This is exactly the situation in the US where the Dow Jones Industrial Average (DJIA), the S&P 500 and the tech-heavy Nasdaq surged this year, hitting new all-time highs in July.
Back home, the once laggard FBM KLCI outperformed its regional peers during the first half of the year, filling many investors with a sense of euphoria.
However, getting caught up in the hype and euphoria when the markets are booming can be a recipe for disaster.
Founder and chief strategist of Pheim Asset Management Sdn Bhd (Pheim Malaysia) Tan Chong Koay has seen this scenario play out multiple times during his 47 years as a fund manager.
Time to exercise caution
In today’s situation where the US indices recently hit all-time highs, he advises investors to exercise caution.
“When it (stock markets) has touched an all-time high, it’s already a red flag.
“If the stocks continue to run up, to do so well and begin to look overvalued, then you need to be very cautious,” he told FMT Business in a recent interview.
Tan, nicknamed the “Warren Buffett of Asia” and “Southeast Asia’s Small-cap King”, said the key lesson for investors is that they must know how to sell shares in such a situation.
“You must know how to reduce your exposure so you don’t get caught when the market is at the highest, and you are at the maximum exposure,” he said.
“When the market is at a very high point, you will never know when it will crash,” he added.
It is said that when the US sneezes, the rest of the world catches a cold. Alluding to the strong correlation between the US markets and Bursa Malaysia, Tan cited the example of the Covid-19 pandemic crash of 2020.
From Feb 12, 2020 to March 23, 2020, the DJIA crashed 11,355 points, a 38.4% drop within five-and-a-half weeks. Market indices in Asean followed suit, ranging from -35.75% in the Philippines to -18.35% for the FBM KLCI in Malaysia during the same period.
“The FBM small cap index saw an even bigger drop of -42.77%. However, in the subsequent market recovery, the index posted a 102.43% increase as of Dec 31, 2020 from its lowest point in February 2020,” he said, highlighting the opportunity of profiting from a market crash if investors are astute enough to buy shares near the bottom.
Riding the bull
However, Tan said he is not advocating that investors sell the bulk of their shareholdings in the near future.
“The key thing I’ve learnt as a fund manager is that before a stock runs, you must have some (shares). When it goes up, you ride with them.
“And when it gets to the highest point, you want to get out. It’s a simple theory but you must do it. In the long run, you will outperform by a big margin, and avoid huge losses,” he said.
He added that while some shares will go to extreme highs, not all shares will hit their highs at the same time.
“Some shares still look reasonably priced while others have gone up (a lot). We are monitoring the US markets closely, although we don’t invest in the US.”
He said if there are sectors which have not reached their highs but have the potential to go up further, then one can consider investing.
Time to raise cash?
On whether he has significantly reduced exposure for his funds, Tan said: “I’ve raised some cash and remain cautious.”
The last time he raised a huge amount of cash was just prior to the Covid-19 pandemic crash in 2020. In a prescient move, Pheim Malaysia disposed a significant portion of its shareholdings in January and the first half of February, just before the market crashed in mid-February.
This enabled the fund management firm to navigate the chaos of the pandemic crash unscathed. With its huge cash pile, Pheim Malaysia was able to swoop in to buy many good stocks at rock bottom prices, and reaped big profits when the markets rebounded.
Tan is not the only award-winning investor to raise cash recently. A CNBC report on Saturday revealed that the world’s most celebrated investor – Warren Buffett – raised his conglomerate Berkshire Hathaway’s cash level to a record US$277 billion (RM1.25 trillion) after slashing holdings in tech stocks including Apple.
The Omaha, Nebraska-based group’s cash hoard jumped significantly higher from the previous record of US$189 billion (RM850.2 billion), set in the first quarter of 2024. Berkshire has been a seller of stocks for seven quarters straight, but that selling accelerated with Buffett shedding more than US$75 billion (RM337.4 billion) in equities in the second quarter.
Buffett’s decision to divest is proving to be an astute move given the plunge in the US market last Thursday and Friday.
US stocks fell sharply last Friday as a much weaker-than-anticipated jobs report for July and a higher unemployment rate ignited worries that the US economy could be falling into a recession.
The DJIA fell 610.71 points, or 1.51%, to finish at 39,737.26 points. At its session low, the 30-stock index was down almost 1,000 points.
The S&P 500 dropped 1.84% to end at 5,346.56 while the Nasdaq Composite lost 2.43% to close at 16,776.16, bringing the tech-heavy index into correction territory, down more than 10% from its record high. The S&P 500 and Dow were 5.7% and 3.9% below their all-time highs, respectively.