Monday, September 29, 2008

Are we at the bottom yet?

The short answer is no, but...

1. In terms of magnitude, yes it's pretty scaring, some markets are close to 70% from the previous peak, China is down 50%, India is down 40%. But the US, where everything started, is down only 28%, and Footsie down 27%. Developed Asia-wise, STI is also quite resilient, down about 36%. Hang Seng down 46%, Japan down 37%. So magnitude wise, maybe 60%-70% done. There may be another 10-15% downside, and things should pacify. Timeline-wise, things started to unfold only last June or so. We hit 1 year anniversary not too long ago. Bear markets don't last 1 yr. Usually 2-3 yrs, so chances are, we see some rebound then returning to downward trend until fundamental gets better.

2. Fundamentals. The saying few mths ago was that the sub-prime market was US$1trn, so we have seen write-downs of US$500bn, another 50% more to go. But now, it is not just about sub-prime isn't it. The whole financial industry is in trouble. And if you look at all these bad stuff, ie mortgages, CDS, CDOs, we are talking about US$3-5trn, or even US$10trn according to mega-bears' estimates which would be 70% of US GDP!?!! So how far are we from the bottom? Man, I have no idea, but we are nowhere near the end. But then again, the whole financial industry is built on confidence, if everyone thinks that the bailout will be successful, then it doesn't really matter if we still have US$ X trn of bad stuff. Bcos the market will look past all this and start pricing in a recovery.

3. The real economy only just started to slow. US GDP dropped two quarters ago but it is still positive. China GDP growth is still 8%, may need it to go to 6% or something. Usually it takes at least 4-6 quarters before GDP growth recovers. The stock market would be 1 or 2 quarters ahead of that bcos it always looks forward. So based on this measure, recovery is at least a few quarters away.

4. We are only at the bottom when nobody is asking whether we are at the bottom. Everybody stops talking about markets. Maybe this blog gets updated once a year. And this blogger writes about restaurants or cars or girls or something totally not related to investment. And none of our friends are in finance bcos those those that wanted to join freaked out, and those that were in finance got fired or their co. blew up. Think Lehman, Washington Mutual, AIG, Northern Rock!

Conclusion: it is not clear yet if this is the bottom, a lot of conflicting info pointing to different outcomes, my guess is that we are not quite there yet. One thing sure is that this uncertainty will continue. So brace yourselves for more volatility in the markets!

Friday, September 19, 2008

Penny stocks - continued

So, 600+ stocks out of the 700+ listed counters on SGX are penny stocks (trading less than $1). What are the implications? What are some takeaways one can develop?

For me, the few takeaways are as follows:

1. The market is cheap. The stock market can tell you the prices of stocks, but not their true values. When these kind of statistics get on the newspaper, you can tell, yeah things are quite bad, there may be some real bargain going on. But somehow, it feels like it is not the bottom yet. It has to be total despair when prices go way, way, WAY below their intrinsic values. Nevertheless, things do look cheap now. Just that they can get cheaper :)

2. Small frys get killed. Despite its mood swings, the market is not stupid. I am not sure how the same stats look in the best of times (was it maybe 100+ out of 700+ are penny stocks). But this stats did ring a warning in me. Yes not all 600+ counters are really lemons, we can find gems here. But how many? 300? Not likely, 100? Maybe, if we stretch our imagination and start building castles in the air a bit. But my guess is more like 10-20 real good co.s with fundamentals that can bring in cashflow for the next 30 yrs. (I am arbitrarily guessing here, no hard facts to support one...)

Singapore is a young country and has a unique economy that is very Govt driven, a small population educated to be obedient workers, no natural resources and no domestic market. So, how many good co.s can we produce? Sweden, the country with most no. of MNC per capita, has maybe 15-20 MNCs (like Ikea, Volvo, Ericsson etc). I think Singapore can be considered successful if we can produce just one or two.

So, one conclusion that can be made is perhaps as astute investors, we should not bother about investing in these small/mid caps simply bcos the odds of them growing to be great is miniscule. However if there are valid reasons to believe that some of these co.s can produce decent, stable cashflow in the long run and hence a good return on investment, then perhaps there is an investment case. This is similar to investing in See's Candy. It will not grow into giants like Walmart, but by paying at a right price, you can enjoy good cashflow for the next 30 yrs. (again in S'pore context, they must pay you dividends lah, unless you can buy over the whole co. like Buffett)

3. Invest with the leaders. Skip the small frys means the same lesson learnt here would be to invest in some stocks above some kind of cut-off. Most simplistically, stocks trading above $1, which is not very scientific lah. So maybe more tangible measures would be e.g Sales of more than S$1bn, Cashflow of more than S$100mn etc. Or maybe just invest in "global" household names. Not your St James Power Station, but more like Tiger Beer (Asia Pacific Breweries). Actually, really not that many. I cannot come up with another investable name.

4. The Singapore market has too few participants. When 84% of the stocks listed fall below S$1, it does say something about the breadth of investors here. Some bigger developed markets would have so-called "natural buyers" to support the market, eg. pension funds etc. Obviously they are not in Singapore. I am not surprised if it's only a handful of institutions trading in Singapore. Arbitrageurs in bigger markets will also bring prices closer to intrinsic values for listed entities. Again, perhaps our markets lack arbitrageurs.

Limited no. of players also mean the possibility of market manipulation. As a small individuals, go in with your eyes wide shut open, esp into small mid cap stocks which are easily subjected to manipulation. One popular trick would be pressing down the price of a good small cap, then taking it over or taking private, so even if you bought at a reasonable price, it is possible to lose bcos the acquirer will pay you a price even lower than that.

Hence back to the biggest takeaway: stick with the leaders.

Sunday, September 14, 2008

Advertisement for my other blog and penny stocks on SGX

After 3 years and 120 posts I think I have covered more or less 80% of value investing, and 50-60% of investment and finance in general. I reckon there are about about 50-60 core concepts in value investing and I have more or less touched on all of them: margin of safety, circle of competence, value trap, economic moat/barrier to entry, stock markets' mechanism etc.

There may be a few more stuff to expand on Financial Statement Analysis. But it's very dry and I don't really enjoy writing about Financial Ratio and Cashflow. I am sure most people read those posts only when they want to get some sleep.

In the past 2 yrs, new posts have been slow at about 2 weeks per post bcos I can only write when new ideas, key concepts enter my knowledge base and well, new ideas and key concepts don't really come by the minute, hour or even days or weeks.

Meanwhile I have been working on another blog which I have simply named "Industry Knowledge and Other Information" which contains snippets of useful stuff (I think!)

The link is here

It's in a very informal style and lots of no.s and statistics are included. More useful for myself than for pple who don't really want to think about what the statistics mean. Yes, the messages in the posts are not so clear cut. And sometimes, no message at all! :)

Well the latest post is about an interesting statistic: 84% of the stocks, or a whopping 600+ stocks listed on SGX are penny stocks (ie trading below $1). Of course, we are in a bear market, so what do you expect right? But let me share another statistic: less than 10 stocks trade more than $10 and less than 20 stocks trade more than $5. And in my short investment career, actually I can't really think of that many stocks trading at a high dollar amount. (Yes I know dollar amt doesn't mean anything, market cap is much more impt, but I am arguing from a simplistic angle).

I think all these statistics reflect a point: finding a real ten-bagger on SGX is 1 in a 100 or even less probable. Why? Bcos if the SGX has been around for more than 20 yrs and you see less than 20 counters trading at $5 or more. Assuming no stock split, and stocks IPO at $0.50 or so, it means you must be really good or damn lucky to identify that handful of $5-10 stocks.

Yes there are stocks that IPO at 20c, rally to $2 which would make it a ten-bagger. But they subsequently falter and return to their IPO price of 20c or even lower. Hence in my definition, they cannot really be considered "real" ten-bagger, right? So what does this all mean? Food for thought huh? I guess I will share my conclusions in another post. :)

Tuesday, September 09, 2008

Hopes and Dreams

Flipping through the newspaper everyday, I see so many dreams asking us to fork out top dollars to make them come true. Proprietary trading systems to help you trade and earn big money, ways to become millionaires, weight loss to a perfect figure, teaching methods to make your kid a genius, and many more others. Most of the time, they don't work, bcos if they did, they won't need these advertisements, people will just flock to their shops by the truckloads.

But the sad truth is, people still pay top dollars to go through these useless programs bcos they are buying a hope, hoping that somehow these programs will make their dreams come true. Humans are given the gift of hope such that in the most desperate of times, we can mentally survive bcos we know things could be better. In prehistoric times, cavemen needed hope to tide through winter, our grandparents needed hope to survive the wars. Today, this has become a marketing tool to entice people to buy hope that their dreams will come true.

Alas, you reap what you sow. How can you expect to lose weight by just paying money while you continue your 3,000 calories diet every day? How is it possible that your investment will make you money if you don't devote time to study what kind of investment you bought? We live in a world of cause and effect. One has to put in the right effort in order to get the desired results. So even if someone told you that the programs did work, it is more bcos they themselves put in the effort to cause the change. Or they may be just lucky.

To make money from investment is just about that: putting in the effort to learn, to think and then execute, ie buy the right securities. Most of it is free. The learning can be found all over the internet and needless to say, on this blog! The thinking is up to you, whether you like mental workout or just let your brain rot. Like most of us let our bodies rot by slouching in front of the TV after a hard day's work. The execution, well, competition among the brokers have brought commission down. So it's not expensive anymore. Unless of course you get some relationship managers or private bankers to service you and you actually get enticed to buy their high cost, high commission investment products. Then sorry lah, you might be paying 5% or even more of your capital for buying stocks or other securities.

The bottom line is this: don't pay top dollars for investment seminars, brokerage services, private banking services, don't pay top dollar for trading systems, learning to invest or any other programs for that matter. The great lessons in life are usually free.