I have a question for you. Would it be a mistake to be fully invested in today’s circumstances, with doubts about where the market is going and with the possibility of being able to use one’s precious resources to buy those shares that will be cheaper still in time to come?
The answer to this question must be that it is always better to buy shares at the low point, and that if you are able to time your purchases then it must be better to buy shares at as near their bottom as is possible.
I was asked this question by a reader, and he obviously considered that I had recently been too sweeping by advocating that it was better to be fully invested; he quoted my own normal argument that many Chinese shares are still quite high, and that one should wait for them to fall further to a point when buyers are so depressed that they tend to panic.
I must say that I would have been much more adventurous when I was younger, and would have decided to take the chance of shares falling to unforgettable prices. In any case, even if I was unable to buy a specific share, then there would have been plenty of other fish in the sea and I could buy a second choice.
But I think that there might be some misunderstanding about my advice, as in my mind I was thinking of those who had gone into this slide fully invested, and recently I had held back from making any recommendations, other than HSBC (HBC) (5.HK), and to a certain point Manulife (NYSE:MFC) (945.HK), but rather half-heartedly.
Among Chinese shares, I had been somewhat tempted by some of the banking shares, but I was more cautious and had expressed my interest at lower levels. I am still wary about many of these Chinese shares, although looking at today’s prices I do believe that power companies, especially Huaneng Power (NYSE:HNP) (902.HK) and, perhaps, Datang Power (991), are excellent buys, having been profitable even in these difficult days.
My advice to retain one’s portfolio fully invested was not so much as to be an injunction to buy, but it was more a warning not to sell. Many investors in Hong Kong, except for those who rely on dividend income to fulfill their daily needs, are accumulating more cash as they are well able to save, and with the dividends rolling in, and these are the investors that I was thinking of.
For these investors, any sales would leave them embarrassed for money, and they are able to add to their portfolio monthly. At the same time, the dividend recipients should not forgo their annual income by selling capital, as the normal increments of increased profits is likely to compensate for the inflation of their living costs, so sales of capital would be an unnecessary gamble.
To retain cash indefinitely is a losing game, as its spending power is being eroded all the time, and there is no knowing where on earth the bottom of this lull in the normal progress of the market might be. An investment in a great stock like HSBC, yielding nearly 6%, as it offered when it was below $115 last week, must be a mandatory purchase.
But how much HSBC should one put in one’s portfolio? This is a question that I have asked myself (and I have not received a reply!), but it would certainly differ between other investors; there is no question but that it should be included with this dividend yield in anybody’s portfolio.
I have brought up the case of China Mobile (NYSE:CHL) (941.HK), and although this price does look rather expensive on its 2006 profits, and even on its potential 2007 profits, it is a share with a tremendous potential from 2009 onwards. If one were to wait to buy it, then how does one decide at which level to make the leap? On a price of $120, it is capitalized at $2,400 billion, and given another 10% currency rise in 2008, after the increase of 10% this year, one could conceivably have a P/E of 20 times on 2008’s profits, so the price cannot be called cheap. But profits for 2009 could well be 20% higher, and with another currency boost, so the next year’s P/E could be in the region of 16 times. This may still be high but it is arguably the most prestigious Chinese share, and this deserves a premium rating.
However, the big Chinese companies are still to present their final report for 2007, although these should be coming on stream at any time. But even though the prices of these shares may well be on the high side, the gradient of profit increases will grow much faster than their Hong Kong, let alone the rest of the world, comparatives. This would apply particularly to ICBC (1398), as future prospects are not so easy to make with some attempt at accuracy without this latest report.
To revert to my original question, whether to be fully invested or not, and with my own reservations, it is safer to be fully invested. Nevertheless that does not mean that this is the fastest way to make money, or that it will give you the largest pay-out; but it is a way in which you will not lose any money, provided you are neither forced to sell, either because you need the funds or because you become scared and panic.