Malaysian NewsDirtydog is taking a break from blogging to focus on restructuring his Malaysian and International portfolios and to prepare for his CFA level II exams (wish me luck!).
Although events have occurred thick and fast this year, and I have not had the time to make many comments, that does not mean that I don’t have anything to share, so feel free to contact me in the meantime if you need to ask anything. Email is tradingmalaysia@gmail.com.
See you again this summer!
Happy New Year!
As you can see below, our imports and exports were already slowing as far back as July 08. This corresponds with manufacturing sales decline of around that period. GDP was already suffering in Q1 08.
‘”he US government should actively support the adult industry’s survival and growth, just as it feels the need to support any other industry cherished by the American people.”
politicalticker.blogs.cnn.com/2009/01/07/porn-industry-seeks-federal-bailout/
How hilarious!
There is has been quite a lot in the papers about how well Malaysia is doing as a whole. In order to shed some light on this topic I have attached a graph of the relevant indices I look at. As you can see, the Leading and Coincident Indices are in a downtrend, alongwith Industrial Production. By my count, we have been in a declining period since early Jan although the structure of the graph only really started to look bad from May/Jun onwards.
Many fundamental analysts have become confused over the last 6 months or so, when their portfolios have shrunk by almost as much as the general index. “Why?”, they question, “does the stock price of a good company fall just as much the stock price of a bad company’? Is it really worth trying to pick good companies, or shall I just focus all my energy on trying to time the general market instead?” Since Jan 08, many blue chips have shed between 30 and 50% of their market cap no matter how sound their business model or balance sheet is. Good counters like Genting, DIGI, SIME, Tanjong, and even defensives like Dutch Lady have not been spared.
This level of convergence of stock price volatility and correlations with the general market index has been so strong that traditional diversified portfolios have also suffered. In the last 6 months, all major asset classes - equities, bonds and commodities have tanked and cash has flocked to US treasuries, bringing its yield down to effectively 0% (taking into account inflation). For this reason, many hedge funds which are supposed to be immune to market movements have not been spared and are facing redemptions as a result. As a result of this strong correlation, some have sought to challenge traditional asset allocation strategies and fundamental analysis.
If you possess a few ‘value companies’ or have built a such portfolio, and like many other managers, are experiencing the same niggling uncomfortable feeling that the foundations of what you thought was a well built strategy are being chipped away by poor performance and this sick realisation , let me provide some further food for thought.
In focusing on prices in this way, the Correlation Argument actually incorrectly assumes that fundamental traders adopt a buy-and-hold strategy. This is flawed because it forgets that fundamental traders should be buying into companies which have superior price-value relationship and selling those with inferior price-value relationships. If properly applied, a portfolio would actually constantly change depending on available bargains at the time. Although this does not ensure that your portfolio will provide a positive return every year, it does mean that at times like this when the whole market is going down the trader is actually buying into good companies which have fallen at a faster rate compared to its peers and the index. Note that this is not the same strategy as averaging down, because the composition of the portfolio is changing all the time.
By continuously buying into the best price-value (i.e. cheapest) company on the block, this exercise helps ensure that your portfolio stands the best chance of zipping right to the bottom without going through the agonising pain of also shrinking on the way there. By way of a crude analogy I describe as follows:
Imagine several escalators side by side each travelling downwards at different speeds, and that each step on each escalator has a different height (each escalator represents owning a stock in a particular company). Imagine also that you possess a certain amount of money which decreases at the same rate as the escalator your are on, and that your object is to reach the bottom a) in the shortest amount of time, b) by jumping down the highest steps you can find around you and c) which are on the slowest moving escalators so that your capital is preserved.
By adopting this hop and step technique, the trader preserves his capital, positions himself best for the eventual upturn and actually ends up timing or bottom picking his trades without realising he is doing so. Portfolios such as these tend to contain neglected gems which tend to go down more slowly than the index and go up more quickly when optimism returns. To state that fundamental analysis supports market timing and bottom fishing may seem counterintuitive and even a bit of an anathema, but I hope that it makes sense.
So next time your broker tells you that he doesn’t believe in buying-and-holding, you’ll know exactly how little he knows about fundamental analysis!
(PS If you look at my portfolio and conclude it has not been following the approach described in this article you’d be right, but it is because as I have not been updating it much lately. This isn’t because I haven’t traded but because I have technological problems updating it on this blog. If the problem isn’t fixed soon I will remove the portfolio.)
Happy Trading!
My personal portfolio consists of happiness, knowledge and wealth and even though the wealth portion is under water, the entire portfolio continues to deliver absolute return. That, is what is important.
Peace be to all!
From all the articles and interviews I have been reading on the financial crisis there is general agreement all around as to what its causes were. On top of all the monetary and fiscal measures discussed over how to fix the global mess, there has also been discussions of regulatory measures to prevent this from happening again.
However there has been little discussion of how to realign the incentives of the middlemen who were too short-sighted and caused the mess in the first place, and what little there is has tended to focus on linking compensation to long term performance.
I think we need to go much further to make financial industry employees accountable not only to their bottom line but the reputation of the whole industry, given the important role which finance plays in the world today. In every other system which provides an important role in society like law or medicine, candidates are forced to go for professional training and taught to uphold the integrity and welfare of their profession, even above their own employer. Since anyone with a law degree would not be able to practise unless he or she has taken professional exams and completed their trainee apprenticeships, why should financial institutions allow simple economics graduates (sometimes not even that!) to become a bankers?
At a time where pessimism is so pervasive, I think that it’s entirely appropriate to understand what constitutes a market bottom and how investors should behave under such circumstances. In relation to this I can do no better than quote from a weekly commentary from John Hussman.
Good investors have the courage to form independent opinions and challenge market conventions if they feel that they have a good reason for doing so. In this way, their abilities are demonstrated and marks them out from the rest of the pack. Also, because traders live and die by their trades, it is always better to read analysis from a trader as opposed to a research analyst. In my opinion, Dr Hussman provides one of the best weekly commentaries available for free on the net and I read him every Monday. Here is an excerpt from his latest commentary:
As a final note, it is important for investors to remember that stock prices trade on expectations. It is often said that the market bottoms before the economy does because investors begin to look ahead to a recovery several months before it occurs. I’m not entirely sure this is a good way to think about market dynamics. Rather, I believe it is more useful to think in terms of what actually creates the bottom itself. Almost by definition, bottoms require an overwhelming negativity about the future. That negativity itself; the common acceptance of the premise that more economic losses are yet to come (which may very well be true) is what creates the market trough. The tendency for stocks to rise afterward isn’t necessarily forward-looking wisdom about a recovery. It may be almost a side-effect of investors moving away from such an overwhelming negative consensus.
The common knowledge among investors that “things are bad and will only get worse” is precisely what forms the basis of every durable market bottom. The consensus of investors tends to be wrong at peaks and troughs in the market, not because the market is diabolical and secretly wishes to frustrate the greatest number of investors, but because the consensus of optimism or fear is exactly what creates the peak or trough in the first place. For that reason, investors who are defensive at tops and constructive at bottoms will be out-of-step with what nearly everyone considers to be “obvious” fact.
Remember this. Just as there are a thousand reasons to buy stocks when the market is at its peak, there are a thousand reasons to avoid them at the trough. It feels dangerous, risky, foolish, and against all common sense to buy stocks low and to sell them high. This is why investors have a difficult time doing it, despite the apparent simplicity and logic of the advice.
Those looking for value are buying into companies with high solvency, low gearing and revenue growth. Although it’s easy to check whether revenue is still growing for a company, there are several methods of analysing solvency and gearing. The easiest approach would be to use some sort of filter such as those provided by KLSETRACKER, which allow an investor to filter companies in terms of their cash, current or quick ratios and leverage or debt ratios. I won’t go into them in too much detail, except to state that solvency ratios are slightly different ways of comparing the current liabilities of the company with either its cash (and near cash) assets or ability to generate cash. This provides a good glimpse into the length of time a company wil survive if it suffers a shock to its revenue stream. In relation to leverage or debt ratios, these show how much debt a company has and hence the likelihood of being made bankrupt if its balance sheet or revenue stream decreases.
On top of these ratios, which any long-term investor must know, I would like to introduce another ratio, which is called the Enterprise Value-to-cashflow ratio. Very generally the “Enterprise Value” is how much it would cost to buy a company, and when you compare that to its operating cashflow you get a general idea of how long it would take to cover back your investment. Enterprise Value can be calculated roughly by just adding the market cap to total debt of a company and then subtracting that from the cash of a company. This means that if an investor wanted to buy an entire company, it would have to buy all the shares in the market and take on the debt which the company has. As it also becomes the owner of the cash owned by the company, this is used to deduct from the market cap + debt amount. Then, by dividing this sum by the operating cashflow you will end up with a ratio that tells you how long it will take for the company to earn back what you paid for it.
The important thing to realise about this ratio is that it is based on market cap and is therefore dependant on its share price. It is therefore a measure of the value of the company (like the P/E). The lower it goes, the lower the ratio will be.
As an example, I have applied this equation to 3 companies: Notion, DIGI and GENTING. Notion scores a 5, DIGI scores a 9 and GENTING scores an impressive 3. As you can conclude, GENTING is the clear winner of this analysis due to its high cash position and cashflow. Taken into conjunction with its low gearing and revenue growth I therefore believe that Genting continues to be a good buy, despite the punishment which foreign investors have meted out to it following the recent woes in the gambling industry (just do a google search for ‘Macau + job losses’ to see what I mean).
Over the past months many analysts have been trying to decipher when things are going to turn around. iCapital itself talks about it in its most recent issue. Despite all that is being said, the sad truth is that no one can tell. Of course it’s possible to compare previous recessions as iCapital has done, but there it just isn’t possible to predict what will happen in this situation by just looking at the dozen or so times the global economy has faced a serious bear market in the past since 1929. Statistically speaking the sample size is just too small to be able to produce any significant conclusions. Therefore there are only 2 things to be do in this market, which is to keep buying into good companies and average down (like Warren Buffett is doing), or get out of the market. There is no middle way, and certainly no way to predict whether the market has already past its bottom or will drop another 20%.
| DJIA | 8280.74 | ||
| 000001.SS | 3088.37 | ||
| ^STI | 2299.75 | ||
| ^KLSE | 1078.71 | ||
| ^BSESN | 14913.05 |
