Bottom-fishing and the retail investor

An investor gazing at stock prices displayed in the trading gallery of RHB Investment Bank Bhd. Data shows that many retail investors are entering the equity market now. — Bloomberg filepic

OVER the past few weeks, it has become evident that more retail investors are putting their money into the market, hoping to bottom-fish for some good stocks while prices are still depressed.

This is perhaps in line with Warren Buffett’s philosophy – “be fearful when others are greedy, and greedy when others are fearful”, which essentially means investors should be prepared to invest when the market is down and to “get out” in a soaring market.

At a time when many are selling their shares in fear of the Covid-19 pandemic impacting businesses across the globe, it appears to be the right time to go into the market – based on this philosophy.

However, there are many other factors to consider when attempting to bottom-fish.

It appears that even the “Oracle of Omaha” himself recently sold large blocks of shares after accumulating at much higher prices over a month ago.

Buffett’s Berkshire Hathaway disclosed recently that it had sold large blocks of stocks in Delta Air Lines at a per-share average of US$24.19 each, after having bought some of the shares in February at an average per-share price of US$46.40.

There are many uncertainties surrounding the current market downturn, such as how long the pandemic will last and its impact on business, and this poses difficulties for even the most seasoned investor.

Even the World Bank, in its recent forecast for Malaysia, said “the depth and duration of the shock are unusually uncertain”, with its more pessimistic forecast based on a scenario that the impact of the pandemic will prolong into 2021.

Last month, local retail investors made up 43.63% of the total volume traded on the local stock exchange, and 22.67% of the total value traded.

While for local and foreign institutional investors, the volume of shares sold outnumbered the volume of shares bought, retail investors bought more than they sold.

The volume of shares bought by retail investors in March stood at 41.4 billion shares, compared to 34.5 billion shares sold, according to data from Bursa Malaysia.

There is also data from online trading platform Rakuten Trade Sdn Bhd, which has seen a surge in new account openings during the movement control order (MCO) period which began on March 18.

Rakuten Trade, which is Malaysia’s only fully digital equities broker, saw more than 11,000 new accounts activated during the period, representing a 100% jump month-on-month.

The managing director of Rakuten Trade, Kaoru Arai, tells StarBizWeek that more than 15% of the 70,000 accounts opened since they first set up in 2017 were activated during the current MCO period.

The retail traders, he says, were mainly going for counters that were trending, recognisable brand names or big-cap shares, as well as oil-related stocks.

In tandem with the surge in account activations, Rakuten Trade also recorded a 20% increase in trading value in March 2020, month-on-month.

Based on all this, it is clear that many retail investors are entering the equity market now.

But the question is whether they are going to end up profiting or learning a hard and painful lesson.

What will happen to global markets in the months ahead is anyone’s guess, and so, it is important that new investors know what they are getting into.

Experts have said that a lot depends on how long the pandemic will last, whether a vaccine is found, and how soon people can go back to work after the pandemic peaks.

While the MCO goes on in Malaysia, elsewhere, lockdowns and border closures continue in major cities across the world as well, with no end in sight.

Global asset manager Unigestion has reportedly warned that the Dow Jones and worldwide stock markets will fall by as much as 50%, despite recent bounces.

The London-based company is among analysts and asset managers that are predicting massive selloffs in the coming months as the pandemic worsens, according to a CNN report.

Global investment analysts TS Lombard also recently said it expects the pandemic to bring huge stock market losses in the coming weeks.

In Malaysia, the number of people losing their jobs or being told to take unpaid leave is on the rise.

Also, many small businesses say they are already facing bankruptcy.

The bigger businesses, which will be able to survive the storm, will see their profits fall and lower dividends declared for investors as they slowly rebuild after the pandemic ends.

This essentially means it could take a very long time before stocks recover to the levels seen prior to the pandemic.

Areca Capital Sdn Bhd chief executive officer Danny Wong tells StarBizWeek that a common mistake by some retail investors is that they often take a short-term position even though they have holding power.

He says investors must be aware that while their entry point could be right for the long run, it may not be the lowest level the stock will see in the immediate term.

“Many also make the mistake of being influenced by sentiment and noise on bottom-fishing.

“One should look beyond the current sentiment and study the fundamentals of a stock beyond the short term, ” he says.

Wong adds that unless the stock is not fundamentally “not right”, investors should hold on to it until it reaches the target valuation, before deciding on the next course of action.

Rakuten Trade’s research head Kenny Yee, meanwhile, advises investors to remain cautious amid the prevailing state of heightened volatility.

“As expected, Bursa Malaysia this week continued to see range-bound trading as a result of broad-based profit-taking and bargain hunting.

“No doubt, there will be ongoing high market volatility for the time being, ” he says.

However, as with all market cycles, Yee says there will be a rebound at some point and signs of recovery will emerge.

As for retail investors, he notes that it is extremely difficult to accurately bottom-fish at the lowest level of a stock.

Hence, he says, it is advisable for investors to buy when there is a steep decline in the share price.

In this way, they can see a profit when there is an uptick.

Clearly, with the current uncertainties in Malaysia and globally due to the pandemic, Malaysian investors who are looking to bottom-fish at this point should be prepared to be invested for the long term.

And as the experts say, regardless of whether the market is down or up, it remains crucial to research, study and analyse before making any investment decision.

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