Wednesday, December 21, 2016

2016 in Review: Most Unpredictable Year Ever!

2016 has to go down in history as the worst year for forecasters ever. Who would have predicted that the China market would collapse 25% in the first month of the calendar year, after dropping 40% in 2015, then only to rebound by year end? And the Bank of Japan reducing interest rates into negative territory, pulling 20-30% of the global bond market into negative yields. And commodities! Oil from $100 skyfalling to $30 and then back to $60, bringing the rest of the resource stuff - iron ore, copper, coal up, up and away!

Then Duterte, a maverick who became President of Philippines amongst high hopes, saw his country becoming the worst performing ASEAN stock market of the year. Then Brexit happened. But then again maybe it's not possible after all due to technicalities. Or it might take a full 10 years to fully exit. Then a King died, and a Cuban dictator whose reign lasted 10 US Presidents also died. Then a best selling phone became a grenade. And the other best selling phone can't use conventional earphones to listen to music. This was the company that transformed music listening with the iPod. Then Donald Trump won, and Renzi lost, and then India decided that its notes would not be legal tender anymore - a move that caused widespread panic among small businesses and rural folks. Gosh!

Oppa Gangnam Style!

Even in the last two weeks of the year, unpredictable bad news can't seem to stop. A refugee decided to bulldoze people in a truck in Germany, the European country that had accepted the most number of refugees in Europe. This event itself might cause the downfall of the most powerful woman in the world, maybe bring about the breakup of Europe? So would it be Brexit first or Breakup first? Elsewhere a Russian ambassador got assassinated while his President enjoys onsen in Japan with his Japanese pet dog. The same President, in the presence of his gracious hosts, then tells the host country straight in the face he won't return the islands his country confiscated controversially during WWII. WTF?!?

Perhaps the only good thing that came out of the year was that a small country no more than a little red dot on the world map managed to clinch its first ever Olympic gold medal as a butterfly against the world's fastest swimmers, who all got silver. Well, this was predicted by some in the swimming inner circles (the gold though, not the three silvers). Yeah! One prediction gotten right.

It goes back to an old point made here - prediction is futile. The future is a set of probabilities. There are a few outcomes and one would become real. The point of investing, is not to predict but to achieve a good expected return. This means, know all the possible outcomes. If A becomes real, what happens. If B becomes real, what happens. Bet such that the expected return will be okay. Say if A comes true, we are neutral. If B comes true, we make a ton of money. If C comes true, we lost 20%. So it's worth a bet. It also means, reading and knowing a lot and making many, many investment decisions over our lifetimes such that in the end, our average expected return will be good enough.

For most people who are new to the game, they like to ask about the future. What would happen? Is USD going to strengthen or weaken? Is STI going to hit 3,000 or not? Then talking heads come in and fill the gap. These amateurs then love it! But the truth is, nobody knows! Who could have predicted Brexit will happen, Trump will win, China will crash and rebound, oil will crash and rebound, commodities will rally big time and the best performing Asian market in 2016 is Thailand - after their King died? 

 Thailand: 2016 best performing Asian market in rollercoaster fashion

Hence it's not about predicting, it's about preparing well. This means reading widely, discussing with like-minded friends, understanding dynamics, then looking for opportunities where expected returns might be very good. One highlighted idea last month was Vietnam (or rather Vietnam property). If the high probability future that the country becomes another Asian Tiger (like Korea, Taiwan, HK, Singapore and needless to say, China) materializes, we have huge, huge upside (like 5x). If it doesn't we lose some money (maybe 30%) in the worst case scenario. That's very good expected return.

To digress a bit, one other big trend that is beyond prediction worth mentioning is the health and wellness trend in our lifetimes. As the global population ages, more and more people think about health and wellness and are willing to spend a lot more to maintain their health. This is a huge positive trend that spans across various sectors including supplements, retail, healthcare, apparel and even IT. Fitbit is a multi-billion company and was worth USD 6bn at its peak! Alas it was overhyped and now collapsed to a smaller USD 1.6bn market cap, but still big.

The two most important aspects of health are actually just diet and sports which doesn't really cost a lot of money but our current consumerism mentality makes sure that we spend as much as possible and be as glam as possible while pursuing our pink of health! Think of the huge supplement and sports apparel industries. Today, running is not putting on our sneakers and just do it, it is about wearing nice Under Amour shirts and 2XU compression pants, equipped with Fibit, mobile phone straps, great shoes and finally posting the run on Facebook! It's a whole new ball game!

But, diet is really the more vital aspect. This author would highly recommend reading this book titled the The Enzyme Factor by Dr Shinya Hiromi. It is compact, easy to read and comes with pure simple logical diet tips that should just be followed by everyone. As a surgeon for 40 years, Dr Shinya crystallized a simple fact: cutting out cancerous body parts did not cure cancer. The "cure" is good diet, good lifestyle. Just to share one tip out of the many in the book: eat a lot more fruits and eat less meat.

The Enzyme Factor

According to this doctor, fruits are created by Mother Nature to be eaten. Hence it contains all the best nutrients and enzymes for living creatures to be absorbed into their bodies. A diet filled with variety of fruits like tomatoes, apples, oranges, bananas, avocados supplemented with other vegetables and small amount of meat would be very healthy and his patients who followed his diet never get cancer relapses. Fruits are also easily digested and hence doesn't burden our digestive systems while meat, esp red meat is very hard to digest and a lifetime of eating meat ultimately causes cancer and/or illnesses. If we look at the structure of our teeth, we have only 4 out of 32 adult teeth that are suitable for eating meat. That's our incisors. Hence our meat to all food ratio is determined by evolution, it should be just 1/8 of our diet. Literally, food for thought huh?

Back to prediction and preparation, a good life is also about preparing well. We cannot predict markets but doctors/nutritionists can surely predict how people fall sick and eventually succumb to what kind of terminal illnesses just by looking at their diet and lifestyle. Stressful lifestyle with lots of tobacco eventually leads to cancer. Alcohol leads to liver problems. Meat lovers get heart diseases or colon cancer. Maintain a lifetime healthy diet, exercise and live stress-free. That's the best preparation against cancer and other big diseases.

It's all about preparing well for a good second half, to use soccer parlance. Yes, we are all more or less hitting half-time, and the score is 0-0! Okay maybe 2-0 for some. Time to strategize! As humans, we tend not to think too far ahead, usually thinking a few years ahead would be considered a feat. No one thinks more than 10 years ahead. When we are in our twenties, all we can think about was money, fun, glam. It never crossed my mind that I would be a father in a few years, have an ass full of debt from the home mortgage and how should I prepare for it. Now that I think back, it's really a miracle that things worked out without much preparation.

To sign off, let's talk about 2017. Remember it's not prediction but preparation. It's not easy but let's try. In my view, 2017 could see the rise in animal spirits given the very bad 2016. Investment appetite especially with the US economy recovering could pull parts of the world up. Although China and Europe should remain tough with the bad debt issues still haunting the financial sectors. So what's the preparation needed? Maybe look to deploy a bit into secular sectors, like health and fitness. Meanwhile in Singapore, 2017 could be the year the property oversupply hits a peak after which the no. of new condos would drop. Hence it might mean it's the bottom for the property market. It's could be the last chance to buy Singapore property before it becomes way too expensive. So, be prepared!

Merry Christmas and a Happy New Year!