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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, 

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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”


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Food for thought: 



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






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