 80% portion and end up still making a loss. I think this is happening to a lot of value investors now.

A profitable investor is not just about picking fundamental solid stocks, he must know when to be fully invested and when to raise his cash level.

Having a good broker
In my view, having a good broker as an advisor is very important to a retail investor. My broker has been asking me to buy stocks during Mar to April period, claiming that stock market has bottomed and valuation is cheap. If I had believed him then my pocket would burn a big hole.

If your broker has been asking you to buy stocks during this downturn, either he is not a good advisor OR he is putting his interest above yours.

Recently I had met up with my friend who is a stock broker, already 15 years in the industry. He told me that he had asked his customers to raise cash at the start of the year.

Defensive stock
Currently he is advising his customers to buy defensive stocks. His recommended defensive stock is a stock that is trading below its book value and has a dividend yield of 10%. His logic is that if the stock is trading below book value, there is a chance of a takeover. If there is no takeover, you are enjoying a high dividend return.

Retail investors
Our discussion moves on to talk about retail investors. Retail investors usually buy during a bull run, bought at high price and eventually suffered losses. According to him, retail investors like to buy small cap stocks.

One and only small cap stock recommendation
He said there is only one particular small cap stock that he is interested. The company has rising revenue, net profit and profit margin for the past 6 years. The CEO owns 37% of the outstanding shares. The stock is only trading at 5.90 P/E.

Dividend yield of the stock is 7% and dividend payout has been rising since 1999. He is advising his customers to buy this stock if the share price is down another 20%.

Coincidently I had held this stock in my portfolio and I totally agree with his opinion on this stock.

Market has not bottomed
My friend does not think that market has bottomed. He has a unique way of judging where is the market bottom. Well he is in the market for 15 years.

It takes 5 years for an economy to go from bottom to peak. With 15 years experience on his belt, this shows that he has gone through 3 cycles.

Long term stock
He told me that some of his customers are not savvy investors and do not have deep pockets. So he is advising them to buy a blue chip stock which is meant to be hold till retirement.

I think its unfair for me to reveal his recommendations here. If you are interested to be his customer and get his views and recommendation, then send an email to me at [email protected].

 

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Have You Given Up Your Hope On Stock Investment?

I have working in the financial sector for 8 years now. Having worked in investment company and also worked as a broker, this allows me to gain a lot of knowledge in the financial world.

But the best learning experience actually comes from a 50 years old secretary in one of my previous firm. Her stock dividend alone is $20,000 a year, to her this is her tour package fund. She will use this amount of her dividend to travel to Europe and Australia.

So I ask her what is her investment strategy. She said buy blue chip stocks in market downturn and wait patiently. Then she will list down the buying price of all her blue chip stocks, all of them are in super low price. When blue chip stocks make money, they will pay out good dividend. And good companies will increase their dividend payout year after year.

Recently I had heard some of my friends saying that they will not invest in stocks anymore. It seems like they have lost hope on stock investment. Then they will lose the biggest money making opportunity of their life time.

Retail investors should adopt a very long-term horizon to benefit from the stock investment.

The best opportunity of major stock investment is during bad times. Always try to start major investments during a recession, a global market crisis, a banking crisis or when nobody is interested in stocks, such as now.

When fear and panic happens and people sell irrationally, fundamentals and intrinsic value are thrown out the window. This is when good companies get dumped together with the bad. Even stocks that are not directly related to the financial crisis are being sold at ridiculous prices.

Bull and bear markets always repeat themselves, just like summer and winter. We all know from history and common sense that the market will eventually recover and go to even higher highs.

If you want to emerge a winner, then stay calm, keep your logic and hold and invest in solid companies that are generating free cashflows, low in debt, and has to ability to recover after a recession.

I am calling for a bottom when S&P500 goes down to 800 or when STI goes down to 1200. At that time it would be the time for investor to commit "big". I am sure our investment will pay off handsomely 2 - 3 years down the road.