股市里听故事

 2015 在我还没进入投资公司以前，我一直认为只要公司的估值低过面值book value, 或者公司的年度平均现金流至少是公司市值的10% 以上，那基本上都可以投资。最好是过去5-10年都有成长的记录，或是公司的股息率高。公司历年财务报表稳定是很重要的指标，加上便宜，那下行风险就会低。不亏，就是为赚钱打好基础。

进入投资行业后头几年，才逐渐学到以前的方法是不够的。还需了解其他投资者的心理。Price chart 可以大约看出投资者什么时候过于乐观，什么时候过于悲观。在其他人悲观的时候多买一些，在其他人过于乐观的时候多卖一些。长期以来就可以有高于市场的回筹。也从 Warren Buffet 的伙伴 Charlie Munger 那里学到专注于寻找及买行业最好的公司，即使比较贵，也不要买一般的公司，即使估值超便宜。

这些都只是基本功。在股市里，投资者最在乎的其实是故事，而我在近几年才慢慢领略其重要性。故事决定公司估值。基本上，有好的故事就是好前景，好前景的公司大家都喜欢，估值也就高。相反的，前景不明朗的公司故事就不好，市场不喜欢，估值可以低到离谱到你不信。所有故事有开始也有结束，当中有起伏转折。股价随着故事的进展飘舞。投资者身为听故事的人，心也高低起伏。举例，我就在这里说说2020年疫情下最耀眼的手套股故事。

在疫情刚开始的2020 年，手套股还延续着2019年当售价还是被挤压着的低迷状态，大家都认为疫情应该像2003 SARS 一样，两三个月就会自动消失。但当欧美各国疫情在3月开始飘升导致多国实施严厉封锁，市场恐慌抛售，油价跌破零，手套股也随着跌，但相对跌的少。尔后手套4大天王之一supermax在4或5月披露手套供应吃紧，价格开始飙升，手套股就受到追捧了。市场开始计算出在成本大约不变而售价不断上升的背景下，一切高出原本的售价将直接反应在利润。手套售价从4月到12月上升超过5倍，手套公司净利润到2021上半年基本将上升10倍或以上。在短短3-5个月内，supermax股价飙了超过10倍，其他4大天王，或小型手套股也飙了5-10倍不等。当美国疫苗研发成功的消息在十一月传开后，手套公司的股价也就到了顶峰。虽然手套公司一再强调售价还在涨；需求还远远超过供应；接种疫苗将需要更多额外的手套；因为建厂需要时间；供需不平衡要到2023年才可以解决；利润本益比 PE 来算在2021年将会低于10倍；所有的辩词都对股价继续上升无补于事。

这时候，投资者就应该擦觉到故事已经讲完了。即使公司给出的故事没变。因为公司大多永远都认为其股价被低估，大多都是乐于见其股价继续攀升的。很多时候公司管理层没说谎，只是没把事实说出来罢了。那也没错，基于商业机密，很多事是不可以明说的。但很多聪明及经验老道的投资者知道疫情一旦受控，无论如何，手套需求就会减少，价格将会下跌，利润也会还原。

市场开始抛售。沽空仓位开始上升，股价就跌得越急。然后手套公司，老板开始回购自家股票，承诺高额股息，试图挽回投资者信心。事实上，好些机构投资者在看到股票回档30-40%时都回头买，因为很多在上升时一路买到最顶，30-40% 的回档可能已跌破他们的平均买价。但股价无情的继续下跌，一直到今天 10月2021年差不多跌回疫情前的价位都好像还没见底。

现实在股价触顶后大约3-5个月后才慢慢浮现。批发商见供应紧张，下了双倍或更多的订单，现在开始退单。然后中国手套商开始发觉手套的重要性而计划疯狂增产。手套价格开始迅速下跌。故事从2020年底的供不应求突然变成供过于求，再变成中国供应链威胁论。

造就手套股上升的故事在疫苗面世那天就讲完了，其股价也在那天见顶了。造就手套股下跌的故事到今天还没有讲完，同样的道理，股价还有下跌的空间。

在股市里，当故事讲完了，就千万不要再留恋了。寻找别的更好的故事吧。

 

China property market and Evergrande

China Evergrande is facing a liquidity crunch issue. It is having difficulties in paying its onshore bond interest as well as US dollar offshore bond interest. As investors are still fresh with the pain that incurred during US subprime mortgage that bring down Lehman Brothers and caused a global financial crisis, market are speculating whether China Evergrande saga will trigger the China version of property crisis and impacting the global financial market stability. Will China Evergrande case is just a tip of an iceberg? Only time will tell.

Back to 2 decades ago, after China restructured many of its state owned enterprise and bad loans, China at that point of time also just enter the world trade organisation WTO. China was having a booming economy where foreign investment boom, factory being setup across China, and infrastructure boom. The income of Chinese people rose at unprecedented pace. This created huge demand for housing. China Evergrande established in 1996 and just in time to ride the decades boom in property market.

With 1.4bil population and starting from young demographic, the growth in China economy drive the property market for 2 decades without major setback. Property prices rose multiple folds in general over just under a recent decade. When the trend go on for so long, people thought that it is still the property that give the best and sure return over all the asset classes. Furthermore, with China strict capital control, there are not many investment options but property and stock market. Stock market has been volatile and not the cup of tea for most Chinese people.

In China, all land belong to the government. When property demand was strong, sales of land was very active. Soon, land sales became a major revenue for state government. In earlier years, GDP was the single most important KPI set by central government for state government. Hence, state government tend to spend big on fiscal spending like building roads, railways, airport that some news article may say many projects don't really make economic of sense. To cover the extra spending, the state government always can sell land.

 Now turn to property developer. In China, you need to put in 40% down payment to buy a house. Part of the money collected by property developers need to put in escrow fund for construction. In order to achieve exponential growth, China property developers utilise significant amount of the downpayment (>50%) to fund the next land purchase and launch the next project as soon as they can. When the property market is hot, a property project normally can be sold out in a very short time. Then the property developer can use this new project deposit to fund more land purchase and launch more new project to collect more deposit and this cycle goes on. This ultra fast pace of expansion can go on because the construction progress which normally takes 3-5 years is so much longer than the land purchase and project launch cycle which in total takes only within 6-12 months.

No doubt, the booming property contributed significantly to China GDP from construction activity, the job created, the demand and supply for building material. Without this, China GDP growth would be much slower. 

But at the same time, property prices has become one of the most unaffordable in the world in terms of price to income ratio. Since 2015 or earlier, China government turn to reducing the wealth gap by trying to control property prices by capping price increase, tightening borrowing criteria in property developer or buyer end, etc. But every time there is slowdown in China economy, Chinese government would always relax some property tightening measure, worry about either cannot meet GDP growth KPI, or worry about state government highly geared situation with their overly dependent on land sales revenue.

Although China government over the years tighten the funding to property developer by clamping down shadow financing, china domestic lending channel, the China property developer found ways to get funding through HK offshore bond or equity raising, engaging in off balance sheet property development activity by joining force in associate and joint venture to make their balance sheet look strong to entice investor. With property demand so strong, strong deposit booking, active land sales, property developer is willing to pay high interest of even up to 10% to get offshore funding to complete the construction or some even to fund further land purchase. International investor are so happy to subscribe with the US yield of merely 1.5% and thought that there is an implicit guarantee that China won't let property bubble pop and devastating its people and economy. The risk looks ring fenced.

In 2020/2021, China government KPI evolved from GDP growth to common prosperity. Besides regulating the overgrown internet giant, public resources issue such as housing again become government's pressing issues to solve the growing inequality problem in China. China set a stricter criteria for funding. With COVID 19 in the background, China property growth slowdown to single digit growth in sales, compared to 20-30% growth in the past few years. Suddenly for the overly expanded property developer where their land sales growth had far outpace the construction growth, their party came to an end.

Now, the reality kicks in that China Evergrande need to deliver all the properties. Likely no more new project and new deposit money, no more offshore funding channel. In order to survive, China government will have to engineer as the last resort to bridge it over in shorter term and China Evergrande will have to sell its projects to other property developer or whatever valuable asset to self fund the construction. Now the question come back to whether China Evergrande is just a tip of an iceberg? If many more trouble developers start to surface, are there enough property developers with stronger balance sheet to takeover those troubled developer's projects? 

The China banks lending as a whole to property developer is less than 10% or may be 5-7%. Most of the China debt is domestic debt. On the banking side, I would like to think that China can stomach the current crisis.  Luckily, Chinese people household debt is at around 60%, and they still have high saving rate. Compare to US subprime mortgage which the root cause is the house buyer default and spread through the over leverage financial system, China property bubble seems to be contend within the property developer which is much smaller in scale compare to the whole housing market. As long as China can maintain the property price without significant drop, the crisis will likely limit to financial market only, but not too much on the real economy.

Many bond holders, equity holders will lose money. There may be impact on other financial market as well where those investor who lose money will need to sell other profitable securities to cover the loss. In the real china economy, hopefully not much people will lose job. It may impact some buying sentiment and thus economy may experience some slowdown. If most Chinese people don't lose money, China economy will remain intact. The key is the Chinese government need to ensure that all the property sold to the people will be completed and there is not panic selling of property in China.

 

 

Professional investor VS retail investor

As an analyst, or portfolio manager, my daily job is to attend company management meeting (now in COVID 19 era conference call), analyse company, write report, make recommendation to investment team, and invest within the framework set by my company and the fund mandate. There are tons of emails sent by broker everyday on corporate news update and research reports.

All these seems to give professional fund manager an edge over retail investor not in the fund management industry. But things start to change in recent years. Various internet/broker platforms for retail investor are gaining popularity. Due to huge number of retail investors and followers in those platforms, the platforms are able to attract talent from investment industry to give talk/seminar regularly, distribute broker research reports, and organise meeting with company management directly. The information flow in those retail internet platform is not second to professional investment industry. So what more advantage does the investment professional has?

In this internet era, information become abundance. Hence, in order to be successful in investing, having only first hand information is not enough. We need to realised that each of us only has 24 hours a day, and the world has millions of businesses and business decisions are being made all the time. There will always be people know something faster than us and react faster than us in the stock market. In short, we won't win by having first hand information. 

We only can win by developing insight. Connecting dots from various information and put it together. Everybody will interpret information differently. We see things differently. Just like in school, we learn the same thing but end up someone else always get No.1 in the class. But we don't have to be No.1 in the stock market. The market is big enough for every prepared investor to make money. 

Resume writing after Aug 2014

It had been such a long time since my last post in Aug 2014. I was finally offered a job in an asset management company in the capital city of Malaysia Kuala Lumpur. This was like a dream come true since I quit my engineering job in 2011 trying to shift career field into investment. The transition was not smooth. After i quit my engineering job, I ended up working for a Hong Kong valuation company and was tasked to work alone from my house to help them explore Malaysia market. I was struggling in those 3 years of doing business development work. I am introvert by nature, and with no business connection in Malaysia corporate world. After several times of failed interview from a few asset management companies, i nearly give up as all the asset management companies i knew already rejected me or no reply. Luckily this company called Pheim Asset Management opened the door for me into the investment industry. 

 Pheim Asset Management was a boutique independent asset management company. The boss Dr Tan Chong Koay is a very unique person as he likes to invest in undervalue stock. He is willing to hire people who is very interested in investment and very desperately wanting to switch career field, like me. This normally don't happen in other asset management company as the normal practise in the industry is they tend to hire people with experience within industry or with relevant educational background. 

 I started work in February 2015. I was already 32/33 year old. A similar age person as mine would have been worked for close to 10 years in this industry. I need to work hard to catch up. So..... I stop writing blog regularly..... And then i found facebook page which i can write just a few sentence when i have some thought (save a lot of time). 

 It is quite amazing that my writing actually never stop. But just become shorter and quote base. Now i want to resume writing blog base format again. This is to resume writing practise, to record down what i see, learn, think, feel regularly in a more complete manner. So i can track my path and may be someday i can compile it into books in later part of my career or stage of life.

Finding value in tough investment outlook

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!

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.

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.