Thoughts On February Market Sell Off

Thoughts On February Market Sell Off
skeeze / Pixabay

This is the first major market sell-off, however, it is not the first major market decline.

Below is an extract of our fund’s memo written in 2016 – “History Matters and the Way Forward”.

It’s been slightly under one and a half years since the Straits Times Index (STI) hit 3,500, a level last seen only in the heady days of 2007.

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Since  then,  the  economic  climate  has  deteriorated,  with  the  STI  falling  close  to  a  1000 points  (between  April  2015  and  February  2016,  a  loss  of  28.6%).  Since  then,  many economists  and  financial  pundits  have  called  for  renewed  caution  amid  the  current slowdown.

No doubt – such advice is warranted. However, at the Heritage Global Capital Fund, we have a slightly different view. Prudence and diligence should be exercised at all times when one is invested in the markets, and not just the bad times.

After all, it is when others throw caution to the wind, and act in a reckless manner that we must redouble our efforts in acting in a prudent and cautious manner. This has been our mantra for the last five years, and forms the bedrock of what we do.

Since 2011, we have had the personal experience of witnessing several events which we think warrant mentioning:

  • The first ever downgrade in the history of the United States of America of its credit rating from AAA to AA+ by Standard & Poors in August of 2011
  • Meltdown of  Singapore  listed  Asiasons  Capital,  Blumont  Group  and  LionGold  Corp which lost S$8 Billion in just three days of trading in October 2013
  • The inflation of the Chinese stock market bubble, and its subsequent crash. More than 30% of the value of the A-Shares listed on the Shanghai Stock Exchange was lost in less than one month in July 2015
  • The stock market rout during the month of January 2016. The Hang Seng Index fell over 35% to 18,319 in February 2016 from the high of 28,442 set in April 2015
  • The Shanghai Stock Exchange also fell close to 25%, from 3,539.18 to 2,655.66 in the month of January 2016

These events have coloured  our  investment  philosophy.  While  we  are  not  immune  to market fluctuations, we have come back each time by the judicious avoidance of leverage, and the careful selection of investments in our portfolio.

These words were written when the world economy was much darker and things less certain – but still remain true even till today.

Focusing on Fundamentals Relentlessly

Markets have not declined significantly as of yet (prices are simply at where they were a few months ago) – and it remains to be seen if the sell-off gathers strength. If it does, we will be net-buyers of select positions at the current prices.

As Warren Buffett put it best – “You need to be greedy when people are fearful, and fearful when people are greedy”.

We are not anywhere that stage, but may encounter that moment in the coming months.

As markets decline, it is easy to panic. We are human too and do not enjoy watching our positions decline in value. And yet, it is moments like this that maintaining a cool head is required.

As investors, your North Star should be simple – focus on the business fundamentals relentlessly.

Purchase businesses that have strong financial positions and proven generators of both significant profits and free cash flow even during periods of distress.

One good investment case study would be – Hang Lung Properties. Ronnie Chan has been developing the equivalent of one Empire State Building every year for the last decade – all while maintaining a net-cash position and high dividend pay-out. It generated almost HK$5.7 billion in rental income in FY2017 – most of it which was paid out to shareholders.


With history as a guide, significant decline in stock markets allows investors to reposition their portfolios and reap significant rewards in the following 12-18 months.

Going forward, we can’t say for certain whether markets are going to enter a bear market or this is merely a correction. However, one thing we can say for certain is that businesses rarely change on a day-to-day basis – unlike the stock market. Prices fluctuate greatly in any given period of time, but in the long run, they always converge on the underlying fundamentals of the business. While there may be short term volatility, we as investors should maintain our laser focus on the long run and on the business’s fundamentals.

Article by Jun Hao Tay, Value Edge

Updated on

I developed my passion for investment management especially equity research at a relatively young age. My investment journey began when I was 20, at a point in time where markets were still recovering from the Global Financial Crisis. My portfolio started from money I saved over the past years and through working during the holidays. I was fortunate to have a good friend with common investing mentality to began my journey towards value investing. To date, we still research and invest in companies together, discussing valuations and potential risks of a company. To date, I manage a fund with a value investing style. Positions are decided upon via a bottom-up approach or smart speculation (a term I came up with when buying a stock for quick profit due to a mismatch in prices in the market due to takeovers/selling of a subsidiary or associate). Apart from managing my own portfolio, I enjoy sharing my research with family and friends, seeking their opinions and views towards the stock. Reading Economics in London, I constantly keep up with the financial news in Singapore & Hong Kong. Despite my busy schedule, it has not stopped me from enjoying other aspects of life. I enjoy a variety of activities in whatever free time I may have – endurance running, marathons, traveling, fine dining, whiskey appreciation, fashion. Lastly, I enjoy meeting new people, discussing ideas and gaining new perspectives towards issues in the world.
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