When things are rosy, it's time to selll stocks...

[Dennis Ng]

The 2nd richest man on Earth, Warren Buffett, who is also the ONLY TOP 10 richest men on Earth that creates his wealth from investing has this famous saying:"Be fearful when others are greedy. Be greedy when others are fearful." Why did he say that? When most people think that things are rosy (awash with good news)...it's typically at such times that stock market are at their highs....thus people get more and more greedy, thinking that good times would go on forever......when they least expect, something negative might happen, and when that happens, the market sentiment is quickly reversed, and the stock market then typically crashed.....have you forgotten about year 1999 (good times) and year 2000 (when market crash?)

What Warren Buffett said is not "proven" by any theory. I for one do not really believe in the "Efficient Market Hypothesis" came up by Professors. Well, I think results speak for themselves. Would I rather listen to a professor who does not make money from the stock market or I listen to a guy who started with $100 and became the 2nd richest man on Earth? I think the choice is pretty clear.

Below is an article that appeared on Business Times 1 Mar 2006 (Wed) that say something similar ie when things are rosy, the stock market may be near the end of a "high" and might dive...

Cheers!

Dennis Ng, http://www.HousingLoanSG.com

A predictor of stockmarket trends?


THINGS are going well right now. An employment survey done by the National University of Singapore showed that 94 per cent of its 2005 batch of graduates found jobs - an all-time high since the survey started more than 10 years ago. And graduates also received a better starting pay of $2,500 a month last year, up from $2,370 in 2004.


Meanwhile, the unemployment rate is at a four-year low of 2.5 per cent as at December last year. The outlook remains rosy. Following a robust 6.4 per cent economic expansion last year, the Ministry of Trade and Industry has raised its GDP growth forecast for 2006 by one percentage point to 4-6 per cent. Some private economists forecast growth of as high as 7 per cent. The stock market is reflecting the good times. It is into its fourth year of gains, with the Straits Times Index having risen by 85 per cent since 2003.

Elsewhere in the world, the economic environment is benign. It is no wonder then that the word 'recession' is far from many people's minds at the moment. A check on our electronic library showed that there were 66 mentions of the word in the first two months of this year in The Straits Times and The Business Times. That's the lowest in the last 17 years. That's a drop from the 95 mentions in the two local dailies in January and February of 2005.





But here's the interesting bit. The previous time when recession was furthest from everybody's minds was in 1997. In the first two months of that year, the much dreaded R-word only appeared 92 times in the two local dailies. Yet, July 1997 marked the onset of the East Asian financial crisis. By the end of the year, the SES All Shares Index had lost a fifth of its value. A comparison of how many times the R-word was mentioned in the beginning of the year and stock market return for that year throws up some interesting findings.

For example, in the last 17 years, recession was talked about most frequently in the papers in the beginning of 1991 and 1999. The word appeared 804 times in the first two months of 1991, and 802 times in 1999. Again, the stock market posted very strong gains in those two years. In 1991, the market gained 25 per cent; and in 1999, it surged 75 per cent. And in early 1993, the word recession showed up 546 times in the papers. The stock market returned 60 per cent by the end of that year.

The stock market of course is forward looking. When recession is most talked about, that's also when the worst has been factored into stock prices. The logical question that begs asking next then is: when things are going so well, has all the good news been priced in? Well, the major difference between 1997 and now is that in the earlier part of 1997, the STI was trading at about 24 times its earnings, according to numbers from Thomson Financial Datastream. Now the STI is still trading at a relatively reasonable 15 times. And there are fewer excesses in the local economy today than in the 1990s.

Nevertheless, investors should not dismiss the possibility of the good times being tripped up by the likes of political unrest in the region, bird flu, high energy prices, inflation and the unravelling of America's twin deficits. While there may be no recession, there is no shortage of risk.