Betting against the herd

"My favorite holding period is forever," Warren Buffett.

The Jakarta Composite Index has recovered today (15.18 p.m), climbed 3.44% to 3.863,58, following global market's recovery. Dow Jones rose 3.98% to 11.239,77 earlier.

This must be hurtful for some local investors bought stocks in yesterday (Tuesday) trading, who were attacked by panic in Monday.

At that day, they enter market in a bid to ride the market rebound. But after having 0.7% gain, the JCI slashed back 3% to 3,735.12 in the last trading session, leaving them to cut another loss in 3 hours.

"Right after doing cut loss on Monday, friend of mine had entered the market on Tuesday morning just to get his capital cut again as JCI dropped in the second trading session that day," an individual investor named Anto told Bisnis.

And then in Wednesday (today), the market bounced back by 3.44%, as if the sudden drop in the last trading hours of Tuesday--giving bumpy kicks to Anto's friend--was never there.

The market indeed, is in turmoil. If you have no plan nor strategies, and trade purely based on market instinct, then you will likely to be part of the herd to experience the shock.

The biggest shock of the month was on August 5, as The Standards & Poor's (S&P) rating agency revised down United States' (US) AAA credit rating to AA+.

US and European stocks posted the biggest weekly drops since November 2008, while The Standard & Poor’s 500 Index fell 7.2%, erasing its gains for the year.

Nevertheless, it's quite interesting too see how Warren Buffet, the oracle of Omaha, posed in the market swings this year. He definitely refused to be part of the market herd, and move quite contradictorily.

His equity portfolio, which rose to US$67.6 billion as of June 30, did suffer last week as markets declined. Stocks around the world fell amid signs the U.S. economy was stalling and speculation that Europe will fail to solve its sovereign-debt crisis.

Bloomberg reported that this old guy kept himself calmed. Through Berkshire Hathaway Inc, he confidently disclosed his biggest quarterly purchase of equities in almost 3 years, exactly in that moment when the market swung.

The Nebraska-based investor bought US$3.62 billion of stock in the three months ended June 30. It was the biggest quarter spending since third quarter spending of 2008 worth US$3.94 billion.

This huge amount of investment was spent right when its top three shareholdings declined by about US$1.6 billion last week. Coca-Cola, Berkshire’s biggest shareholding, fell 1.8% last week, wiping US$248 million from the market value of Buffett’s stake.

Wells Fargo & Co., the second biggest holding, dropped 9.8%, reducing Berkshire’s holding by US$935 million. Meanwhile, the stake in American Express Co., Berkshire’s third-largest stockholding, fell by US$429 million as the credit-card company’s shares slipped 5.7%.

Dynamic
Regarding the market turmoil, Buffett said on Aug. 6 that while the market slump may hurt confidence, the U.S. will probably avoid a recession. The 80 years 'oracle' even said S&P made a mistake and the U.S. deserved a “quadruple A” rating.

“Financial markets create their own dynamics, but I don’t think we’re facing a double-dip recession,” he said.

Berkshire sold US$200 million of equities in the three months ended in June, the second-smallest quarterly total in more than three years. The company spent $2.78 billion on fixed-maturity securities.

It increased stockholdings this year in 'commercial, industrial and other' stocks. That portfolio was US$10.7 billion on June 30 on a cost basis, compared with US$6.5 billion on December 31.

The 'US-based consumer products' stocks was down 2.4%, while holdings of 'banks, insurance and finance' were up less than 1%.

Nonetheless, Buffet as the Berkshire’s chairman and chief executive officer self-assuredly reported a 74% jump of net income worth US$3.42 billion, boosted by derivative returns and earnings from the company’s manufacturing and retailing units.

Will he win the bet against the herd this time? Along with millions others who has decided to pick contrarian move? The market, as the stage of this 'battle', will show us the result soon.

One thing for sure, Warren temporarily corrects when saying that market will recover. In Indonesia, we're facing a 3.44% climb just in a day, after recording 3% drop in the previous day.

Reality, once again, reaffirmed the fact that, in market turbulence, calmed-investors will hunt for oversold blue chips stocks, while the panic ones keep selling them.

The calm one, just like Warren, doesn't necessarily need to cut the loss as he may simply expand the investment time-horizon. As there are thousands of Warren-like investors in the US, the market is quite steady and sustainable.

How many more years needed for our local investors to have the same sustainable market? The answer are in the traders' hand, as they are (the ones who make) the market.

Under such strong trading system the IDX is building, the wiser they are, the more sustainable the market will be.