Taking Stock of the Stock Market and the World

Time files. We are coming to the end of 2022 and it is always good to take stock at such timing. How was the year? Did we have anything to celebrate? What are the lessons learnt? As of this writing, there is nothing much to celebrate. We are still not out of the COVID-19 pandemic. We have a war in Ukraine and the global stock market has corrected on average 17% since the start of the year. Nasdaq is down almost 30%. 

NASDAQ -28% 

HKSE -25% 

DAX -21% 

SPX -17% 

Nikkei -10% 

STI -1%

Source: Tigerbrokers

Surprisingly, STI is flat while most markets are down double digits.

Valuations remain high despite interest rates going up. More importantly – the risk-free rates are going up! As you may recall from those textbook studying days, risk free rate forms the basis of all valuation. If I can earn 4% risk free, which is what the Singapore government Treasury bills give today, very broadly speaking, there is no reason to buy any stock with PER > 25x i.e. earnings yield < 4%. Why should I take risk to earn 4% or less when I can buy T-bills which are risk free and giving me 4%? 

But global stock markets have not caught up with this logic. The following are the PER and EV/EBITDA ratios for the same markets:

NASDAQ PE 26x EV 15x (vs low at PE 21 EV 10x in 2012) 

SPX PE 18x EV 12x (vs low at PE 13x EV 8x in 2011) 

Nikkei PE 15x EV 9x (vs low at PE 14x in 2018 and EV 7x in 2011) 

HKSE PE 11x EV 9x (vs low at PE 9x EV 7x in 2011) 

DAX PE 11x EV 7x (vs low at PE 11x EV 5x in 2011) -> DAX looks cheap! 

STI PE 11x EV 12x (vs low at PE 9x and EV 10x in 2011) 

Source: Bloomberg

Long term investors who had looked at a few cycles may recall that T-bills was not 4% when these valuations hit their lows in 2011-12. Japan has a different story back then and today and at PER 15x, it is not screamingly cheap, even though the yen is and everyone and his dog is in Tokyo buying luxury products. Germany, Hong Kong and Singapore look like of cheap, but clearly the US markets look expensive when compared against the current interest rate environment and with other markets. It is also expensive when compared against its own history. The SPX needs to be closer to Mar 2020 bottom of 2500 for valuation to make sense, assuming earnings hold up.

The old story goes as such, if US is not cheap and US falls, then the other markets will not be spared. Remember the old adage - when US market sneezes, the world catches a cold. Hence a lot of investors are bearish. Some are saying there will be a big, big crash e.g. GMO.

https://www.gmo.com/americas/research-library/waiting-for-the-last-dance/

According to GMO, the markets should have collapsed pre-pandemic. We glimpsed that in Mar 2020 but then the huge rescue package from the various governments drove markets to new highs! At the end of 2021, the S&P hit its all-time high at c.4800 (see chart below).

Source: Google

This marked the backdrop of this crazy year. Since then, we had a war, inflation going through the roof, the shortest tenure UK prime minister and the meltdown of the GBP, the UK bond and stock markets, the assassination of a former Japanese prime minister and Donald Trump having a second go to be the world’s most powerful man after he messed it up big time last time!

Just when we think the world cannot be crazier, Koreans squeezed into a small alley to watch K-pop stars and got stuck, resulting in a stampede that killed more than 100 girls, an unthinkable accident in a developed country (my heart goes out to the families, pls pray for them). At the same time, we also realized China has become a prison and is forcing their rich and powerful (with the ways and means) to flee the country, pushing up home prices and rentals in Singapore!

So, how do you feel about 2023?

I would say this. We are not at the bottom. The war in Ukraine is escalating and inflation is here to stay. This means that global interest rates will stay high and the stock markets need to correct to lower valuations before we can say we are near the bottom.

Inflation will be a big topic in 2023. The following chart shows Singapore’s inflation for the past 25 years and we are at historical high. While the chart may seem to have peak out, anecdotal evidence tells us this is not the case. Rental cost in Singapore continues to rise, we are still seeing restaurant raising prices and importantly, as long as global issues causing inflation are not tamed, we will continue to import it due to the nature of our open economy.

Source: tradingeconomics.com

This brings us back to the STI. Recall that it corrected 1% while the rest of world has corrected double digits. Yes, we trade at lower PER (11x) but that is because of the constituents are mostly in the financial sectors which command lower multiples. Moreover, against our own history, we are not super cheap.

The only cheap market seems to be the DAX, but with the Russia-Ukraine war still looming large and the energy crisis unfolding, it is hard to bet on Europe. There might be individual stocks that might be interesting. Screening tools could come in handy. For the courageous, there is the option to buy some short ETFs but we need to be careful about the decay which can be 6-10% per year. Caveat: this is definitely not value investing and only seasoned investors should try this!

In conclusion, 2023 might be the year to just hold on tight. We shall wait for interesting names getting to interesting valuations as alluded in our first ever real investment idea on 8percentpa.substack.com. But mostly, stay vigilant and stay liquid.

Huat ah!

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.

Choosing Numbers, Beauty Contests and Stock Markets

I once attended a class where the professor asked us to play a game. It was a pretty simple game on the surface. Everyone was asked to choose a number from 1 to 100. The person who chose a number that is closest to 2/3 of the average number that everybody chose will win the game.

Now how should one choose such that it would maximize one's chances of winning?

Well, first you must determine what is the average of everyone's number choices. There were about 100 students in the class, so assuming everyone randomly chooses a number, probably the average will be close to 50. So 2/3 of 50 will be 33.

But wait a minute. If everyone thinks similarly and chooses 33 then the average will be 33 and 2/3 of the average then becomes 22.

Hey wait a second, if everyone then chooses 22, the 2/3 of the average will then become 2/3 of 22 which will be 15. And so the reasoning goes.

So in the end, I chose 1, based on the above logic. Of course, I did not win the game. The real winning number, was somewhere between 22 and 33 (I forgot the actual no.). So what went wrong? And what the hell has it got to do with Beauty Contests and the Stock Markets?

Let's talk about the Beauty Contest first. The great economist John Maynard Keynes came up with this concept to explain the stock market. So this Beauty Contest is also sometimes known as the Keynesian Beauty Contest.

Btw Keynes is a big name in economics, if you don't know him, shame on you and pls go check him up on Wikipedia.

Anyways during Keynes time, some newspaper in London publishes 100 pretty faces and asks its readers to choose which face would likely be the pretty face that most readers choose.

So there are people who would simply choose who they think are the prettiest. However that's quite unlikely to win bcos we all have different tastes right? Xiang Yun may be your favourite but I like Fann Wong. Ah Beng may like Auntie Zoe and Ah Seng likes Wong Li Lin. (Ok as you can see, I belong to a dinosaur generation and has no clue who are the new stars.)

So some smarter readers will naturally try to guess who they think the general public will choose as the prettiest face. And just like our number game, even more sophisticated readers can even go further, and choose the face that other readers will choose as who they think the general public will choose as the prettiest face. And one can further increase the order of the guessing game.

Ok if you have been reading intently this far, you would have guessed that the stock market works in a similar fashion. Well that is if you want to pick a winning stock tomorrow, or next week or even in the next 6 or 12 mths.

Basically you can throw fundamentals out the window. Technicals may help a bit but what's gonna make you big bucks is to guess what everyone else is thinking and be a step ahead. The winning stock will be one which the market participants think will have the rosiest earnings growth in the near future. It does not necessarily mean that the stock will actually deliver the rosiest earnings. Just what everybody thinks is what it counts.

Actually the market mostly likely works in the 3rd order: ie the winning stock will be one which most market participants expects most other market participants to like a lot. This is chim, right?

Today, these are your alternative energy, oil exploration, frontier stocks etc.

It does not make sense to go too high into the order bcos the market cannot be too sophisticated as there will always be some uncles, aunties and amateurs choosing their own favourite pretty face (or their own favourite stock). That's why choosing 1 in the number game will not win.

In the stock market, it means that you shouldn't be buying stocks of a company that provides the core component for a high-end analytical equipment used to detect uranium in some desert. And as you know, uranium is used for nuclear power generation - the hot, sexy story in today's environment. The market is not sophisticated enough to think so far ahead. Even though you may be right and the company may have a genuine investment thesis.

This means that you shouldn't be thinking too far ahead of the market. You should be 1 step ahead but not 5 steps ahead. Well, that is if you want to pick winners in a short time frame: ie from 1 day to 6 to 12 mths.

In summary, the stock market works like the beauty contest in the short term. It's the ultimate guessing game and chances of you getting it right is not high unless you have that flair or talent. But over the long run (ie 5 yrs and above lah), stock prices have to reflect fundamentals: earnings growth, shareholders' return and companies' true intrinsic values. And value investing ensures that you have better chances getting that part right.

Zoe, Fann, Li Lin can be Queens of Caldecott Hill but Mother Theresa, Florence Nightingale, Helen Keller are the real winners in life's beauty contest.

Defensive stocks

In different markets, different sexy terms come into play. I guess the latest infatuation on Wall Street in recent months has been "defensive stocks". Defensive stocks usually refer to stocks that will see stable profits even during times of trouble, ie like the past few months lah. These would be stocks in industry sectors like: consumer staples ie your food, beverage, razor blades etc. The thinking is that people need to eat, drink and shave no matter what right? Stock market down means everybody goes without food? Unlikely, so these are defensive stocks.

The other sectors are like pharma (your diabetic patient needs his pills regardless of stock market woes), utilities (eh, obvious I hope, we need electricity even during bear markets) etc. So you get the idea, things that we can't do without even during an economic downturn.

So what are things that we do without during the downturn? Well it actually differs for different entities on this planets. For example, Ah Beng who made money punting property and bought himself two Ferraris will still drive his Ferraris and buy Prada bags for his Ah Lians even though his latest punt has gone wrong and he has a $4mn mortgage but his condo at Sentosa is worth probably <$1mn and his monthly salary is $5k. So to him, Ferraris and Prada bags are still things that HE cannot do without even during a slowdown. But for most people and for the stock market, consumer non-staples (like car, furniture, luxury products, massage chairs, high tech goods etc) usually see profit decline.

Also most of the darling sectors that rallied during 2003-07 bull market ie oil exploration, shipping, property etc. One reason would be bcos credit is drying up and most of these sectors require a lot of credit financing to grow their profits. Of course, some experts may beg to differ, these sectors are in a secular boom and some silly sub-prime trouble is not going to derail their "sexy" story. Well... this blog is big enough for differing biews, so share your thoughts if you have some. The other type of defensive names would be stocks that pay high dividend, has huge amts of cash on their balance sheet, or stocks that generate huge cashflow regardless of business cycles

Of estimates and consensus thinking

I attended an investment session where the instructor asked the class (of around 20 pple) to estimate the size of Thailand vs Singapore. Was it 50x bigger? Or 100x bigger? Or 500x or what?

He wanted to prove a point. The true answer will lie in the range of everybody's estimate. Bcos someone was bound to get it right. Well his point was quite valid, in the end, the answer did lie within the range of everyone's estimate.

But what was more striking to me was that most estimates are wrong and some VERY WRONG. For those dying to know how big is Thailand vs Singapore, well it's actually 73x. The closest estimate was 50x. And only one guy got that close. Some had it 10,000x. My estimate was 400x.

This made me think very deeply about the nature of estimates. And more specifically, estimates of future earnings of listed companies. We know that the sell-side or brokers have their army of analysts to forecast listed companies' earnings for next yr, or 2 yrs out. Maybe, just maybe the analysts' estimates on a listed company's EPS that we, and most investors rely on, might usually be wrong as well. And it's logical that they should be wrong. Bcos estimates, by virtue that they are estimates, are usually wrong!

Of course, you may argue that analysts have access to information since they get to talk to industry people, competitors, company management etc. Well the analogy with Thailand vs Singapore may not be quite right today, since we have Google and Wikipedia.

But imagine if it were the Stone Age and the class was given 1 yr to walk Thailand and Singapore and come up with an estimate, how likely is it for the class to get it right? Probably as likely as the analysts to get next yr's EPS right, right? Which implies that estimates based on some info but INCOMPLETE info is not much help and that's the way it should be.

So consensus thinking and crowd thinking, by logically extending the argument, can actually be usually wrong. This can be quite scary bcos most of us (well some of us) usually follow others' action thinking that they did their homework so we are safe. E.g. I will go for a stall with a respectable queue in front of the shop at an unfamiliar hawker centre. As for financial markets, there is this thinking that even if we are wrong, so would most others and so it shouldn't be that bad.

Now based on the recent poll, I guess most pple would agree that Singtel is a bad investment since most pple thought that Singtel gave back 0% return since IPO. But guess what, the actual answer is more than 44% return since IPO, which is at least 3%pa based on the price of Singtel when the poll started (around S$3.60). Bcos Singtel gave back lots of dividend and capital back to shareholders during the 15 years it was listed. Since then, Singtel reached a new high of S$4.00 or so. That's another 10%. So again, most people are wrong. Ok you may argue 3%pa is not very attractive, esp after putting your money there for 15 yrs. Well its better than fixed D, and the point here is actually estimates are usually wrong, just a reminder.

Also it's a mere 15 years since Singtel IPOed. Statistically, it's not really that significant yet. Yes in order to be of statistically significant, the track record has to be 18 yrs or more! If you hold on to Singtel for the next 3 yrs or more, maybe the annual return will converge 8%pa or something.

So I guess the moral of the story here is this: Don't trust what most people do, they are usually wrong. Do your own homework and come up with the logical conclusion. Or you can visit this blog (which tries to post accurate logical conclusion on most stuff) more often.

Emotions, Emotions, Emotions

Market participants, or rather human beings, are really suckers when it comes to investing in the markets. In almost all kinds of transaction, people look to buy cheap and sell expensive. When you buy a fridge, you look to buy it during some sale or discount. When you sell your car, you ask for S$5,000 above COE valuation.

But when it comes to the market, people look to buy when the prices are high, the higher the better, like now. And when prices nosedive for 2-3yrs, people become totally not interested, like in 2003.

This is the result of two powderful emotions at work: Fear and Greed.

Fear is a much forgotten emotion nowadays except during 1-2 weeks when the markets stumble a bit (like last week). During 2000-02, when the markets entered a full-fledged bear cycle, it was a sight for sorrow. Finance stories made headlines like only when the editors need to choose whether it's "Dead Kitten on Toa Payoh Road" or "NOL stock price made new low". IPOs that came out almost always nosedive. Soon pple got so disappointed, nobody participated anymore, which made it worse. There was a general fear of the stock market bcos many pple got burnt.

As the bleeding continues, fear spreads even further. At gatherings, none of your friends, colleagues, acquaintances talk about stocks, or investment anymore. It simply hurt too much. If you said your job was an investment analyst, they go “Oh ok.” And move on to another topic. You can smell the fear of words like “stock” or “investment”.

Only value investors were very active. They were buying up all the cheap and good stuff, like during the Great Singapore Sale! But somehow, most pple really become suckers during those times. i.e. they fail to buy when it’s cheap.

In today’s market, Gordon Gekko’s good friend has taken over. Well, Gordon Gekko is the guy who quoted, “Greed is Good” in that hit movie and then won an Oscar! I heard he is coming back for a sequel to the 1987 blockbuster Wall Street.

So greed has taken over today’s market. The guys who got burnt in 2000? Well most of them shunned the markets until maybe yesterday, then decided to join the party bcos everybody around them is talking about it. But entrance tickets are not cheap now. What about the grandmas? Maybe they will join tomorrow.

Of course, there are also lots of newbies who have not seen the bloodshed the last round. And they have the all important role of Ra-Ra-ing this whole party. Haven’t we all heard how that young punk made a ton of money buying some stock and bought himself a Ferrari? So greed is all around now but maybe we have not seen it grown full blown just yet.

During these times, it’s always hard for the value investors. Some wished that they had bought more during the good old days of 2003. Some are thinking whether to sell now, but if the market keeps going up, then they lose out again. So as you can see, Greed spares no one, not even value investors. The same goes for Fear by the way.

It is an art to be able to judge the greed barometer of the market and decide if the peak is reached (vice versa: to judge if the market has reached maximum fear which will mark the bottom of the bear market). If you can do this, you are on your way to great success. But most old timers would advise against that. Hence they advocate the good old buy-and-hold strategy. As they say, it is futile to try to time the market.

As for me, I suspect the market hasn’t reach maximum bullishness just yet, so there may still be some upside from here. Forward PER of the STI is still ok at 15-16x, but it’s hard to buy anything now. The margin of safety is not there anymore. In this game, it’s only worthwhile to buy during the Great Singapore Sale. But somehow, most pple buy AFTER the Great “GST” price hike (of 200%). GST here stands for: the Great stock market Surge of 200% rally Tax!

PS: STI in 2003 was 1200, it rallied roughly 200% to 3600 today!

See also: Fear and Greed

What the heck drives stock prices?

Now this is the million dollar question isn't it? I am delighted to inform you that there are a million answers. Below is a non-exhaustive list of the most relevant answers.

1) The weather
2) Coffeeshop talk on stocks
3) Greenspan's or now Bernanke's facial expressions
4) Fart from sell-side analysts
5) This blog (when MoneyMind features it in 6 yrs time)

There are another 999,993 answers that drive stock prices in the short run which I will omit for obvious reason of space constraint. And two answers that drive stock prices in the long run. By long run, I do not mean 24 hours, or 2 weeks, or 3 months. Sorry, 2 yr with your steady also not long enough. Long run means 5 to 10 to 30 years. Yes, really really LONG RUN.

The answer is consistent earnings growth and valuations. If a company can consistently grow its earnings for the next 30 yrs, AND, further if current stock price has not factor that in, then the stock is a buy.

Now if you really think about it, how many co.s 30 yrs ago grew their earnings for 30 straight yrs? And if they did, wouldn't their earnings probably be like a gozillion times larger since it is compounded over 30 yrs. Well you are right and the answer is, maybe about 5 co.s, globally.

This illustrates how hard it is to find a good company and how harder it is to find one that actually trades below its intrinsic value. This is the truth. And this is value investing. But it is not impossible and the prove is Warren Buffett.

Now just for the fun of it, I have included a list of irrelevant stuff that will drive a lot of monkeys on Wall Street crazy. Be careful when you show this list, sometimes they will be delighted and shit bananas and sometimes they will run wild without their shirts.

1) Quarterly earnings announcement
2) Recommendation change from sell-side analysts
3) Technical outbreaks on stock charts
4) Update on economic indicators
5) News on stocks like M&A, new product launch, CEO change, dividend increase, share buyback, alliance with competitors, entry into new businesses etc

See also Good company but not a good buy
and SWOT analysis

The Players

Know yourself, know your enemy and you can fight a hundred battles and win a hundred battles. This timeless quote from Sun Tze holds true for players in the stock market as well. (I also got a bit of ink lah!) Although a true value investor (see also value investing) would not worry about matters other than those that are related to the intrinsic value of the company, one must be mindful of the forces that move stock prices. This would allow us to buy a good company at cheaper prices and also help us determine when to take profits.

As a basic introduction, here is a (non-exhaustive) list of players in major markets

1) Institutional investors (mutual funds, pension funds, etc)

2) Hedge funds (Macro, long-short, long-only, arbitrage, quant)

3) Brokers (Investment banks, traders, investment arm)

4) Retail investors (rookies, day-traders, investors)

To give you flavour, for a moment let's think of Zouk as the market, then the discription becomes

1) The incumbents, always around, deep, skilful, in control

2) New kids on the block, funky, attention seeking and scoring big

3) The pimps, gd at managing relationships & taking commissions
4) Participating on the sidelines, usually at the losing end

Institutional investors continue to be the major class of investors in the world. They usually invest in benchmarks (like STI, S&P or Nikkei) and their investment activities revolve around their benchmarks as well. Hence on average they are the trend-followers rather than the trend-leaders. Of course there are the top fund managers who can identify trends way before everyone else. But when the majority follows a trend, they move markets big time.

Perhaps the most important takeaway is that hedge funds have become a major force in the markets. Hedge funds are usually small investment outfits that invest with radical strategies to make a lot of money with leverage. Hence the name "hedge fund" is actually a misnomer. Hedge funds take a lot of risk to produce their desired return. They are responsible for a lot of volatility in stock prices nowadays and they are increasing their asset under management, for better or worse.

See also Securitizing yellow-top taxis

and Brokers cannot be trusted

Expectations vs Reality

The stock market moves on expectations, not on its actual performance. If the market expects Firm A to grow its earnings by 20% for the next 5 years, the stock will rally 100% in the next 5 weeks. It does not matter if Firm A can actually grow its earnings 100% after 5 years. Similarly, if the street expects Firm B to miss its forecast, Firm B's stock will not wait for the announcement and then plunge. It will plunge today.

Zooming out to the bigger picture, if everyone expects the Singapore IR (i.e. Integrated Resort, where you integrate treadmills with slot machines with massage chairs placed toilets maintained by elite toilet specialists) to be an extraordinary success. It does not necessarily need to be an extraordinary success 5 yrs down the road for money to pour in by the truckload. It only needs everyone to think that it is a success, and everything from real estate prices, to ERP, bus fare, taxi fare, to stock prices except salaries and banana prices will skyrocket.

I used earnings and the IR to explain this phenomenon, but it can apply to everything, from favourable regulation changes to M&A rumours. The stock moves on what the collective thinking of all the investors point towards to and not the actual scenario that will eventually play out. If one can understand this, it is easy to see that this phenomenon has two impact:

1) The market may be wrong, but since the actual scenario does not happen immediately, at the meantime, the market is right. Hence the saying "the market is always right".

2) The market may be right, but it will almost always overreact (e.g. factoring 5 yrs of earnings in 5 weeks) and the scenario is played out in a shorter time frame than expected.

In the long run, the market moves towards the actual scenario and the market corrects its past mistakes. Hence value investing, by trying to estimate the intrinsic value of the company, stands the test of time and the idiosyncracies of the market.

See also Brokers cannot be trusted

and Fear and Greed

Brokers, analysts, advisors, investment bankers, private bankers etc cannot be trusted

Why do brokers provide research service to their clients? Brokers, or analysts (from sell-side brokers), or investment bankers or private bankers for the matter, thrives on activity. Activity is their friend, and is what drives their profits. For every trade that you make, they will take a cut, regardless of whether you are buying or selling.

Now bearing this in mind, does it make sense for research analysts, working for brokerage firms to make a BUY recommendation and do nothing for the next 5 to 10 years? So, in a sense, research analysts from sell-side can only make short-term calls, to generate churning. They may not realize it, they may genuinely want to analyze companies and give their client good advice, but the system is in place for them to generate churning.

In the markets, to make short-term calls is like throwing a coin and then trying to guess whether it is heads or tails. Research estimates that investment professionals are right 40-50% of the time. The best guys are right 60% of the time. Trusting an analyst to make a correct short-term call is as good as trusting a monkey to throw a dart on chart to determine a stock's target price.

Having said that, brokers are good for information and flows, so use them for that. As far as they want to project an image that they are on our side, we must remember that their interests and ours are not aligned. We must be careful not to let them suck away precious returns in the form of transaction costs.

See also Securitizing yellow-top taxis

and Fear and greed

Securitizing yellow-top taxis and workings of the stock market

This post is update in 2024.

The stock market is, in its original and actual intention, a place for business owners to "borrow money". The difference is that the borrower, instead of paying interest to the lender, agrees to sell a part of his ownership of the business (i.e. his stock) to the lender. The lender can hope to receive dividends from the borrower when the business do well, or sell his ownership to yet another person.

This ability to transfer ownership from one person to another, for better or for worse, leads to the creation of something that humbles even the most intelligent, Nobel Prize-winning monkeys: the stock market.

To make things simpler, let's try to understand the stock market with an analogy. Imaging a yellow-top taxi driver one day decides to sell his ownership of the taxi to 10 other people. (Yellow-top taxi drivers own their taxis, other drivers rent their taxis from companies like ComfortDelgro, SMRT). The 10 new owners can also sell their 10% ownership (i.e. their stock) to other people.

Now imagine another 9 yellow-top taxi drivers do the same, selling 10% of their taxi ownership to 10 people, we have just created a "stock market" for yellow-top taxis with 10 x 10 = 100 investors/traders. Depending on the ability of the different drivers, the stock of some taxis will sell at a higher price than others. Some stocks will fall and some will rise, driven by people's perception of the ability of the different taxi drivers and, well, almost anything else one can think of. People may worry about what Grab and Uber is doing, or will Comfort Delgro just buy all of them out, or the weather forecast in Ang Mo Kio, or increase in taxi prices relative to decrease in air-con temperature in shopping centres etc.

So, how would you choose which taxi stock to buy? Based on the driver's ability? Or analysts' forecast of the number of people taking taxis next week? Or listening to the weather forecast? Or by looking at how the stock have traded in the past hour?

Buying a stock on some positive news hoping to earn a profit in one day or one week completely misses the point. To buy a stock is, in effect, to become the owner of the company (or the taxi). Surely this decision should be based on solid fundamentals of the company (or the driver) and also the stockholder's long-term conviction that the company will continue to perform in the future.

See also Investment cannot make you filthy rich

and Brokers cannot be trusted

PS: Yellow-top taxis will be completely gone in a few years if not sooner:

https://www.torque.com.sg/features/vanishing-yellow-top-cabbies/

Market cap (or market capitalization)

Market cap is a cap that you can buy for S$5 at a pasa malam market.

Ok, just kidding lah, don't choke and fall off the chair, PC chairs with rollers are getting less robust these days. Below is the real definition.

Market capitalization (a.k.a. market cap) is simply the share price x the no. of outstanding shares that the company has issued. It is a measure of the "perceived" value of the company. To paraphase, market cap is what the participants in the stock market thinks how much a company is worth, it may or may not reflect its true value, or the intrinsic value of the firm.

See also Securitizing yellow-top taxis

and Market players