How not to catch a falling knife?

I read an interesting post in forum today on how to avoid catching a falling knife. Please allow me to share my experience. In year October 2008, I read Warren Buffet’s advice that it is time to buy stocks because he noted that seasoned investors are afraid that the economy is going to collapse.

Heeding his valuable advice, I immediately researched a stock that I knew is going to do extremely well in year 2009. This stock is Ho Bee. In a quick summary, the important numbers are Net asset value, 80 cents, share price 38 cents, market value about $200 Million, company has a few projects fully sold like The Coast in Sentosa expecting to TOP in year 2009. That is when I got excited because the projects will generate estimated $900 Million in revenue. Based on net profit of 30%, Ho Bee will likely generate a profit of $250 Million for year 2009. The next figure is what keeps me excited. That gives Ho Bee a PE of 1. What can I lose if the PE is 1 and I m buying at 38 cents at 80 cents net asset value? I decided to buy in December.

In addition, I urged my brother and mother to buy Ho Bee as well. But they commented that it is too risky to buy when the economy is collapsing. After I purchased at 38 cents in December 2008, I thought the share price will rebound in January. My god! More bad news followed, and the stock market tanked further. Ho bee was not spared and it fell 30% to 29 cents. That is when I should buy more. I hold on to my stocks and was actually worried that my brother prediction could be right. I also chided myself as I have utilized most of my funds with a couple of thousands left.

In February, I looked at US regional banks in an attempt to emulate Peter Lynch performance in buying Savings and Loans in year 1990. Some of the banks like Fifth third Bank and Huntington Bank have insiders buying at $2 or $3 and the share price fell to $1. I was excited about this banks. What can I lose when I buy at half the price of insiders? Due to lack of funds, I spent two thousands dollars to buy US banks. In March, the economy suddenly rebounded due to the QE measures by the FED. I was vindicated. What a relief. For a moment, I thought, my brother is right in the economy going to fail and all stocks will fall to zero. Thank god, things eventually turned out right. Ho Bee rose from 29 cents to $1.80 in year 2010. The US banks like Fifth Third rose from $1 to $12 in a year or so. Wow!

Peter Lynch is right. He mentioned that it is best to wait 2-3 years (sometimes even longer) and let things fall and then hit the ground and vibrate for a while before picking it up. It is great advice.