Tread with caution

The Kuala Lumpur Composite Index closed above 1,300 points, a thirteen year high on April 10, last seen on Jan 5 1994. Back then, fate had it that one was stranded in Perth, Australia with an open air ticket and no available flights to KL. Lucky! The day after my return, the KLSE plunged heavily. The then finance minister had warned the general public that foreign funds were selling down the market. Instead of appreciating his warning, those who lost lots of money blamed him for triggering the plunge. Some one literally sent him a coffin. (Truly, remaining blameless is the highest good.)

The naïve had taken to heart that foreign funds invest for the long term – between a three to five years time frame, their managers had indicated in earlier interviews. But the general public did not quite understand that foreign funds were looking for a reasonable steady growth of say 10 to 20% a year for their investments. The funds sold out their investments because they achieved their ‘three to five years’ objective within a year. The KLCI had doubled in early 1994!

If Malaysian investors are mystified as to why the prices of some blue chips are still comparatively lower than those achieved in 1993/94, it is because the KLCI component stocks had been changed over the years.

The KLCI is about 20+ points away from its all time high. 1,300+ points represent a 30% increase from November 2006 when foreign funds, mainly hedge funds, started to invest in the KLSE in earnest – the KLCI was about 1,000 points then. As expected, quite a number of stocks had topped their 12 months high the past two weeks. Coupled with the rising ringgit against US dollars, I wonder whether these funds have made enough for this six months period – giving an annualized 60 to 70% return.

The stock market looks lethargic even with the high volume churned. For the past two days, one has been locking in profits of stocks bought early last month, quite happy with some of the 50 to 100% returns. Stocks cannot go up for ever; bulls still has to take a breather. Therefore it is time to tread with caution. Heavy profit taking and stale bulls selling (those caught in the February 27 plunge) may set in.

April is a month where investors have to be wary. There could be a few bear traps for the unwary and the exuberant. One did not cast away friends and kin when I told them to stop buying and to take profits. If they had followed, fine and good, if they want to be contrary and traded, it is also fine by me. Their gains and losses is no longer my concern.

A good friend asked the reason for my selling when he expects the stock market to rally this Friday with the expected announcement of better policy changes by the Prime Minister. He understood me perfectly when I told him there were no reasons why the market will fall. Perhaps after putting down the phone in a jiffy, he had started to take profits on Tuesday and today.

Yi students not understanding the wisdoms contained in the Book of Changes tend to lightly dismiss this Chinese classic as non philosophic and/or only good for divinations. No matter how many years they have spent reading the Yi, a number still do not quite get it. Earnest and sincere students may understand this third line of Tai / Peace in terms of philosophy and changes:

No plain not followed by a slope. No going not followed by a return. He who remains persevering in danger is without blame. Do not complain about this truth; enjoy the good fortune you still possess.

If Yi students still do not understand the philosophy and wisdom contained in the line, think in terms of the rise and fall of the KLSE, or of the US property market – discussed in a previous entry on ‘Three types of Change’ in 2005.

Cycles do not need divinations – what goes up will come down - but we may divine when we want to know their timing. Unless you have learned to read the annual Yi chart for investments accurately! (Joke)