How To Catch Falling Knife Of Blue Chip Stocks Without Getting Sliced

How To Catch Falling Knife Of Blue Chip Stocks Without Getting Sliced

Catching Falling Knife Of Blue Chip Stocks In Singapore Without Getting Sliced

This post first appeared on InvestingNote and was written by our verified community member, Li Guang Sheng.


This weekend, I will be sharing my thoughts on catching falling knife blue chips like M1, Star Hub, SPH and Raffles Medical Group. Usually, for stocks that fall so much within a short period, there is a reason and usually is due to change in fundamentals such as profit, growth or potential future earnings look bleak. In my opinion, if a retail investor who hates to see paper losses should wait a bit more before burning their cash as analyst reports are usually negative on them hence funds are selling. There is no point in catching a falling knife for them as there is a possibility of further pain in such shares. Is better in my opinion for such retail investors to chase high and buy when fundamental improve than to bottom fish. There is no one size fits all investment strategy for all. For me, I prefer to bottom fish as there is more upside potential but the risk is paper losses in some counters when they continue to fall.

I am one who believes strongly in probability and game theory. Catching a falling knife is a phrase used to describe a stock which has dropped significantly within a short period. One must know that the chances of a stock falling further or rebounding from the current levels are equally strong. To me is 50/50 unless you know the company well and have inside information. I have seen in some cases when the blue-chip even loses most of its market value when the situation does not improve. Technology, pharmaceutical and commodity darling companies had collapsed when things turned against them and eroded most of their value.

SPH CEO Ng Yat Chung
SPH CEO Ng Yat Chung

Let us use SPH as an example. When SPH is falling rapidly, for some fund managers, all bets are off on SPH as to them it is a falling knife situation and investors are jittery over it. As of now, SPH has a big bogey over a lot of retail investors as they lose a lot. My analyst on this is that if one invests in pedigree stocks like SPH, one should hang in there and do not panic. However, I may be wrong as if indeed SPH business is in the sunset industry and the company cannot find a new engine to grow, it may never see previous high again. Beauty is in the eye of the beholder, and although I like this company from what I know and see, my judgement is blinded as I am vested in it. Only time will tell.

I would like to share my thoughts on why when the stock fall, usually is hard for those who cannot stomach paper losses even to consider venturing out and nibbling on those falling knife blue chip stock. In case a lot did not know, a lot of high net worth in private banks like to pledge example shares, property and bonds at a low-interest rate and buy stocks like SPH which has consistent dividend like 5% and make the difference. When things are smooth, one makes the differential difference in interest rate. But when things turn awry, there will be margin call, and it is a miserable position to be in when bank force sell your shares. Hence the sell down of SPH recently could be due to margin call as a lot pledge SPH to private banking and financial institution and prior of this fall they use the dividend to pay the interest and make the difference. Similarly, a lot of accredited investors are pledging assets and buying bonds and REITs with good yield which is a good strategy when the stock keep going up or remain stable. BUT when the stock start to fall, it could also bankrupt you if you leverage too much on it.

I love to catch falling knife stock as I believe I can create wealth from stock falling steeply. I always believe that when a stock fall very steeply,it is due to its fundamentals changing and the technical stock chart being super bearish when it is falling. When things stabilise for the stock, my take is it will be the first one to bounce back. A good example is bank stocks being sold down on Swiber crisis, and all have rebounded. My advice for those is that investors should not buy stocks because it is cheap but select companies that could show improve earnings visibility in the future, linked to government reforms push such as healthcare, stable management, and preferably have low debt levels. One should look at stocks that have future growth potential and invest keeping a time horizon of at least two to three years, which will benefit in the long run and also nullify the effect of volatility.

Always trade within one means. If the company management is good I believe the “blue chip” will see light one day. Have faith in the company especially if you think you are not buying rubbish. Companies especially those with properties asset will appreciate over time due to inflation hence use the dividend (like collecting rent) when times are bad. Is like an investor buying properties at a high in 1996 and collect rental for next 10 years before seeing property prices reaching 1996 prices again. Have a good weekend all.

For further discussion and debate. This thread is not to induce buying and selling. This thread Is just for education purpose only. Please do your due diligence when buying and selling of shares and seek your financial advisors for clarification. All the best.

This post was first posted here in InvestingNote, by one of our veteran, verified community members Li Guang Sheng.

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