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Monday, 20 April 2020

(Tradeview 2020) Principles of Investing - Rule 3 : "Diversification is the Best Defence”




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 : [email protected]
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KLCI rebounded strongly and broke 1400 to close at 1407 on Friday 17th April. KLCI reach a high of 1414, around 2%. This was quite surprising given how oil price WTI has fallen below USD 20 per barrel to US18+ and Brent retreated to USD 28+ per barrel. That is what the equities market is all about I supposed, irrational. If the market is always efficient, then there are no opportunities for investing and trading as the price will always be at an equilibrium. 



Now as we are fast approaching the end of April and wishfully the MCO, many seem to be quite bullish about the market or otherwise it is “Fear of Missing Out” (FOMO) that is pushing the market uptrend momentum. Of course some attribute to the fact that US is talking about slowly opening the economy again as they claim they are past their peak cases for Covid-19. Floods of good news in global markets are also abundant as touted by promoters of stocks across various telegram channels / groups. This is not the case for us. 

Maybe by nature, we are contrarian. I supposed most value investors or fundamentalist would be, given the current actual current market conditions. We genuinely believe artificial support of the market does not last and will not reflect the actual fundamental of the economy. Have a look at the picture above which to us a true oxymoron and ask yourself, How can US market have the best weeks of gain since 1938 but at the same time, more than 16 millions have lost their jobs in the past 3 weeks? Something is wrong somewhere isn’t it?”



We can have a debate endlessly on this topic without arriving anywhere. Believers of the bulls have totally forgot how the market was when it plunge all the way towards 1200 in March just few weeks ago. People are generally forgetful. If history teaches us anything, it always returns with a vengeance and strikes like a lightning bolt. So here comes, if you are torn and is uncertain or unsure with the market direction, what should you do? 

1. Risk on - enter the market and hope for the best (for market to continue rallying); or

2. Risk off - stay on sidelines and hope for the best (for market to plunge); or

3. Stay invested whilst holding sufficient cash to average down (best of both worlds)?

I am sure most of you would choose option 3.  So how do you execute your investment strategy if you choose option 3? In my view, you cannot do it without sufficient diversification. Risking everything and putting all in one basket is akin to gambling, not investing. So what in actual fact is diversification? Simple as it may sound, there are different extents of diversification. I will share with you all through a simple illustration with some of our stock picks. 



1. Diversification within same sector

Let me use the example of oil and gas. In 2019, the oil and gas companies were really roaring back to life with the likes of Uzma, Carimin, Serba Dinamik, Yinson, Hibiscus, Dayang, Perdana amongst others leading the way. Whoever that caught on the wave probably made close to 50-60% return within 1 year. Some exceed even that of 100% if they entered companies where notable investors has substantial position and highly promoted by investment banks or syndicates. Today as we know it, oil market has plunge ferociously and those who have existing position who did not take profit in 2019 would suffer the sell down in 2020. Those lucky enough to have exited quickly would have been able to protect their profit. 

So how do we diversify? Oil and gas sector is divided to upstream and downstream. There is the process of exploration & extraction, the process of refining and the process of retailing. In addition, there are the storage facilities, supply of equipment, maintenance of equipment, FSPO charters and others. So what I meant when it comes to diversification within the same sector means you should not put all your investment in one sector in one part of the the value chain. If you do choose to invest in oil and gas industry, you cannot throw all your money into Hibiscus which is primarily in exploration and extraction. When the oil market is good, they will do well and hit above RM 1 as in 2019, but when oil plunge, it dropped almost 80% of the value to 20+ sens. Hence, you should consider allocating your investments into different part of the value chain. An example, for us, we like put our investment in Yinson (FSPO charter), Dialog (storage facilities), Uzma (maintenance). 





2. Diversification Across Sectors

Now moving on, this is what we have always advocated and used often. We like to put our funds in different sectors and it actually helped us weather past crisis such as 1MDB, oil crisis, GST, Election, Brexit, Trump and today. Don’t get me wrong, it doesn’t mean we didn’t lose money. In fact, even if we make losses, the losses are able to be carried by the winning investments. Let’s not look too far, and put it simply for 2020, the stocks we have mentioned in previous articles.

We have funds in :

1. QL & CCK (poultry / essential retail), 
2. DKSH (Consumer), GCB (Chocolates grinder / commodities), 
3. RHB & Public Bank (Banking), 
4. Allianz (Insurance), 
5. Scicom & Pentamaster (Tech / E&E) 
6. MFCB (power plant & resources)
7. OCK (telecommunications) 
8. RCE Capital (Finance)

If you look at our list above, it is vastly different and it is definitely not in one single sector. From our list you cannot even tell which is our favourite sector. This is one of the reasons why conglomerates are usually strong in times of weakness because their exposure in various sectors help them cover the weakness in certain aspects. The Korean chaebols is a good example where they stand very strong for a long duration of time over the years and various crisis as they are protected from cycles through each different business division. 





3. Diversification of  Investment Strategy

As a continuation to the above list of stocks, from our list, if you look very closely, you can see we have a diversified our investment strategy such that we do not invest with one single modus operandi. We have combined investing based on the stock’s earnings yield, dividend, growth.  

Example : We invested in RCE Capital for the Earnings Yield, Scicom for Dividend, Pentamaster for Growth.

This is another form of diversification. This form of diversification is closely related to diversification across sector as using different focus on investment strategies would usually means you have to pick out from a basket of stocks belonging to different category of industries. 



4. Diversification of Asset Class

This last bit is not complex. Many I am sure knows the 30:30:40 rule. 30% savings, 30% investment & 40% expenses. Now use the same logic into asset class of products such as :

1. Cash
2. Equities / Stock
3. Fixed income / Bonds
4. Commodities / Gold
5. Pension / EPF
6. Amanah Saham / Tabung Haji (For the bumiputera)
7. Real Estate / Property

Noticed, I did not put insurance and cryptocurrency in the above asset class. This is because I do not believe in cryptocurrency and for insurance, I believe it serves a different purpose, i.e. not investment. Insurance to me, is for the safety net in the event something bad happens and best to purchase vanilla products instead of investment linked products when it comes to insurance. However, this is topic for another day. The short video below gives a simple illustration of Diversification. 






Do stay tune for my next write up, “Principles of Investing - Rule 4 :  "Scaling When Buying Falling Stocks”

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Food for thought: 





Saturday, 11 April 2020

(Tradeview 2020) - Open Letter to Koon Yew Yin on Dayang, Margin & Ethics



Dear Tan Sri Koon,

You do not know me but I know you like many of the investors in the KLSE. Your reputation from the days as professional engineer, early pioneer of Malaysia’s construction and building industry as the co-founder of IJM, Gamuda, Mudajaya, prominent investor and philanthropist is known to many. Your vocal opinions and write ups are often read and referred by many people as well. In short, you are a very influential man. At a ripe age of being an octogenarian, many look towards you for guidance, wisdom and advice. This is especially so when it comes to investing in the share market. In fact, you have many followers and readers, I believe the most even in the entire i3 forum.

I have thought very long and hard whether to write an open letter to you, Tan Sri, as what I am  about to say is not easy to swallow. I rarely write in reference to anyone in all my years writing, however in this instance, I cannot keep silent. I have to call you out for your unethical action in your public advice to readers / investors in the share concerning Dayang (5141).  

Dayang share price today is RM1.30. In your latest 10th April blog writing, you said that you have sold all Dayang even at a loss because of the price trend reversal being unsustainable and the oil market. However, you have no less than 30+ blogs promoting Dayang from as early as 2019 until today. Even up until 1st April, you were asking “Ikan Bills” investors to not be stupid to sell Dayang and reproduced a write up from Public Bank with TP of RM 2.80 to support your claim. I have attached some recent articles  by you below with some highlights on points you made (refer below).

I am calling you out now for misleading the public, readers and especially new investors who are new to investing with limited funds / savings. For everything you said and written have impact because of your stature, did you consider the repercussions of your action? You are rich and successful and do not need the money, but there may be some who have worked hard to save up their income hoping to invest in the share market during this lockdown period to supplement their family income or business income. As there are many writers in the i3 forum, some are great teachers, some are shady, some are syndicates hence many new investors would hope someone like you would be the right person to guide or teach them. What you have done is to a large extent grossly unethical and even immoral as we are now in the midst of an economy stagnation stage nation due to Covid-19. 

I agree that everyone needs to take responsibility for their own action especially when it comes to investing. We must however acknowledge that as part of the investing community and society as a whole, as human being as well, we owe it to one another to be righteous and upright, and if we cant, we might as well keep silent. However, you chose to speak and write in the public forum, with the goal of helping people make money and teaching people how to fish. My observations - what you did was the  opposite. You may start off wanting to give guidance and sharing good stocks so everyone can make money (including yourself) like Liihen, Hevea, Favco, Jaks, Teoseng, Dayang amongst the many, but whenever the calls start to go against you, you refuse to acknowledge but rather blame it on investment banks, company management, securities commission, ikan bilis investors, i3 readers on the forum, trends etc but you never once acknowledge you made a mistake. Even assuming you do not want to acknowledge mistakes, which is human nature (most wouldn’t admit), the least you could do is not double or triple down on the same call and write it publicly with so much conviction whilst criticising others who do not think like you. The best example for this erroneous mistake by you is Dayang. 

I do not hold a single share in Dayang, but I think it is a good turnaround company which would do well if not for the oil market plunge. I can understand that this was unpredictable but that is the problem with companies in exposure towards commodities. This is a risk of investing but I dare say many investors do not think like you. The right thing to do was to own up or stick by your call, if you indeed believe so but not write articles over articles promoting your stock then selling suddenly and quietly leaving all your readers (supporters and new inexperience investors) suffering the brunt of the losses. You may say you also took a hit with Dayang, but please know that you can sustain the losses, not everyone who read your article and look up to you are as rich and successful as you who can sustain losses. Some may never rebound from this losses. Especially those who you followed your advice to invest on margin. Many would have lost their savings and be in debt as a result. This is also one of the worst advice you have shared with readers and new investors - to use margin to invest. 

I3 Forum may protect you from the comments column hence, we will not know how readers actually think of what you have done. I think I have said enough. This is my personal opinion, I do not represent anyone or organisations but myself. Please understand, I have no animosity towards you and I respect you for your contribution towards education, poverty and also you past contribution towards Malaysia’s construction and building industry. I am not calling you out not to insult or embarrass you, instead intend to express my view for you to continue to be a part of the investing community with greater sense of accountability / responsibility. You must understand with your influence, stature and knowledge, many people look up to you and seek out advice and guidance.

Do not abuse the trust people placed in you. Economics like the laws of the world, have its own way of finding an equilibrium.

Sincerely,

Tradeview 
11th April 2020



26th March





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 : [email protected]
__________________________________________________________



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 not 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 Koon Yew Yin and UZMA where Brahmal of Creador has recently taken a position. When Mr. Koon 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 Mr. Koon no longer holds a substantial share in Dayang? Would it cause a panic? It would and the holders of Dayang may rush for the 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”


_______________________________________________________________

Telegram channel : https://telegram.me/tradeview101
Website / Blog : http://www.tradeview.my/
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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 : [email protected]
__________________________________________________________


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: