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Saturday, 3 January 2015

KLSE Boom/Bust Market Cycle, How to Use Value Investing Approach In An Effective Way! (1st Jan 2015)

As we are in 2015, where are we now? Let’s start the sharing of the Boom/Bust market:
1. Bear Market/Recession/Depression:
Prices of stocks drop more than 50% and some up to 70%/80%. Consecutive 2 Quarters of GDP in NEGATIVE – The Media will announce to the world, yes we are in bad shape – RECESSION! Words of fear and pessimistic everywhere, stocks are selling below intrinsic value/below NTA or book value.
2. Recovering Period
Blue Chips/Good FA companies from their trading P/E 20++ to 30++ being whacked to single digit P/E and early teens P/E. This is where the Value Investors and Value Oriented Fund Managers (VOFM) started to do their cherry pick. Companies with strong balance sheet and sustainable business model will be their top choice. You will notice when Bank Negara started to DROP INTEREST RATES and GOVERNMENT INCREASING THEIR EXPENDITURES/REDUCING TAXES (In Malay, we called this Dasar Fiskal dan Dasar Kewangan)
In Malaysia, currently the ICapital boss Mr. Tan Teng Boo is an expert in this.
3. Bull Market
Constant stimulates from the Government and lowering of Interest Rates created a lot of cheap funding and excess money to the economy and market. This will jump start the market and increases the stock prices. From here, Momentum Investors/Momentum Fund Managers/Traders will join the crowd. The stocks will rise above their Fair Value/Intrinsic Value. The return from Momentum Fund Managers will be superior to the Value Oriented Fund Managers.
Stocks are trading in their teens P/E and some already in the twenties. VOFM find it difficult to look for the next good and valuable buy. If VOFM can sell to you their stocks at P/E twenties and thirties, THEY WOULD SELL TO YOU AND KEEP THE CASH. The next thing you can see is VOFM are leaving the stock market because they could not produce spectacular returns compare to Momentum Fund Managers (MFM). From here, you can see a lot of Unit Trust Funds, Fund Managers creating new funds and posting higher returns to entice more investors to invest.
4. Top of The Bull
An overly Goreng Economy will create inflation. Bank Negara will start to increase rates to cool it down (sounds familiar?). When stock prices already in their P/E twenties and thirties, guess what? The analysts will tell you:
This A stock P/E is lower than the B stock P/E, still have room to grow! BUY CALL!
This A stock historical P/E is 25, based on valuations, we are forecasting a FORWARD P/E 18 of 2016 due to increase of revenue and a further FORWARD P/E 12 of 2017 due to further increase of revenue.
Why analysts do not tell you base on 2015 P/E 25 = BUY?
Why says 2017 FORWARD P/E 12 = BUY?
It is because, no one will buy if you are selling your company to me pegging it at P/E 25x of my current year earnings (while FD P/E is 18).
5. Bursting of the Stock Market
When market do not talk about the value of their business and keeps on blowing the trumpet for ‘WANG AKAN DATANG’, and Bank Negara started to be cautious, personally you should take note on this. VOFM already left the market.
Talking/Forecasting about the Future is okay. But if you use it as a main selling point to push your shares, it becomes unhealthy. No one talk about value anymore. All talk about ‘WANG AKAN DATANG’. Let me share a story:
WONG has a KAMBING (Kambing Kampung Gred A - normally sells for RM1000 per KAMBING). During Farm Market recession, WONG is willing to sell to TAN his KAMBING. WONG worrying that the market will be worsened; he is willing to sell at RM500. TAN look at the deal and started to consider. Then the Ketua Kampung YAP said ‘TAN, do not worry, buy the KAMBING, I will lend to you money and charge you LOWER RATES. I can lend to you the RM500 with BLR -3. TAN without hesitation, bought the KAMBING from WONG. Fast forward a year, the Farm Market recovers and KAMBING is now worth RM1000. Due to Ketua Kampung has been lending money to his villagers due to GOOD INTENTION to help them to overcome the glut; the cash in the village is in surplus now. The villagers started to hunt for more KAMBING. When RM1000 can’t buy a KAMBING, the villagers raise it to RM1500 and then RM2000. To entice the buying and selling of KAMBING activities, the KAMPUNG STORY TELLER started to tell FUTURE DREAMS OF OWNING KAMBING!
Story Teller says:
This KAMBING is Gred A. Gred A KAMBING is different. Look at the future: This KAMBING Gred A can give birth to another 5 ANAK KAMBING and at the same time you get the SUSU KAMBING! RM2000 cost you spend now at 2015 is equivalent to cost RM1000 rearing a KAMBING one year down the road (selling price of KAMBING STILL RM1000). If you keep the KAMBING for another year till 2017, it will multiply from 5 to 25 KAMBING thus bring down your cost rearing a KAMBING RM500 (KAMBING still sells for RM1000).
Looking into this scenario, more people resort to borrow from KETUA KAMPUNG YAP to buy RM2000 a KAMBING that values RM1000. Yap started worrying on this trend and raises his interests on loan on the GOOD FAITH’ that it will softens the KAMBING MARKET. TAN gets an offer RM1500 for his KAMBING, he sold it.
Pay RM500 back to YAP and keep his cool RM1000.
TAN’s thinking was: I am selling a KAMBING worth RM1000 at the price of RM1500. A good deal indeed. About the promise on 1 KAMBING becomes 5 KAMBING in 2016, TAN says, I do not see the 5 KAMBINGS yet how to count it as owning it? My KAMBING next year might be stolen or poisoned before it produces 5 KAMBING. Now villagers are buying KAMBING with my cost of fund RM500 with RM1500. I SELL TO YOU one KAMBING with my cost of RM500 and enjoy my RM1000 after paying YAP RM500. Regarding the OPPORTUNITY of selling price of RM2000 per KAMBING if TAN waits longer, TAN says, I’m happy with RM1500, let other people make the extra RM500.
TAN (VOFM) – I am buying a business at the price I think selling below intrinsic value and availability of cheap funding. I will sell and walk away if the market no longer buying/selling the business of what it is valued of INSTEAD MARKET IS BUYING/SELLING about THE FUTURE INCOME THAT YET TO BE PRODUCED.
Do you notice TAN's cash are increasing year after year?
(please refer to the attached file).
Market Cap RM326m VS CASH on Hand RM240m.
Personally I think when TAN is keeping his cash aside, I will INVEST CAUTIOUSLY to avoid becoming like WONG!
Happy Trading!
Humble Pie

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