Long Term Investment

I credit my dad as the person who introduced me to the stock market and to long term investment (buy-and-hold). I vaguely remember it was in 2007, before the financial meltdown that resulted in the closure of Lehman Brothers, that I first really experienced the stock market.

The market was in a bubble and my dad, following the advise and euphoria of the general public and all the financial advisers who are advising the same thing today, asked me whether I wanted to chip in to buy some shares in Singapore Press Holdings (SPH) in the Singapore. Exchange (SGX). Strangely these same advisers don’t go to jail or even have to be responsible for the things they’ve done. I digress!

It was thought to be a sure win investment as it was a really awesome stock. Everybody’s buying it and it has been trending up! Can’t go wrong with it. So sure enough, being an obedient teenager that I was :D, I withdrawn $1000 from my savings for the purchase. I didn’t care much because I wasn’t into the financial stuff yet. All I know is I want the money to grow.

The market came crashing down and everybody was suffering. Thankfully the position was small as it was to “play-play only”. It took until 2013, together with dividends over the years for us to breakeven. The shares were sold recently when it was trading near the highs of $4.20+. It was a long term investment. 6 years long to be exact.

Since then, my dad has learnt about the stock market more. With my own learning and trading in the market in recent years, he has learned even more. One lesson is that it is stupid to listen to the others for financial advice. He remains a long term investor however, because of his work schedule. He also only invests in the Singapore Exchange and trades through a broker. So he’s a long term investor who invests in local stocks. He invests independently in the stocks that he follows and understands when to scoop them up and when to take profit. After all, his stocks are for long term investment. Even if he’s wrong, time will make it right.

Don’t Buy Yet

I haven’t encourage my dad to step up to buy anything yet. Why I’m not recommending my dad to do so is because I think the market (STI) is going to go down. As a long term investment, I want to select a good entry for him. If you have been following my website, you’ll know that I’m expecting the US market to sell off in a “larger than you think” magnitude.

Historically, the US market has a strong correlation with the Straits Times Index STI. Even though the relationship has diverged in recent time, I believe when the drop happens, the STI will get hit as well (US market has a big influence on the global economy). That’s when I’ll tell my dad to start scooping. Long term investment!

Createwealth8888

Correlation And Pairs

If you take a look at this chart, pardon me for my inability to find a better one, this shows the relationship between the STI and the DOW from October 2008 to December 2013. Ignore all the text and technical drawings. We’re only looking at the correlation.

As you can see, there is a strong correlation between the 2 index. And by that I mean that they travel together, up and down. But a divergence started happening in around April of 2013. This sets up a pairs trade where one can buy the STI and sell the DOW in a ratio. What a pairs trade does is that you bet on the relationship between something. In this example, you’re betting that the DOW and STI gap will close. There are multiple scenarios how this can happen.

1. DOW falls faster than the STI falls.

2. DOW falls while the STI remains constant.

3. DOW falls while the STI rallies.

4. STI rallies faster than the DOW rallies.

5. STI rallies while DOW stays constant.

Looking at how overbought the DOW is now, I’m thinking the DOW will fall out of bed. I’m also thinking that the STI will follow suit to the downside, but it’s definitely going to be more resilient. So I’m picking scenario 1. And when that happens, Dad Buy Dad!

Hope you have learned something new from this “Long Term Investment” post where I also touched on pairs and correlation in trading. If you like it, please show your support by sharing around, liking my facebook page on the top right and subscribe to me by sending me an email at neopokchow@gmail.com.

Cheers!

Pok

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