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Tuesday, 7 April 2020

(Tradeview 2020) Principles of Investing - Rule 2 : "Small Is Beautiful, Especially During A Crisis.”




Dear fellow readers, 

Once again, these writings are just my humble highlights (not recommendation), feel free to have some intellectual discourse on this. You can reach me at :


Website / Blog : 
http://www.tradeview.my/

or Email me to sign up as private exclusive subscriber : tradeview101@gmail.com
__________________________________________________________



The past week has been great for investors due to the relief rally globally and KLCI. Once again, the positive vibe re-emerged due to US Senate passing the US 2 trillion stimulus, extended unlimited QE commitment from Fed and for Malaysia, the drop of SRR by 100 basis point by BNM helped with the liquidity in the market. In addition, with the oil market surging upwards due to “potential resolution” between Saudi, Russia and US being the facilitator, oil traders are factoring in close to 10 million barrels of cut to help with the oversupply. Question is can this be resolved? I believe eventually, market forces are effective and will strike an equilibrium between supply and demand. In the immediate term, we shall know come this Thursday based on the OPEC+ discussion. 



Please note however that we have advocate caution many times and advised our readers to sell on strength instead of taking new positions as we believe the fundamentals of the market is wobbly due our belief of a protracted downward bear pressure for 6-12 months as a result of Covid-19, time for a vaccine to be ready for mass production and the economic aftermath impact from the MCO / lockdown domestically and globally. 

Previously, we advocated Rule 1 - Buy Good Quality Companies That Will Still Be Around in 5 Years. You can read it here http://www.tradeview.my/2020/03/tradeview-2020-my-principles-of.html . Today, we are moving on to Rule 2 - “Small Is Beautiful, Especially During A Crisis”. Have a short view of the video below on how this UK Parliamentarian argue about the economics of being small. 



Now, in simpler terms, it is saying what we traditionally view as advantages of being big is something for us to review and rethink in today’s climate. Why is that so? In fact using Covid-19 as an example, if would appear smaller countries seems to be handling the crisis and aftermath of the impact better than large countries. Of course, logically this is because of the healthcare system for larger countries to cater to the population as a whole is more challenging, the considerations taken for a large country with various states and stakeholders compared to a tiny Singapore or Switzerland has less of these issues. In essence, the advantage I am trying to exhibit is about being nimble. “Small & Nimble” - this reminds of the story of the mice and the elephant. 

The reasons are as follows :

1. Small but Nimble 

As a small investor, we have the ability to adapt and move quickly, compared to the large funds or institutions. As a small investor, one can change their strategy as and when one see the market moving in a different direction without going through layers of approvals like big funds. Example : I can decide to go underweight the oil market without going to the head of investment or even the board to say, “hey, lets move our money out of the oil market now and into technological sector”. In fact, some big institutional funds have a specific mandate to only invest in certain sector which limits their ability to navigate out of the downtrodden sector despite seeing the challenges ahead. Another interesting point to note, some large funds are not allowed to invest in stocks which are not covered by institutional research arms, whereby clients in these funds only allow them to invest in stocks where banks have published rated reports. All these cumbersome rules of governance that binds the big boys are not applicable to small investor which makes small investors very nimble.

2. Taking Positions and Realising.

As a small investor, one can sell easily because my position is small without wrecking havoc in the market. For instance, if I decide to sell off 100,000 shares of Serba Dinamik, it is much easier for me to offload compared to a fund like EPF to throw 1,000,000 shares. This is because when small investors throw, the share price does not move in the same weightage compared to the big boys. The opposite is true, whereby when I buy into a stock, it barely moves compared to when the big boys enter. But this will push up the price affecting the average entry price. Being small allows me to average down as and when or average up, but when you are big, your funds will push it and it takes a long time before you can even realise the position (be it sell or buy) at a meaningful price or entry level. Hence, this is a distinct advantage of being nimble.  

3. Investing in Small and Mid Cap Stocks

What most people do not understand is that big funds do not invest much in small and mid cap stocks. This because there is lack of liquidity to cater to their investment size and of course, the risk of small and mid cap stocks are too high for these funds to bear. An example would be a stock like CCK, OCK, DKSH, the stock has limited amount of free float for a big fund to take a meaningful size. This means if the fund enters at a good level and wants to realise profit, there may be no taker. This will be a problem as the fund would be stuck with a stock for a long time. As small investors we do not have these problem. Whilst Bursa has a rule of 25% minimum public float, but it is insufficient for big funds to take a meaningful stake for small and mid cap stocks. 

4. Disclosure and public knowledge 

Most of who are in the market would know the annual reports and BURSA periodically exhibits top 30 shareholders of the company and also substantial shareholders transaction of the company right? This is a problem small investors don’t have. Small investors would know hold a stake to the point of regulatory requirement for disclosure and can move freely without worrying about public opinion or swaying the market direction for the particular stock. However, this is a problem for funds. If say EPF or Tabung Haji disposes or drop from the list of top shareholders, this would affect sentiment of the stocks (whether rational or irrational, this is a topic for another day). Let’s take a more recent example; Dayang where the notable investor is Tan Sri Koon Yew Yin and UZMA where Brahmal of Creador has recently taken a position. When Tan Sri makes a comment or write up on Dayang, the entire market will follow with great interest. Now, imagine what happens if the market suddenly realises the announcement that Tan Sri no longer holds a substantial share in Dayang? Would it cause a panic? It would right and the holders of Dayang may rush to gates. Same goes for Brahmal of Creador. Imagine, yesterday The Edge reported about Creador taking a stake in Uzma as the largest shareholder, what if today Bursa announces Creador has ceased to be substantial shareholder of Uzma, would you be still confident to hold the stock? So this is another clear illustration of the beauty of being a small investor. 

 
If you have followed the article to this point, you must be wondering, all is good and fine but how do small investors take advantage of the above mentioned point. Have a look at this video by Peter below :




We sincerely believe that it is about using what you have to your advantage. As a small investor, we are nimble, we can take and realise position as and when we want to, we have no disclosure obligations and not bounded by governance rules, furthermore, we can invest in small or mid cap stocks to diversify our risk. These advantages should be adopted to real life application and not just wait for movement by big funds like EPF, Tabung Haji, KWAP, PNB to show us the money. If indeed these funds are doing so well, then there would be no need for the Malaysia MOF to set up Urusharta Jammah Sdn. Bhd., to takeover poor performing stocks and underwrite the losses. This is very clear illustration that not all big boys know what they are doing. I would go as far as to say many are not even half as good as small investors on various reasons but amongst those are mentioned above.


Do stay tune for my next write up, “Principles of Investing - Rule 3 :  "Diversification Is The Best Defence”


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Food for thought: 



E. F. Schumacher quote: Man is small, and, therefore, small is ...






Saturday, 4 April 2020

(Tradeview 2020) The Interlude





Dear fellow readers, 

Once again, these writings are just my humble highlights (not recommendation), feel free to have some intellectual discourse on this. You can reach me at :


Website / Blog : 
http://www.tradeview.my/

or Email me to sign up as private exclusive subscriber : tradeview101@gmail.com
__________________________________________________________


I call this The Interlude. It means a temporary intervention in the middle of an event. Like when you are watching a theatre show or broadway play, during the middle (intermission). Why? 






As most market followers would have know by now that the oil market had a sudden surge of close to 40% in 2 days due to Trump’s tweet and the pending OPEC+ meeting to potentially cut supply of oil production. I need not explain more as the Crude and Brent Oil chart shows exactly what is happening in the global oil market. Trump is also trying to stabilise the oil market at the US front by having meetings with top oil executives over the weekend. Globally, he claimed to have spoken to Russia’s Putin and Saudi’s Prince MBS.

This has led to the steadying of KLCI index as a whole due to the relief rally which rotated towards the oil and gas sector. Stocks like Serba Dinamik, Uzma, Dayang, Naim, Penergy, Hibiscus, Carimin amongst the many have rebounded strongly in 2 days in tandem with the oil price relief. Whilst we highly think this is premature, but the fact is oil price has plunge equally deeply.




Whilst China’s Covid-19 situation seems to be in control, other parts of the world are heading towards and implosion or peak. This includes US, Europe and closer to home, WHO has said Malaysia would be reaching its peak in middle of April. 


Now there are 2 prongs to analyse these news and market happenings above :

1. The jobs / unemployment rate. Non-Farm Payroll US release was really bad at 700k jobs lost, whilst unemployment has risen to 4.4%. And it will only get worst with the next month due to the situation in US. 

2. Oil market continued the rally today and surge continues after OPEC+ agreed to meet to discuss the oil situation. However nothing conclusive has been reached and it is believe, Trump will meet US oil producers to discuss their role to play in stabilising the market (including taking their share of production cut). If US, Canada, Brazil agrees on top of OPEC+ only then it will be possible for 10 million barrels cut. 

For both points, unemployment data indicates recession and is clear precursor of global recession. Do not forget, the share market usually moves 6 months ahead of actual economic situation. For oil, if producers of oil in OPEC+ and beyond do cut, it will benefit Malaysia directly as we are oil nation and will help with the government coffers. This will then lead to another round of short rally before the market returns to the normalcy of the true scenario of a recession. 

In short, we believe that the true and only way for the economy to get out of the doldrums is if the vaccine for Covid-19 is ready. Otherwise it will be a long protracted battle of downward bear pressure for the market and we forecast this will last for at least the next 6-12 months and may revisit previous KLCI low of 1210.

Remember, in our earlier articles 19th March 2020 and again 24th March 2020 when we openly put in black and white for our readers to see our position where we said it is time to collect and enter (refer here : http://www.tradeview.my/2020/03/tradeview-2020-recession-is-finally.html
http://www.tradeview.my/2020/03/tradeview-2020-cash-is-king-time-to.html) , I believe many have already made some gains. Our advice this moment now, except for long term dividend yielding growth stocks to hold and ride it out, we think the others that had rebounded on relief, those in position should consider to take profit.

This is why we call it The Interlude. We believe once this very short oil relief rally is over, the forces of economics, actual business fundamentals (where businesses are not opened due to lockdown, unemployment on the rise, loss of revenue for govt in taxes and larger deficit due to the stimulus) kicks in, there will be another round of sell down. This is our view and we are advocating caution for your hard earned money / savings. 




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Food for thought: 





Saturday, 28 March 2020

(Tradeview 2020) My Principles of Investing - Rule 1: Buy Good Quality Companies Which Will Still Be Around In 5 years




Dear fellow readers, 

Once again, these writings are just my humble highlights (not recommendation), feel free to have some intellectual discourse on this. You can reach me at :


Website / Blog : 
http://www.tradeview.my/

or Email me to sign up as private exclusive subscriber : tradeview101@gmail.com
__________________________________________________________



The past week has been great for investors due to the relief rally globally and KLCI. Once again, the positive vibe re-emerged due to US Senate passing the US 2 trillion stimulus, extended unlimited QE commitment from Fed and for Malaysia, the drop of SRR by 100 basis point by BNM helped with the liquidity in the market. Of course it was also on the steepest sell down in KLCI since 1997, you can see the chart below.


As you can see the steep sell off have caused a sharp technical rebound or rally of almost 110 points from 1219 to 1334.73 as per this afternoon KLCI break. This in our view is within our expectations though the magnitude of rebound exceeded expectations. However, the question remains for us and many of our readers are, will this be U shape rebound or V shape? Different circumstances dictates different outcome. I will give a simple hypothetical :

If tomorrow, any country announced the vaccine for Covid-19 is ready, most definitely this will lead to a V shape rebound globally across all markets. If the Covid-19 prolongs coupled with other factors, it may even be a case of U shape rebound. In addition, world economies will need to deal with the aftermath of the impact from Covid-19.

So question now, should I sell on strength, hold or wait for dips / retracement to enter the market again since KLCI and global economy has rebounded so strongly in 1 week?




This is where I hope to draw the attention of my readers to. As boring as it may be, value investing is the best guide to making your decision. Please use this as guidance above and to make it even simpler for beginners, I would like to share our Rule 1 - Buy Good Quality Companies Which Will Still Be Around in 5 years.

This seems like such an simple philosophy, some may even say its lame. But if you look back at each recession, there is always a minority that is still around with the same management, same name and continued good performance. Just compare 1997 to 2020 share counters. Therefore, we do not have to look all the way into the future 50-100 years unlike Warren Buffet did with Coca-cola. The reason is because today, with the proliferation of technology, competitive landscape, easy funding and liquidity, there will be an ever changing dynamic to the business world. What may be around and successful now will disappear in 5 years. Additionally, investors these days are less patient and more greedy than ever, hoping for fast return and money. Not many can wait. Hence, my rationale for using the 5 years metric. 



I will use a few of the stocks in my list to exhibit how I choose to the shares to invest. CCK was listed in 1996 as poultry broiler farm company. Over the years it has evolved and grown tremendously. Today, CCK should no longer be a designated poultry company as it has businesses in aquaculture and bulk of their earnings are derived from their CCK fresh mart. There are retail company with foot prints mainly in East Malaysia. Recent expansion to Indonesia are amongst is growth strategies paying off. So when I chose this company, I believed in the prospect of the growth and most importantly, the management. I know in 5 years, this company will still be around and grow even bigger. If you look at their earnings and dividends, every year it has improved in tandem with their business strategies. Previously, we have analysed their mid term Fair value to be at 69 sens. Due to the market sell down, it is only trading at 34 sens now. It is 40% below its intrinsic value, has good DY of 3+%, it is growing as well. If we don’t consider investing now, when else?



Another example would be Guan Chong Bhd, the largest cocoa grinder in South East Asia. It is companies like this that make us as Malaysian proud. I believe most would not have known about this humble 1 factory company has grown to be a leader in this sector and region. What I like a bit this company is the fact it is involved in processing of a raw commodities which are required on daily basis for the FMCG sector. Additionally, it has grown organically in the past but in recent times have grown through M&A buying German chocolate maker Schokinag Holding GmbH for RM137.84 million at the end of January.  The valuation in itself is not expensive for a growth company at only trailing 9x PER at current price of RM2.06 (Please note ourselves and our subscribers entry price is much lower as we bought on weakness). Further they have implemented sound growth strategy whereby they are setting up their facility in Ivory Coast, the biggest cocoa producer in the world to bring down cost for their exports. I believe in 5 years, GCB will do even better and with their focus being exporting to overseas market, the world is the market.




I like the message that Ray Dalio is trying to convey here, the time to buy is when there are blood on the streets. These are just amongst the 13 stocks I have picked during this downturn and my list will only grow with the emerging values. I also like a variety of big caps and small caps, not just mid cap stocks. I sincerely believe we should not fear buying on weakness but we must have the ability to hold. I understand it take a lot of guts to buying on  a sell down compared to buying on a bull run, but it is all psychological. If you are worried and scared, always return to this Rule 1 - Buy Good Quality Companies Which Will Still Be Around in 5 Years. 

Do stay tune for my next write up, “Principles of Investing - Rule 2 : Small Is Beautiful, Especially During A Crisis.”


_______________________________________________________________

Telegram channel : https://telegram.me/tradeview101
Website / Blog : http://www.tradeview.my/
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Food for thought: 










Wednesday, 25 March 2020

(Tradeview 2020) - April Fool’s Came Early : MYR 100 Billion Bank Loans Deferment Policy By Government



Dear fellow readers, 

Once again, these writings are just my humble highlights (not recommendation), feel free to have some intellectual discourse on this. You can reach me at :


Website / Blog : 
http://www.tradeview.my/

or Email me to sign up as private exclusive subscriber : tradeview101@gmail.com
__________________________________________________________

I am sure most by now would be have heard about a “wonderful” new policy by Government which allows people and businesses to enjoy a 6 months period moratorium. Now, I do not usually comments on politics as I am a financial writer, not a political writer. 

However due to the urgency and request for clarification by many of my readers, I felt obligated to write an immediate post to enlighten my readers due to the misconception painted to the public by the Government especially where it is being trumpeted like a “Great Escape” for the people from their current predicament. 

Our new PM said RM100 billion worth of credit restructuring will result thanks to the Moratorium on bank loans repayment for 6 months. Now first thing first, it is important to understand what Moratorium means. A quick search on Mr. Google shares :



After studying and understanding this so called policy to help the people, we find this to be a half past six measure / half baked policy to assist the people. In a same away, this is exactly like the EPF Account 2 assistance aid to the Rakyat. 

Let me explain, before clarification from BNM, many thought the interest during 6 months deferment period of all loans (except credit card) will not be charged. Turns out, whilst both principal and interest are suspended for the 6 months period however the interest owing still runs including the 6 months period which is accrued to be pay later. 

In simpler terms, the policy only defers 6 months but this 6 months interest unpaid during deferment will be charged later on to the people and business. 





It is no wonder the banks shares perform well today, because it doesn’t affect the banks at all as the  Bank’s cashflow in this 6 months will be mitigated by the lifting of their reserves by BNM and in fact may even get extra income from people and businesses who don’t understand the real impact because the loan tenure is extended and additional interest income can be collected for the 6 months deferment. A simple explanation below  :

Now Ali have 30 months loan outstanding, because of Covid 19, the Government imposes lockdown.  Ali cannot work and have no income, or Ali work from home, and Ali’s Boss forced to continue paying salary even though Ali’s Boss shop is close and Ali Boss has no income. How long can Ali and Ali’s Boss sustain? 3 months, 6 months, or 12 months?

Hence the Government imposes moratorium for 6 months on banks loans as relief to Ali and Ali’s Boss (Individual and SME). This is great news right? But no, turns out Ali and Ali’s Boss will still need to pay the interest on the loan for the 6 months moratorium. Which means Ali’s original interest on the loan for 30 months has now been extended to 36 months! 





Same like the EPF Account 2 aid, the Government permits the people are to withdraw their OWN MONEY during this difficult time. It is in fact actually using our own future savings for old age to be used presently. Yet, the Government shouts about the potential RM40 billion flooded to the market. This is not a form of stimulus at all. These funds are already within the financial system of the country. It is with the EPF who uses our savings and funds to invest and support financial & the housing markets. So what is new?

Policy makers, please fee free to read comments of the Rakyat before making half baked policies.

Covid-19: Mixed reactions over EPF withdrawal scheme
https://www.thestar.com.my/news/nation/2020/03/24/covid-19-mixed-reactions-over-epf-withdrawal


Relief at the expense of EPF savers
https://www.thestar.com.my/opinion/letters/2020/03/25/relief-at-the-expense-of-epf-savers


https://www.themalaysianinsight.com/s/231406


Unlike other countries such as US, Japan, UK, Italy, Singapore and others, the government steps in and absorbs the cost for the suffering people and business instead of passing the cost to the people.  Example, in the US, the government student loans for 2 months and whilst it is suspended in the 2 months the interest for loan repayment is waived, not accrued!

The government should have a skin in the game, instead of asking the people and business to shoulder the financial hardship from being locked down unable to make a living. This is why the Rakyat and Businesses pay taxes, for the Government to use the taxes to take care of the Rakyat  and Businesses during difficult times







Quoting a reader of mine “ It’s a big disappointment and for good 3-4 pager of notices in the Circular , This key point on interest on accrued interest is only at the footnote” 



As I am writing, a fresh news is out saying MCO is extended another 14 days to 14th April. From ‘‘ 1. warm water stops Covid-19, 2. EPF Account 2 withdrawal releases RM40 billion into the market and 3. 6 months Bank Loan Moratorium releases RM100 Billion to the market,  indeed, April Fool’s came early this 2020.

_______________________________________________________________

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Food for thought: