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?