Wednesday, April 07, 2010

The Truth Shall Prevail

Value investing is based on an inherent fundamental assumption: that someday, an asset's true value (or intrinsic value) would be realized. Hence buying a stock when it is trading significantly below intrinsic value would yield good return bcos they eventually trade back to its intrinsic value (albeit after a long time and only for a short while). But what happens if the stock never reverts to its intrinsic value? Is that likely? Well I don't have a good answer to that, but let's explore this topic a bit more broadly first.

Analogous to this the concept that a stock eventually reverts to its intrinsic value are similar logics like: the truth shall prevail, good will triumph over evil, hardwork eventually gets rewarded etc. I would think that these tenets should hold most of the time, if not all the time. The issue in the real world is that it can take generations for them to come true. Think Khmer Rogue, North Korea. Think about why some incompetent managers can stay in the firm for years. Or why some evil deeds never get punished (50% of murder cases are unsolved). Well the stock market is efficient, but the reality may not be as efficient.

Khmer Rogue did get its retribution after killing 6 million Cambodians 30 years later, and one or two ex generals are getting trial. One may say that this is too little too late. But Cambodia is finally thriving now with its Angkor Wat and a few hundred other Tomb Raider ruins. But our beloved tyrant in Pyonyang is still enjoying his tyranny. It's been about 20 years of hardship perhaps for the North Koreans? Well I hope I can see some resolution in my lifetime.

Of course, bad managers, they manage to stay afloat for some time but eventually they are either being force to retire or they themselves choose to retire after creating maybe 20 years of negative goodwill amongst colleagues. Yes the damage is done. But what I think could happen is that these people accumulate so much negative goodwill during their lifetime, even though they can be rich and living a luxurious life after retirement or termination, they are not happy. And they die not happy.

As for murder cases, again we can only hope that goodness finally prevail whenever the murderer reflects that he lived a meaningless life, caused only harm and pain to the world and dies a lonely death with nobody to mourn for him, eventually.

The fortunate thing about markets would be that many many participants are judging the stocks, everyday. Hence prices revert to value relatively quicker (but still a good 3-5 years). However there are cases that prices never revert back to value, then shit happens, like the company got taken private at a cheap price (very likely in Singapore). But overall, I would say maybe 70-80% of the time, prices will revert back to intrinsic value over a period of 3-5 years or sometimes a bit longer.

In the case of bad tyrants and bad managers, I guess the problem lies with too few judges. For bad tyrants, virtually nobody can judge them until things get so bad that the people revolt (usually 50 years or more? If we look at the history of China). Or in today's context, global leaders may force a regime change. For bad managers, well perhaps a few bosses on top judging them but not a whole lot efficient. Hence, in my opinion, universal truths can take a long time to prevail. In the worst case, a hundred years.

What is the solution to this?

In the stock market, it would be some diversification, buying enough value stocks so that even if one or two stocks never returns to its intrinsic value, the portfolio should be ok. And that is perhaps why good value fund managers tend to be able to beat the market more often than other managers.

In reality, my current thinking would call for dis-association. Or simply escape from such situations, bcos we cannot live a hundred years to wait for things to revert. I always wondered why North Koreans can endure such shit for 20 years. Shouldn't 90% of the population be gone by now? Indeed I estimated that 0.5% of the population escapes the country every year. But the conclusion I arrived at is that people weigh the risk of dying while escaping vs risk of dying in North Korea and choose the latter. Aside from the great famine in 1993-95, most people have enough food to eat so as they won't die, they have a shelter over their heads, medical is taken care of somewhat. And they adapt. However population growth for the country is near zero or may even be negative. Needless to say, economic growth is also near zero. Well that's North Korea.

As for situations closer to our reality, like in the cases of your bosses happening to be real jerks, pls quit your jobs asap. That is the first step, the 2nd step would be to help the world by revealing their evil deeds such that justice can prevail faster.
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