What goes up must come down? Not necessarily



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Nov 21 2008
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Sometimes it pays to be negative provided you know what you’re pessimistic about. Sir Isaac Newton’s discovery of gravity after got bonked by an apple gave birth to the “What goes up must come down” wisdom to many stock investors. I wonder if stock markets were invented much earlier in 1687 would Isaac be able to make any money out of it. He’s a great mathematician but that doesn’t means he’s a good stock investor or trader – the same way why Warren Buffett is a billionaire but not his mentor or guru, Benjamin Graham. But the gravitational law does not apply in outer space and for that I’m proposing stock markets to be traded only in the space stations *grin* so that we can end the current miserable of economic crisis.

However even on earth there’re certain parts of the world that the gravitational law does not apply – well, to be fair it only works sometimes but not all the times. This place is Malaysia, a proud nation that will never enter the recession door regardless of what will happen to other powerhouse such as United States, European Union, Hong Kong, Singapore or Japan. Malaysia is fully insulated from recession disease because the top leaders have built a very strong fundamental layer of shield to protect the domestic needs. Frankly if not for the influence of internet and bloggers, the fuel prices would remains at RM2.70 a liter and can never retreat to the current RM2.00 a liter, thanks to the Mar 2008 general election’s result. It’s a shame that the ruling government country cannot continue to prosper by making tens of billions of ringgit in profit after the global crude oil prices tumbled from $148 to current $49 a barrel. Can you imagine the quantum of revenue losses here?

There was a time when Malaysia’s stock market defied the gravitational when it behaved the opposite way of Dow Jones. Those were the days when KLCI shot up even when Dow came down but as strange as it looks, the KLCI would retreat when the Dow shot up to the roof. That is another proof that Newton laws does not apply in this country. There’re other living testimonials that could send Sir Isaac Newton home crying because his law is flawed. Now that the ruling government has no other choice but to lower the petrol price to RM2.00 a liter (they’re still making handsome profit at this level, mind you) with more to come, amazingly the price of other goods remain stubbornly. You can be forgiven for scratching your head in disbelieve but if you’re a local then the above makes perfect sense simply because Malaysia is a very unique country which never fails to produce astounding world wonders.

Let’s go back to the topic of “What goes up must come down”. It was nice to read Warren Buffett was optimistic about stocks and advised us to not hold cash but scooped the stocks recently. I’ve wrote that you cannot and should not read Warren’s recent action as a bible simply because the mess that United States was facing was simply too gigantic to be neutralized by one Warren Buffett. Furthermore Warren has such a deep pocket that he can afford to be wrong while you can’t. His Berkshire Hathaway (NYSE: BRK.A, stock) has since lost more than 40% of its value and now it’s back to where it was in 2003. If you do not already know, Buffett actually sold “naked puts” option contracts worth about $5 billion to an undisclosed group of investors. The Oracle of Omaha thought he could make easy money of $5 billion because he was positive that U.S. and world equity values would be higher in 15 to 20 years back then – when DJIA was at 13,000-level.

Now rumors are flying on Wall Street that the owners of the put contracts have demanded that broker Goldman Sachs (that brokered the deal) put up collateral for the rest of the amount due. And that’s precisely why Warren pumped in $5 billion into Goldman Sachs Group Inc. (NYSE: GS, stock) recently – not because of the stock but because he need to get Goldman Sachs ready with cash in case his bet goes haywire. So, if the genius can’t be right all the time you can’t simply follow without doing your homework before jump into the sea of uncertainties. If only “Die-Hard” Bruce Willis has done his homework and knows who is Petra’s CEO Vinod B. Sekhar and Imran Ibni Tuanku Ja’afar, he would not have to deal with numerous excuses (ahem, that’s the special skills possessed only by “certain” Malaysian businessmen) over a pathetic $US900,000.

All right, here’s my reward for being negative again. Lock-in my profits on Apple Inc.’s (Nasdaq: AAPL, stock) put options, the same way those investors bought their put options as insurance against Warren Buffett.

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