How You Should View Bad Financial News

Hey shareholders... will be updating our fund's performance soon. Will be away for eye laser operation tomorrow and hopefully eyesights return in time for me to update by next Monday.

Worried about endless bad financial news recently? Read on...

"Stock markets worlwide are crashing and reaching historical lows...", so you turn on the television to catch the latest market news, so you flip pages of business sections to check how the market is doing or so you hear colleagues talk about not the right time to buy. But instead of logging to CNBC or CNN, imagine that you can tune in to Benjamin Graham Financial Network ("BGFN"). By the way, Benjamin Graham was a great teacher to Warren Buffett. On BGFN, the audio doesn't capture the famous sour clang of the market's closing bell; the video doesn't home in on brokers scrurrying across the trading floor of stock exchanges like angry dogs. Nor does BGFN run any footage of fund managers telling how bad the market is going to be in the next few months.

Instead, the image that fills your TV screen is the facade of the KLCI, festooned with a huge banner reading: "SUPER SALE! 50% OFF". A promoter girl announces brightly, "Stocks became more attractive yet again today, as the KLCI dropped another 5% on heavy selling volume - the third day in a row that stocks have gotten cheaper. Plantation investors fared even better, as leading companies like IOI Plantation Berhad lost another 10% on the day, third consecutive day of 10% drop, making them even more affordable. That comes on top of the good news of the past year, in which stocks have already lost half of its value, putting them at bargain levels not seen in years. And some prominent analysts from big houses like CIM Bank are optimistic that prices may drop still further in the next few months with their sell calls."

The newscast cuts over to top market strategiest, Mr Top Market Strategist of Top Research Firm, who says "My forecast is for stocks to lose another 15% by year end. I'm cautiously optimistic that if everything goes well, stocks could lose 30%, maybe more."

"Let's hope Mr Top Market Strategist is right," the newscaster says cheerily. "Falling stock prices would be fabulous news for any investor with longer time horizon."

(The above article was modified based on an article in page 222 of "The Intelligent Investor, The Definitive Book on Value Investing")

EPF a Contrarian Like Us?

Stumbled upon this article in the Edge Weekly written by Kathy Fong. It was titled "EPF ups stakes in plantation companies".

According to Kathy, the EPF appears to be contrarian in terms of stock picking on Bursa Malaysia lately. Although many probably think that buying plantation stocks, which are currently undergoing a sharp correction, is a little like catching a falling knife. The EPF, however, is pouring money into plantation counters. The recent decline in CPO prices does not seem to worry it.

Sounds like what HDFIV is doing? The recent decline in CPO prices does not worry us too. In the article itself, the managing director Gerald Amrbose from Aberdeen Asset Management Snd Bhd also made a comment that is very in line with HDFIV's strategy. He said "Over the long term, we've made the point that the supply of edible oil will be limited because of scarcity of agriculture land. If it becomes alternative fuel, we are not just eating it but also burning it. But it is just that there are little bubbles resulting in some uncertainties in the shor term."

However, as a fund management company, Aberdeen Asset Management have shorter term investment horizon and concerned about possible excess supply when th eworld economy slows down, the rising fertiliser costs that eat into planters' margin and changes in policy on biofuel in some European countries amid inflation worries.

Majority of research houses in Malaysia have downgraded the plantation sectors and stocks under coverage. Again, not a concern to us because I can guarantee the houses will upgrade them when CPO goes up.

What Warren Thinks...

Happened to stumble upon an article (http://money.cnn.com/2008/04/11/news/newsmakers/varchaver_buffett.fortune/) by Fortune on what Warren Buffett thinks about the current economy, the credit crisis and much more.

Have quoted a few FAQs from the article which I felt are meaningful:

Q: I know you had a paper route. Was that your first job?
A: Well, I worked for my grandfather, which was really tough, in the [family] grocery store. But if you gave me the choice of being CEO of General Electric or IBM or General Motors, you name it, or delivering papers, I would deliver papers. I would. I enjoyed doing that. I can think about what I want to think. I don't have to do anything I don't want to do. It might be wonderful to be head of GE, and Jeff Immelt is a friend of mine. And he's a great guy. But think of all the things he has to do whether he wants to do them or not.
Seane Lynch: Warren doesn't or probably never aspire to be a CEO of a very complex company. His whole life is spent on doing what he really likes and do at best - investment.

Q: How do you get your ideas?
A: I just read. I read all day. I mean, we put $500 million in PetroChina. All I did was read the annual report. [Editor's note: Berkshire purchased the shares five years ago and sold them in 2007 for $4 billion.]
Seane Lynch: Warren can just read annual reports, talk to management and close a deal with a price he sees right. That easy?

Q: What should we say to investors now?
A: The answer is you don't want investors to think that what they read today is important in terms of their investment strategy. Their investment strategy should factor in that (a) if you knew what was going to happen in the economy, you still wouldn't necessarily know what was going to happen in the stock market. And (b) they can't pick stocks that are better than average. Stocks are a good thing to own over time. There's only two things you can do wrong: You can buy the wrong ones, and you can buy or sell them at the wrong time. And the truth is you never need to sell them, basically. But they could buy a cross section of American industry, and if a cross section of American industry doesn't work, certainly trying to pick the little beauties here and there isn't going to work either. Then they just have to worry about getting greedy. You know, I always say you should get greedy when others are fearful and fearful when others are greedy. But that's too much to expect. Of course, you shouldn't get greedy when others get greedy and fearful when others get fearful. At a minimum, try to stay away from that.

Q: By your rule, now seems like a good time to be greedy. People are pretty fearful.
A: You're right. They are going in that direction. That's why stocks are cheaper. Stocks are a better buy today than they were a year ago. Or three years ago.

Q: But you're still bullish about the U.S. for the long term?
A: The American economy is going to do fine. But it won't do fine every year and every week and every month. I mean, if you don't believe that, forget about buying stocks anyway. But it stands to reason. I mean, we get more productive every year, you know. It's a positive-sum game, long term. And the only way an investor can get killed is by high fees or by trying to outsmart the market.
Seane Lynch: So, you think the Malaysian economy is going to do fine? If yes, should you go into stocks now?

Where Are We?

High inflation due to rising food prices and oil. Economy growth is slowing down and major countries in the world are heading towards recession. You can call that stagflation. Construction and properties industries are basically bleeding to death soon with rising material costs like steel, cements, bricks and transportation costs. The rakyat are not having enough disposable income to live a normal life. Our government is busy hurling allegations against the opposition. You bombed a pitiful Mongolian lady, shout the opposition. You poked a pitiful young lad's ass, shout the government. Now I declare, now I don't declare (because I am under duress when I declared).

Here we are. Trapped in a rubble worst than those caused by a 9 magnitude earthquake.

From the day we started our fund i.e. 1 March 2008, KLCI has since dropped 14%. Our fund, as expected, also suffered a drop in value by about 10%. Key point here is to continue to be able to outperform the KLCI. We are now outperforming KLCI by 4% as of last Friday. We have 30% in the form of cash (approximately RM10,000) and have the benefit of cashinflow every month. We can easily average out some of our cost of investment but the strategy now is to keep the proportion intact, adopt a defensive stance while monitoring the political situation. Stocks are cheap at the moment but as mentioned, we will retain the RM10,000 cash.

Ding! Ding! Ding

... and stop! At 2.58pm today, a bell was rang. A bell known as the "circuit breaker". What's that huh? The circuit breaker is a mechanism implemented by the stock exchange, namely Bursa Malaysia when the KLCI records a 10% decline from the previous day's level. Hee... is there such a thing? Yes, and to add on, when the bell rings, boxers (namely the investors, speculators, aunties and uncles) will have to get to the ring side and breathe for an hour. Essentially, the trading in the stock exchange is halted for an hour.

The purpose of such mechanism is to act a temporary measure designed with the intention to maintain market stability and provides an opportunity for the "boxers" to access new information before making further investment "jabs" and "hooks".

Political instability is always a happening that is definitely not too "happening" to investors. Although many Malaysians would cheer with satisfactions with their support for oppositions turning into real takeovers of seats from the Barisan Nasional coalition, most are not smiling by now as KLCI has dropped 130.01 points at closing. Those who are smiling will be those waiting eagerly for the drop in KLCI. They are not wicked at heart but they are just like ordinary Malaysians waiting for sale at KLCC.

Political Tsunami Swept KLCI Along

I can't stop myself from taking a time off my lunch to drop an article. The historical event on 8 March 2008 is a day of political tsunami as voters in the country voiced their dissatisfactions over the ruling Barisan Nasional by voting for the oppositions. The swing was so great that the oppositions themselves did not expect such outcome.

On the very first trading day of KLCI after the election result, KLCI fell by 7.24% to 1,202.51 at 10am. Most government related stocks went for a bungee jump, only that it is without the rebound at sight as yet. A classic example of fear, investors can't help but to sell before the rest do, hence triggering selldowns in non-government related stocks.

Should investors go into the market now? Not at the moment. The drop in KLCI will trigger some margin calls and sell-down limits of institutional investors and may drag the selling further. Tomorrow or the day after might be the day Hengdai Equity Fund IV ("HDFIV") makes its first acquisition. So far, HDFIV has been outperforming KLCI since the inception of the fund on 1 March 2008 just by not investing at all. KLCI was at 1,330.61 (as at 3 March 2008). It has since dropped to 1,202 (10am today), representing a 10% drop. Our fund is still registering nil return at the moment but has outperform the KLCI by 10%.

More and More Worries

On Thursday, stocks in the United States tumbled after more shits were discovered from the credit markets pot hole. Coupled with the lackluster retail sales, everyone now is really worried that the economy is nearing recession.

One of the main culprit from the series of fresh jolts to the market is that there was news that this "jumbo" mortgage lender in US called the Thornburg Morgage Inc, was in default after failing to meet its creditor demands for upfront cash. Needless to say, the share price of Thornburg plunged 51.5%!

Second news was that there is a report that showed the number of foreclosures of US mortgage hit a record high in late 2007. That slapped the S&P financial index (equivalent to KLCI in Malaysia) down 3.7% in its sixth straight daily decline.

It is interesting to note the following statement from Frederic Dickson, senior vice president and market strategist at DA Davidson &Co in Lake Oswego, Oregon (not too sure whether actually) - "We are dealing with a market that at this point is still very, very jittery, wondering what's going to come out of the closet next". What does that tell us as a layman investor? The so-called experts can't even determine what is coming next. So, how can we? Every few days you will hear some good news and share prices rebound (go up) but in the next few days, some bad news slapped share prices down again.

Can the market be timed? I would prefer to take a No as the answer. Best strategy is to invest a portion in the market and half as cash. Let me talk more about the strategy in asset allocation for the Hengdai Equity Fund IV ("HDFIV") in the next post.

Recession? What Should I Do?

Recession... a scary word? Not exactly unless you are in certain industries that are popular with retrenchment. In the United States, investment bankers are the first to be retrenched when it's recession. Simply because no one in the market would like to do any deals at all. Back in 1997 when Asia experienced a recession, increments and promotions were all frozen. Some got retrenched but generally Malaysian paymasters are humane enough to retain its employees. Senior management are able to retain their seats but pay cuts are inevitable in order to ensure survivability of the firm.

By technical definition, an economy is said to be in recession when it records two consecutive quarters of negative growth. Economists have split views on whether US is already in a recession mode, both by technical definition or common sense definition. Economic datas such as number of unmployment, sale of houses and interest rate are all closely watched in order for the economists to tell themselves or whoever listening to them that the US is or is not in a recession.

So, is Malaysia in a recession? By technical definition, no. For whole of 2007, the economy expanded by 6.3%, slightly up from 5.9% in 2006. Fourth quarter itself accelerated by 7.3% year on year from 6.6% in third quarter.

The KLCI fell 2.2% to a five-month low of 1,285 mid today (Wednesday), dragged down by losses in plantation stocks as crude palm oil (CPO) prices retreated, and also on some foreign selling of index-linked stocks and heavyweights. Why is KLCI taking the beating when the economy is growing, earnings are good and not forgetting that the local banks do not need to suffer any losses arising from the subprime morgage crisis? The answer is what the fundamental investors are patiently waiting for. Fear and greed, and in this current scenario is fear. Investors are fear now as they do not know how they are being affected by development worlwide. One selling leads to another. Cut loss limits or sell-down programmes in placed by mutual funds or asset management companies are not helping the situation (fear) either.

Bottom line, hang on to your cash and bargains will come. I am not timing the market but merely hunting for cheap stocks. When market is down, stocks can become real cheap. Let's wait.