SINGAPORE: Singapore sovereign wealth fund GIC, which manages more than US$100bil of the city-state’s foreign reserves, on Saturday warned of a tough investment outlook over the next decade as global central banks withdraw ultra-easy monetary policies.
GIC said the prices of all major asset classes have been inflated by the massive stimulus measures, and now face weak future returns.
“Global financial markets have been recovering strongly from the 2008/09 global financial crisis, supported by low interest rates and unconventional monetary policies,” GIC said in its annual report. — AFP
In the face of withdrawing the massive stimulus measure, the inflated asset will have weak future return. The inflated asset market value itself, however do not directly related to the underlying businesses. If the underlying business borrow a lot of money, the rise in interest rate during the global tightening of money supply over the next decade (forecast by GIC) will have impact on the negative side of the business earning. That will again impact negatively on the asset value.
Therefore, those businesses with inflated market value and borrow excessively to expand or whatsoever insensibly will see weak return or negative return over the next decade.
Inflated market value happens when the investor or buyer bid the price of the asset high anticipating the earning ability of the asset will improve excessively or continuously over long term. For example, the business is forecasted to generate over 20% return over 10 years is considered excessive in valuation point of view. Some may say the industry prospect is good because of the demand supply imbalance or because of the trend, however one must take into serious consideration that we live in the world of constant changes. Everything change and never one can predict things with certainty over 5 years beyond. It is therefore sensible to forecast conservatively the future earning of the businesses.
There are also assets that are sold very high price in anticipate of the rising wages of the buyers, or the anticipate entering of the richer buyer community. In the inflation environment, or good economy growing environment, it is very sensible. But be careful that it may change rapidly when the growth expectation wane. When the inflation start to rise because of previous years of monetary stimulus across the world, the central bank will be forced to raise interest rate and tighten monetary policy. But as long as the economy grow in a fashionable way, there will be no problem. But when the economy started to slow down because of the inflation pressure, there will be a dilemma. The central bank will not be able to do monetary stimulus because of high inflation environment, and the interest rate is high, and the economy is slowing down, that will be like India. Doing business will become very difficult because of high funding cost, defensive policy by government to protect the local. Foreign investor, funds just exit.
In that situation, businesses with quality service or product and low or no debt will be the winner. They are able to take advantage of the depreciated currency and increase their competitive advantage in the export market. The increase in sales will offset or more that offset their low debt servicing obligation. Thus their businesses improve in those situation. In fact, those businesses are expected to generate profit in whatever market situation, consider that their product or service has the competitive edge in the global market and can continuously adding new and retain existing customers.
Finding those quality businesses may not be very difficult as you can probably find a few on the big established companies that dominated the local market or big established multinational companies. The difficult thing is finding those quality business companies that sell or trade at cheap valuation. Every people like those companies. That's why their selling price will not be cheap, but often too expensive. It is easy to find those companies that are valued at excessive valuation. Investors are often too optimistic and value the company as the company can grow indefinitely at high growth rate. While the company underlying business continue to be good, but because it cannot produce the growth as the investor had hope for because of the market situation or industry prospect change, the return of the investor get will be low.
So, it is consider very lucky if you can find a company that have such a wonderful business with quality, competitive service or product, with low debt in the company, that sell or trade at very conservative valuation. (for example, no grow or 2,3% grow scenario). It doesn't really matter which state economy cycle we are in. It is a treasure!
Monday, August 4, 2014
Monday, June 23, 2014
Beat the market
You need to hold a different view with the market to beat the market. Meaning you need to be pretty much a contrarian.
Friday, May 9, 2014
Becoming rich by investing in stock market? Not so easy, in fact very difficult
If you are thinking of becoming rich by investing, it is a very tough and long road. When you look at people around you, how many people is actually investing in stock market and become really rich, virtually none. The fact is, there is an expectation mismatch when people talking about stock market. Many people see stock market as a place to gain quick return and become rich quickly. Hence they are seeking answers from the expert which stock is about to rise, whether the market will be good or bad in the near term. They want to buy and sell and take advantages of the rising market. They want to buy and sell taking advantage of the undervalue stock that are about to be discovered by examining the market sentiment or reading analysis report by expert. They want to sell when the stock reach their target price, when the market sentiment change or expert said its time to sell and take profit.
So in order to fulfill these “investors” needs, many stock seminar inviting experts to talk about the market direction in next half of the quarter or year. This kind of seminar normally is fully seated. Economists and reporters around the world are talking about the latest economic numbers and next year forecast. There is actually no problem with economic numbers as it gives you indication of the economic cycle we are in. But when they link it with the stock market, the excitement of the stock market movement often induce the investor to take short-term action whether to buy or sell. When I listen to the stock market commentary, often what I heard is the expert talk about the recent corporate action taken by the company and what does it mean for the stock price, in the immediate term; whether this is the right time to buy or sell, base on the stock price chart over 6 months, 1 year or few years back period. They are drawing lines and lines, trying to project where will be the next price movement.
All of the above activities are trader’s activity, whether the buy and sell period is half year, 1 year, or few years. It is not about how long your invest, it is the how you treat and see investment as it is that determine whether you belong to trader camp or investor camp. One cannot say they are long term investor just because they hold long term but they base their buying and selling action on the above considerations. They are not necessary financial illiterate. A lot of them have sharp business mind, they read balance sheet and financial statement. But they are actually take advantage of the pricing mismatch. They may be a value trader. Some of the trader common traits are:
1. They often run like hell when the market tide turn and if they are lucky enough to run before the market or stock price down, they will be very happy to tell you how good or lucky they are timing the market. If they are being caught in market downturn, they will often hold their share and wait for market to rise again.
2. They talk about business in a very near term basis, like 1 to 3 years. Anything beyond that is too uncertain for them to consider. It is irrelevant to them, as they are free to move their capital to other pricing mismatch stocks.
Occasionally I do practice these traits when I see obvious opportunities for short-term gain. But I am not a fan of trader. I like to look at stocks, as I would like to own some part of the company. I like to discover the potential of the company as what the company might become 10 years from now, and watch it grows. Just like watching my child grow from small to big. However, the discovery of this type potential company is a tedious process. Some traits below:
1. You find the company is strong financially;
2. You find the company has good product or service;
3. You believe the company product or service can compete with the big boys out there;
4 You find there is a lot of room/market for the company to grow for a very long time.
5. You find the management is capable in day to day operation; has strong marketing team, have the ability to innovate and improve the product and service, and have long term vision how to grow the company to further up level.
6. You discover that the company valued their investor.
When you truly believe the company possesses all the traits above sustainably, it would have taken you lots of time (may be 1 to 3 years). I normally invest more as I find more of these traits in the company. And I try to sell out if along the road, I discover the company doesn’t possess some of these traits. I will do my valuation as to decide when to buy and sell the stock.
But the traits above are desired and well known among investment industry. So it is natural that all the listed company tries to portray themselves having all the traits. That is why I often skeptical about management’s or expert talk. I believe time will tell. Careful observation of the company action over a period of time and personally examine the product and service and compare it with the top quality product of service in the market will show the competitiveness of the company in long term perspective.
When you truly believe the company, you will not sell in any market situation. You only sell when the company starting to lose the above traits. Along the way for me to become truly believe in one company, the company stock would have become major shareholding of my investment portfolio as I will accumulate when I firm up my believe. Bad market sentiment will only be seen as a good opportunity to buy more if the valuation drop to attractive level.
Back to can we become rich in stock market question.
For trader, to become rich, you need to continuously right about the market timing, and increase the bet every time you get richer. But, the danger is, 1 or 2 time big wrong about the market timing will send you hopeless about the stock market.
For long-term investor, to become rich is the company you bet on need to have high compounded growth in size and profit for a long time, and you need to buy cheap or when investor ignore it, usually when
1. The size is still small when nobody noticing,
2. The company is in trying times preparing for new product/service, when failure occur along the way,
3. Market downturn when every stock good or bad drop simultaneously
4. After Restructuring of the company to become more efficient, better new management.
I think the probability of choosing the right company to invest in and at the same time choosing correct entry timing is probably as low as trader getting rich.
No matter which path you prefer, trader or investor, it is very difficult to become really rich by investing. If someone really becomes rich mainly by investing, despite very good luck, it is because of continuously, years and years, decades and decades of hard work and passion.
So in order to fulfill these “investors” needs, many stock seminar inviting experts to talk about the market direction in next half of the quarter or year. This kind of seminar normally is fully seated. Economists and reporters around the world are talking about the latest economic numbers and next year forecast. There is actually no problem with economic numbers as it gives you indication of the economic cycle we are in. But when they link it with the stock market, the excitement of the stock market movement often induce the investor to take short-term action whether to buy or sell. When I listen to the stock market commentary, often what I heard is the expert talk about the recent corporate action taken by the company and what does it mean for the stock price, in the immediate term; whether this is the right time to buy or sell, base on the stock price chart over 6 months, 1 year or few years back period. They are drawing lines and lines, trying to project where will be the next price movement.
All of the above activities are trader’s activity, whether the buy and sell period is half year, 1 year, or few years. It is not about how long your invest, it is the how you treat and see investment as it is that determine whether you belong to trader camp or investor camp. One cannot say they are long term investor just because they hold long term but they base their buying and selling action on the above considerations. They are not necessary financial illiterate. A lot of them have sharp business mind, they read balance sheet and financial statement. But they are actually take advantage of the pricing mismatch. They may be a value trader. Some of the trader common traits are:
1. They often run like hell when the market tide turn and if they are lucky enough to run before the market or stock price down, they will be very happy to tell you how good or lucky they are timing the market. If they are being caught in market downturn, they will often hold their share and wait for market to rise again.
2. They talk about business in a very near term basis, like 1 to 3 years. Anything beyond that is too uncertain for them to consider. It is irrelevant to them, as they are free to move their capital to other pricing mismatch stocks.
Occasionally I do practice these traits when I see obvious opportunities for short-term gain. But I am not a fan of trader. I like to look at stocks, as I would like to own some part of the company. I like to discover the potential of the company as what the company might become 10 years from now, and watch it grows. Just like watching my child grow from small to big. However, the discovery of this type potential company is a tedious process. Some traits below:
1. You find the company is strong financially;
2. You find the company has good product or service;
3. You believe the company product or service can compete with the big boys out there;
4 You find there is a lot of room/market for the company to grow for a very long time.
5. You find the management is capable in day to day operation; has strong marketing team, have the ability to innovate and improve the product and service, and have long term vision how to grow the company to further up level.
6. You discover that the company valued their investor.
When you truly believe the company possesses all the traits above sustainably, it would have taken you lots of time (may be 1 to 3 years). I normally invest more as I find more of these traits in the company. And I try to sell out if along the road, I discover the company doesn’t possess some of these traits. I will do my valuation as to decide when to buy and sell the stock.
But the traits above are desired and well known among investment industry. So it is natural that all the listed company tries to portray themselves having all the traits. That is why I often skeptical about management’s or expert talk. I believe time will tell. Careful observation of the company action over a period of time and personally examine the product and service and compare it with the top quality product of service in the market will show the competitiveness of the company in long term perspective.
When you truly believe the company, you will not sell in any market situation. You only sell when the company starting to lose the above traits. Along the way for me to become truly believe in one company, the company stock would have become major shareholding of my investment portfolio as I will accumulate when I firm up my believe. Bad market sentiment will only be seen as a good opportunity to buy more if the valuation drop to attractive level.
Back to can we become rich in stock market question.
For trader, to become rich, you need to continuously right about the market timing, and increase the bet every time you get richer. But, the danger is, 1 or 2 time big wrong about the market timing will send you hopeless about the stock market.
For long-term investor, to become rich is the company you bet on need to have high compounded growth in size and profit for a long time, and you need to buy cheap or when investor ignore it, usually when
1. The size is still small when nobody noticing,
2. The company is in trying times preparing for new product/service, when failure occur along the way,
3. Market downturn when every stock good or bad drop simultaneously
4. After Restructuring of the company to become more efficient, better new management.
I think the probability of choosing the right company to invest in and at the same time choosing correct entry timing is probably as low as trader getting rich.
No matter which path you prefer, trader or investor, it is very difficult to become really rich by investing. If someone really becomes rich mainly by investing, despite very good luck, it is because of continuously, years and years, decades and decades of hard work and passion.
Sunday, March 23, 2014
To invest long term, we need to have faith
Whatever you do, if you intent to stay long term, you have to have faith. Marriage, work, career, hiking, practising, investing. It is very easy to lose focus and sway away if you do not have strong faith.
You have to believe in something. For investing, if you do not have faith in China, you would have given up on China after so many years of dismal China stock market performance. Those have faith understand that dark will be followed by dawn. The longer the dark is, the nearer the dawn is. They believe that China is progressing and will continue to do so in gradually opening up, and this is a no returning path until China fully achieve its full potential. And they believe now is still the early day. Only this kind of faith will enable them to invest long term in China.
Those who can invest long term in company, private or public, must have faith in the company business and people. So much so that they will not withdraw their investment when the company is in crisis mode or making losses. If it is a private business owned by your family members and relative, or you are one of the founders, you probably have the faith to succeed and failed together. If you are investing in public company, your faith is more easily shaken when bad thing happen. To invest long term in a public company, you have to believe the management team has the reputation of responsibility, accountability, and capable to drive the company forward to greater height, the company must have the unique competitive strength and able to innovate over a long term period. Although that was base on historical track record that cannot guarantee future success. That is the only thing we can rely on to believe in. For a safer consideration, the company must have good hard asset which is demandable and can expect to generate sustainable profit, and you believe that the management is acting in every possible way in favour of shareholder.
Hence, if you are doing your own investing, to have faith, we have to understand the economics, the business, the people, and have the interest to continue follow the news. It is normally very hard if you are not familiar with investing. All people are busy doing their own work. They normally rely on other people to give them investment advise, hire a financial advisor, or invest through professional fund management company. However, even that, they have to have strong faith in their friend who give the advise, to the financial advisor who serve them, or to the fund management company. If they do not have strong faith, when their investment performance is not satisfying, they will just sell and lose faith. They may lose faith on their friend's advise, lose faith in financial advisor personnel, lose faith to the fund management industry. They might even stay out of investment and become conservative. But for those who are not so extreme, they will switch between financial advisor, switch fund management company, listen to other friend advice. Their investment will never long term. They are happy and buy when the investment rise in value, and sell when the market is bad. Or they close their eye when the investment turn bad, not trying to understand what happen.
To be success in everything including investment, we have to go through high and low, knowing what to do in each cycle and occasionally adjust our strategy. We have to know our direction clearly, have full faith that we will reach there. Then we have to sail through every high and low before we can reach our destiny.
You have to believe in something. For investing, if you do not have faith in China, you would have given up on China after so many years of dismal China stock market performance. Those have faith understand that dark will be followed by dawn. The longer the dark is, the nearer the dawn is. They believe that China is progressing and will continue to do so in gradually opening up, and this is a no returning path until China fully achieve its full potential. And they believe now is still the early day. Only this kind of faith will enable them to invest long term in China.
Those who can invest long term in company, private or public, must have faith in the company business and people. So much so that they will not withdraw their investment when the company is in crisis mode or making losses. If it is a private business owned by your family members and relative, or you are one of the founders, you probably have the faith to succeed and failed together. If you are investing in public company, your faith is more easily shaken when bad thing happen. To invest long term in a public company, you have to believe the management team has the reputation of responsibility, accountability, and capable to drive the company forward to greater height, the company must have the unique competitive strength and able to innovate over a long term period. Although that was base on historical track record that cannot guarantee future success. That is the only thing we can rely on to believe in. For a safer consideration, the company must have good hard asset which is demandable and can expect to generate sustainable profit, and you believe that the management is acting in every possible way in favour of shareholder.
Hence, if you are doing your own investing, to have faith, we have to understand the economics, the business, the people, and have the interest to continue follow the news. It is normally very hard if you are not familiar with investing. All people are busy doing their own work. They normally rely on other people to give them investment advise, hire a financial advisor, or invest through professional fund management company. However, even that, they have to have strong faith in their friend who give the advise, to the financial advisor who serve them, or to the fund management company. If they do not have strong faith, when their investment performance is not satisfying, they will just sell and lose faith. They may lose faith on their friend's advise, lose faith in financial advisor personnel, lose faith to the fund management industry. They might even stay out of investment and become conservative. But for those who are not so extreme, they will switch between financial advisor, switch fund management company, listen to other friend advice. Their investment will never long term. They are happy and buy when the investment rise in value, and sell when the market is bad. Or they close their eye when the investment turn bad, not trying to understand what happen.
To be success in everything including investment, we have to go through high and low, knowing what to do in each cycle and occasionally adjust our strategy. We have to know our direction clearly, have full faith that we will reach there. Then we have to sail through every high and low before we can reach our destiny.
Subscribe to:
Posts (Atom)