The most precious commodity (and no, it's not gold!)
The markets for the past two months have been seemingly suffering from a classic case of rabbit caught in headlight syndrome. The faster responding funds immediately sold, however, the majority of the funds could probably only look on helplessly as share prices continued to drop on low volume (MSCI Far East Free was down another 0.8% MoM in June). Some of the markets were seeing volumes last seen during the crisis, for e.g. the Thai market traded with less volume than Christmas day. Yet selling continued as funds sold to prepare for the wave of redemptions (that so far has not yet materialized, but then most funds, especially hedge funds, need a certain amount of notice before investors can redeem). Although the markets seem to have taken the latest statement from the Fed after announcing another 25bp rate hike well, response may be exaggerated by some window dressing activity.
After the recent rapid declines in the markets, everyone wants to believe that the worse is over and that the Fed will probably stop raising rates, giving the US economy (and US housebuyers) a welcome relief. When I read Mr. Bernanke’s statement, it didn’t looked that dovish to me, or maybe I’m just not reading the fine nuances in it as I don’t normally scrutinize the Fed statement every rate hike. In meantime, exports to US continues to flood in as companies hope the US consumer will be able to recover and for stockmarkets to go back on their way. That’s wishful thinking in my view, and frankly, there is no room for wishful thinking in investments. Hope that the stock you bought, which is now down 30%, will recover is what will lose you another 50%. There is no escaping the fact that the US consumer is leveraged up to the hilt and given where house prices in the US are and look to be going, there is no escaping a potentially painful adjustment period, one that has only just begun. With this in mind, we have to be wary of the impact of the stocks in Asia, especially those that are especially reliant on exports to the US.
Given our focus on achieving absolute returns rather than relative returns, these kinds of markets are not easy. But I much prefer this headache to one I would have if we could not find any stocks for the fund to invest in. From my past experience, these are the kind of markets we can generate handsome returns when invested over longer term. The heightened perceived risk from investors actually provides an improved risk return reward, in my view. But how do we ensure that the stocks we invest in at these levels, which we feel over the longer term will generate superior returns for us, but in the short term won’t actually lose money for us? The answer is simple, we can’t. The shorter term we go, the more unpredictable it becomes. This is part of the reason for the fund’s longer than average redemption period (90 days notice), and also a way to ensure that investors in the fund have a similar mindset to us. The way I see it, the more we don’t have to follow what everyone is doing, the more opportunities for higher returns.
Some people call it luck, some call it strategic positioning, but our strategy is so far proving sound as the portfolio continues to perform well despite the difficult markets, partly because the stocks we are holding have very cheap valuations, relatively low institutional investor holding and have high cash value (as percentage of market capitalization) and partly because of continuing stream of positive newsflow for some of our bigger holdings. In these markets, we ended up trading a little more than we would have liked, reducing some weighting in stocks that had gone up substantially and in the more volatile stocks. Given the size of our fund, we can be a lot more nimble than the larger funds, allowing us to produce returns that would be more difficult if we were a lot larger.
Though we are pretty much a bottom up fund, we still cannot escape some macro and thematic analysis. Our final decision is bottom up but long term macro trends will still inevitably have some influence. It never hurts to always have the big picture in mind. One of the more consensus views, is that the US$ will continue to weaken. The inevitable slowdown of the US economy, the unsustainably high trade deficit and finally the reduction of importance as the primary trading currency in the world will all contribute to ongoing weakness of the US$. However, trade cannot function without a common currency (people just don’t barter anymore) and the Euro, I believe, it will go someway to replace the US$ as the major trading currency. Implications are significant, especially as the view that the US$ will continue to weaken gains more traction. One thing that all central banks hold a lot of is US$ assets and if they feel that the value of this asset would continue to depreciate, at some point they are going to think of diversifying their assets into more Euros (or even gold) instead.
In fact, as the US$ dollar continues to weaken, it may signal the end of the great US consumer driven global growth phase, and instead see the rise of the Euro spender. Last month, I noted how over 40% of the revenues for the companies in our portfolio comes from Eurozone. Given Euro was up 4.7% from end March, results for these companies should be quite good for 2Q06, purely from forex basis, but in addition, as some of the exporters to Europe has already found, given the stronger currency, orders from Europe have been much stronger than expected.
In meantime, I’m starting to see a lot more value popping up across the region, with stocks that two months ago looked unattractive but at current prices looks quite inviting. We are running through our filters again at current prices and preparing to do another round of visits across the region to try and dig out some more ‘undiscovered’ stocks, to boldly go where no investor will. With that, I will leave you this thought for this month…
The most precious commodity (and no, it’s not gold)
One of the oldest stockmarket newsletter writers of all time, Richard Russell (www.dowtheoryletters.com – a website I highly recommend for all investors alike) puts it very well in one of his popular articles on investing. Anyone can make money, it’s just a matter of time. So for e.g. if we invested in a risk free investment which yields 5.5%, over a period of 13 years, we would double our money, and assuming all the returns were reinvested, an investor would continue to double their money every 13 years, eventually ending up with so much money, they would have to donate most of it to charity. As such, when we launched our fund to try and beat the risk free rate returns by more than 2-3 times, we are in fact trying to shorten the time we take to ‘double our money’ by 2-3 times, i.e over 4-7 years instead of 13 years. This is also the basic tenet of value investing. We have no idea when a stock would reach its fair value, however, as time progresses, we can expect this discount to narrow. In the short term, the discount could widen even more, but we are more confident over a 3-5 year period, it should be less, not more, especially if the business continues to grow steadily and management delivers a consistent return. When an investor speculates and hopes for a quick profit, he is trying to save some time. When I look at the markets now, I see valuations for some stocks that are approaching or are even lower than July 2005 and late December 2004, despite little changed outlook for the companies concerned. As such, I see an opportunity to ‘buy effectively 1-2 years of time’ if I were to buy at current prices. So who said you can’t buy time. Time, is the most precious commodity we can buy.
After the recent rapid declines in the markets, everyone wants to believe that the worse is over and that the Fed will probably stop raising rates, giving the US economy (and US housebuyers) a welcome relief. When I read Mr. Bernanke’s statement, it didn’t looked that dovish to me, or maybe I’m just not reading the fine nuances in it as I don’t normally scrutinize the Fed statement every rate hike. In meantime, exports to US continues to flood in as companies hope the US consumer will be able to recover and for stockmarkets to go back on their way. That’s wishful thinking in my view, and frankly, there is no room for wishful thinking in investments. Hope that the stock you bought, which is now down 30%, will recover is what will lose you another 50%. There is no escaping the fact that the US consumer is leveraged up to the hilt and given where house prices in the US are and look to be going, there is no escaping a potentially painful adjustment period, one that has only just begun. With this in mind, we have to be wary of the impact of the stocks in Asia, especially those that are especially reliant on exports to the US.
Given our focus on achieving absolute returns rather than relative returns, these kinds of markets are not easy. But I much prefer this headache to one I would have if we could not find any stocks for the fund to invest in. From my past experience, these are the kind of markets we can generate handsome returns when invested over longer term. The heightened perceived risk from investors actually provides an improved risk return reward, in my view. But how do we ensure that the stocks we invest in at these levels, which we feel over the longer term will generate superior returns for us, but in the short term won’t actually lose money for us? The answer is simple, we can’t. The shorter term we go, the more unpredictable it becomes. This is part of the reason for the fund’s longer than average redemption period (90 days notice), and also a way to ensure that investors in the fund have a similar mindset to us. The way I see it, the more we don’t have to follow what everyone is doing, the more opportunities for higher returns.
Some people call it luck, some call it strategic positioning, but our strategy is so far proving sound as the portfolio continues to perform well despite the difficult markets, partly because the stocks we are holding have very cheap valuations, relatively low institutional investor holding and have high cash value (as percentage of market capitalization) and partly because of continuing stream of positive newsflow for some of our bigger holdings. In these markets, we ended up trading a little more than we would have liked, reducing some weighting in stocks that had gone up substantially and in the more volatile stocks. Given the size of our fund, we can be a lot more nimble than the larger funds, allowing us to produce returns that would be more difficult if we were a lot larger.
Though we are pretty much a bottom up fund, we still cannot escape some macro and thematic analysis. Our final decision is bottom up but long term macro trends will still inevitably have some influence. It never hurts to always have the big picture in mind. One of the more consensus views, is that the US$ will continue to weaken. The inevitable slowdown of the US economy, the unsustainably high trade deficit and finally the reduction of importance as the primary trading currency in the world will all contribute to ongoing weakness of the US$. However, trade cannot function without a common currency (people just don’t barter anymore) and the Euro, I believe, it will go someway to replace the US$ as the major trading currency. Implications are significant, especially as the view that the US$ will continue to weaken gains more traction. One thing that all central banks hold a lot of is US$ assets and if they feel that the value of this asset would continue to depreciate, at some point they are going to think of diversifying their assets into more Euros (or even gold) instead.
In fact, as the US$ dollar continues to weaken, it may signal the end of the great US consumer driven global growth phase, and instead see the rise of the Euro spender. Last month, I noted how over 40% of the revenues for the companies in our portfolio comes from Eurozone. Given Euro was up 4.7% from end March, results for these companies should be quite good for 2Q06, purely from forex basis, but in addition, as some of the exporters to Europe has already found, given the stronger currency, orders from Europe have been much stronger than expected.
In meantime, I’m starting to see a lot more value popping up across the region, with stocks that two months ago looked unattractive but at current prices looks quite inviting. We are running through our filters again at current prices and preparing to do another round of visits across the region to try and dig out some more ‘undiscovered’ stocks, to boldly go where no investor will. With that, I will leave you this thought for this month…
The most precious commodity (and no, it’s not gold)
One of the oldest stockmarket newsletter writers of all time, Richard Russell (www.dowtheoryletters.com – a website I highly recommend for all investors alike) puts it very well in one of his popular articles on investing. Anyone can make money, it’s just a matter of time. So for e.g. if we invested in a risk free investment which yields 5.5%, over a period of 13 years, we would double our money, and assuming all the returns were reinvested, an investor would continue to double their money every 13 years, eventually ending up with so much money, they would have to donate most of it to charity. As such, when we launched our fund to try and beat the risk free rate returns by more than 2-3 times, we are in fact trying to shorten the time we take to ‘double our money’ by 2-3 times, i.e over 4-7 years instead of 13 years. This is also the basic tenet of value investing. We have no idea when a stock would reach its fair value, however, as time progresses, we can expect this discount to narrow. In the short term, the discount could widen even more, but we are more confident over a 3-5 year period, it should be less, not more, especially if the business continues to grow steadily and management delivers a consistent return. When an investor speculates and hopes for a quick profit, he is trying to save some time. When I look at the markets now, I see valuations for some stocks that are approaching or are even lower than July 2005 and late December 2004, despite little changed outlook for the companies concerned. As such, I see an opportunity to ‘buy effectively 1-2 years of time’ if I were to buy at current prices. So who said you can’t buy time. Time, is the most precious commodity we can buy.
posted by Kenneth | 3:16 PM
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