August 05, 2021

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Market Irrationality Swings Both Ways

 
Dear all, I hope my constant writing is not becoming a nuisance. I have been receiving many emails over the glove stock selloff by readers. Most are panicking as they see their portfolio profits evaporating since Pfizer announcement last week followed by Moderna last night. 
 
Investing requires knowledge, competence, strategy and importantly qualitative aspects that help you navigate the troubling times. It is easy to be a "hero" when the market is rallying, but the true test of your aptitude & character is during a selloff. One requires a calm and collected composure coupled with the nerve of steel to do well in the stock market continuously. You must be able to handle an irrational selloff of epic proportion to sustain, otherwise it is possible to be wiped out entirely. 
 
This morning, during the huge selloff for gloves, how many actually went against the flow to catch the bottom? Remember I have always said the best time to buy is when the fear is in your gut? Did you have that feeling this morning? If so, and you acted on it, you would be making good returns by the close of trade today. I am delighted to see the market closed strongly for gloves after the series of bad news on Top Glove factories, Moderna announcement and negative comments in the media by certain fund managers / research houses which impacted the gloves stock price further. But what I find the biggest irony is how certain individuals can flip their view overnight. I remember some were in fact big glove bulls just few weeks back. If a columnist or professional, keep switching his opinions based on the herd mentality, would you value his opinion? I am not saying that such opinion is wrong but there must be justification to backup an opinion. Investors, unlike politicians, we do not need to play to the gallery hence what we express should always be objective.  
 
As what I shared to my subscribers, this is how I view Top Glove negative news on Covid-19 cases - if  Top Glove production is hampered, it will only worsen the glove shortage as Top Glove supplies 26% of world market share. Clients have no choice but to buy from others even at a higher ASP to the address immediate demand. Having gloves at high price is better than no gloves due to the need to fulfill contracts with hospitals and end consumers. This will in turn benefit the other glovemakers unaffected. Why should the other glovemakers share price plunge irrationally? For Top Glove, they will need to draw on all their inventories during this closure and by the time their affected factory can resume operations, they will need to catch up with their new capacity. Failing which, the shortage persist and will drive the ASP even higher. 
 
Of course today's reversal may be just a technical rebound due to oversold position in gloves. But from the huge movement in the afternoon session, I believe it is the foreign funds who bought in. Maybe EPF. Some share buyback as well possibly. But retailers would be the smaller portion. If you believe in the glove story, it is not because you are irrational, after all irrationality swings both ways. Those who are advising you to buy O&G, Hospitality, Tourism, Airline stocks are the ones who are being irrational. The fact remains even if the pandemic blows over, will you resume travelling immediately, will you start flying again, will oil price suddenly spike without OPEC controlling supply? It will take 1-2 years maybe more before earnings recover to pre-covid levels. Glove stocks on the other hand are giving you great record earnings visibility for the next 1 year. So you have a bird on one hand, but decided to go for two in the bush?   
 
If I have to choose one metric to guide me in selecting stocks for investment, I would choose earnings. Apart from share buyback & corporate exercise, earnings is probably the only factor that have direct correlation to pushing share price upwards. Good luck.
 
 
Food for thought: 
 


 
 
 
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This  information should not and cannot be construed as or relied on and (for  all intents and purposes) does not constitute financial, investment or  any other form of advice. Any investment involves the taking of  substantial risks, including (but not limited to) complete loss of  capital. Every investor has different strategies, risk tolerances and  time frames. You are advised to perform your own independent checks,  research or study; and you should contact a licensed professional before  making any investment decisions.

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