My Personal Finance Journey

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Between Ice and Fire

Contributed by mm | August 15, 2007 1:58 AM PST

The ride in the last four weeks has not been easy, if you know what I mean.

Yes, I'm talking about my investment portfolio, which sinks day after day as the general market does in the midst of this credit squeeze that still hasn't seen the end of the tunnel. The home-made index of my portfolio, which was as high as 125.89 at the end of June (read: 25.89% appreciation since January 1, 2006), tanked to 120.69 as of yesterday. Behind the movement of the index is the evaporation of more than $30,000 paper gains in my actively managed accounts, and I have yet to mention the wealth destruction of similar magnitude in my employee stock option account.

Adding insult to injury, the local stock market in Shanghai is as hot as ever. The Shanghai Stock Exchange Composite Index, which just broke 3,000 in February before the massive sell-off that spread across the world, closed today at 4,869. Since July, the index has been setting new historic highs almost every day, so it is only a matter of time before it flirts 5,000. Many analysts are talking about the index hitting 8,000 or even 10,000 in the near future.


Being a value investor at this junction is particularly excruciating. On one side, I know that my concentrated financial stock holdings are cheap in valuation. These household names like Citigroup, Bank of America, JP Morgan and AIG, are each big enough to weather the storm -- any multi-billion-dollar worse-case exposure is no more than one or two percent off these giants' market capitalization. The fat dividend yields (5.3% for BofA and 4.6% for Citigroup at yesterday's close price) will provide a good cushion too while the market is figuring out what to do next.

I also know the China stock market is a bubble that can burst any time because the underlying earning quality is poor due to investment income from cross-holdings, and a market P/E ratio of 50 is not sustainable even if earning quality is not a concern. Yes, local analysts can advocate that China GDP growth will continue to be strong in the next few decades and high valuation is justified when we have too much liquidity, but we also just learned the painful lesson that liquidity can disappear almost overnight.

However, it would still be a lie to say that I don't feel any pain these days. I do, like everyone else, like to see the consistent appreciation of my portfolio, which will bring me closer and closer to my million-dollar financial independence goal. But given where I am and what the market condition is, I am literally between ice and fire. Is what I believe fundamentally wrong, or is it just bad timing?

Being an optimist, I have to see this as a test of my patience and adherece to the value investing doctrine. Will I past the test?

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This Post Has Received 7 Comments. Share Your Opinions Too.

The Dividend Guy Commented on August 15, 2007

Hey MM - I feel your pain. Everyday I open up my Microsoft Money file to do some banking I take a glance at my portfolio and sure enough it is once again lower than the day before.

This is where the rubber hits the road for investors. Do they have the confidence in their strategies and the will power to act on facts and not feelings. There is millions of dollars being lost out there because of this. I have to admit I have thought about selling, but don't because I think back to historical stock market returns and over time the market always ends up higher. Just my opinion though.

The Dividend Guy

Josh Mullineaux Commented on August 15, 2007

I definitely believe that the stock market will return and surpase it's high based on historical reference. I do however think that there is always money to be made in the market. So if you had a lot of cash on hand it will soon be a great time to get started investing.

Chris Commented on August 16, 2007

I personally jumped out of the market altogether about 2 weeks ago. That is aside from my employer sponsored 401K.

My last sale was AAPL at $144/sh (after having bought it about 40 days previous at $120/sh).
The last time I checked, it was more than $6/sh less than I had originally purchased it at.

I didn't try to time it that way, but boy did I get lucky! I did admittedly get in on VMW for a couple days, and made about 10% on it in those couple of days, but I only bought 50 shares.

Chris Commented on August 16, 2007

I had considered shorting GOOG (back when it was around $540), but wasn't sure how to do that.

Does anyone know how you can do this? Is it buy at a certain price, and predict that it will be no more than $X by a certain date.

Michael Fang Commented on August 16, 2007

mm, your blog is very informative and educational, but if I may take exception to the common expectation of "consistent appreciation" in a stock portfolio.

As we have all experienced, common stock is risky and values can fluctuate a lot. While it is great that you are trying to stick to a "value" investment strategy, you MUST have a real, intellectually honest, gut check with yourself with regard to losing money in the stock market. In other words, how would you really feel if you lose 10%, 20% or even 30% in the market in a span of months? How about 50%? Laughing it off? Depression? Will it affect your relationship w/ your family? If you haven't even thought about how you will psychologically react in these tough scenarios, YOU DON'T REALLY HAVE AN EXIT STRATEGY. You are just going by a wing and a prayer, which is not how you should run your money.

tim Commented on August 17, 2007

well considering buffett just bought BAC yesterday, i'd say there was some value in the stock. i had sell triggers set, but prices never hit the prices. i did buy lots yesterday though. the bigger picture to look as the fact the markets are still up on the year. sucks if you bought high, but for the long terms stocks, you are still up.

MM Commented on August 17, 2007

Thank you for all the comments. I bought some AXP yesterday too.

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