Invest well and grow your wealth

31 January 2016

Dear Fellow Investor,

In the last month we have faced a storm on negative news as stock markets worldwide and crude oil plunged.

Volatility had reached levels not seen since the 2008 collapse. This is evidenced by the VIX index (Volatility index traded on the Chicago Mercantile Exchange).

Last week the markets turned. Foreign funds are returning to buy. Khazanah Investments are repatriating overseas funds to support the market.  Some of our local institutions are supporting the markets

Some banking shares that have been oversold and are at attractive levels, the RM Is strengthening which supports some of the importing companies.  The revised budget will release EPF funds to members which will be spent of consumer goods which could boost some consumer stocks.

How do we protect ourselves and prosper during these volatile and uncertain times?

First we must buy right.  We search for stocks that offer value and trade at low multiples to earnings.  They must have fortress balance sheets, an economic moat and honest and tested management.  They should also offer steady and rising dividends.

If you find something that fits these criteria, go and visit the company to get hands on feel of the company. If the managers own stakes in the company that is a good sign. It means they have  motivation to maximize profits.

If you have done your homework, you will have the confidence to hold through adversity.  Program your brain to think as a business owner rather than a shareholder.

Could things go wrong? Of course.  If the company has a rights issue you must be on guard as your shares may be diluted.  If they increase their leverage through bank loans or a bond issue that could be a warning sign.  If brokers start to recommend and the crowd jumps in your share may become overvalued- a crowded trade. Another risk  you must be mindful of is political risk.

An example of this is the new telco policy in Malaysia.  Bandwidth spectrums as announced in the revised budget will be auctioned to the highest bidder.  That could drive up costs which would affect revenues.   Competition in the Telco’s is tough as it is and margins will be further squeezed.  

I exited all our telco positions Friday and will wait for the dust to settle before allocating again.

For 2016 we should think small. By that I mean small and mid-cap companies.  These are companies usually under researched and off the radar screen of most investors.

Many of these companies meet all of the fundamental investment criteria I recommended but are less sensitive to political issues and do not have large staffs, layers of bureaucracy, high Capex and have lower overheads.  Many are owner operated businesses. Many have low debt to equity.

The KLSE has 2 small cap indexes. One is the FBMFL and the other is the FBMSC.  They have both outperformed the KLSE by wide margins in 2015.Do take a look at this space.

Invest well and grow your wealth,

Bill

 



Has the bear returned?

 

Does anyone know what animal they are?

 

My new book coming out soon!

 

23 Jan 2016

 

Dear Fellow Investor,

 

After losing in excess of  16 Trillion USD since the beginning of the year  many world markets have fallen into bear territory  as defined by a 20 % drop from their highs.

 

Most of the world economic leaders in  Davos, spoke in chorus that liquidity boosting with QE is the solution to market recovery. Draghi, the head of the European Central Bank as well as most government officials pledged more QE and liquidity boosts.

 

Only the US  did not join the chorus but chances are that they will as world growth slows and the US November election for the congress and the president takes place.  

 

Should US stocks and the economy collapse, Obama and his cronies  will be kicked out so Obama’s only hope is QE 4 or Trump and his friends will take over.   Trump may take over anyway as Obama’s economic, health care  Middle East and China  policies have failed miserably. Americans have become poorer under his leadership.

 

When Draghi spoke about increasing the size of his QE program, there was an immediate bullish response as stocks in virtually every world market including Malaysia, Hong Kong, Japan, China  and Singapore reversed and closed   sharply higher. Even crude oil rose 9 % .

 

I will continue to  focus on small/ mid cap shares that have  strong financials, a moat , and a market niche.  We will sell our remaining big caps if the markets continue to rally.

 

Going forward into 2016 our strategy will be to avoid the big caps which most fund managers participate in and look at less followed and promoted shares.

 

My new book Small is Big will detail this strategy with performance metrics and many examples.  Hopefully I will have this project wrapped up by mid March.

Invest well and grow your wealth, Bill

 

Right in the heart of Kuala Lumpur near the lake garden is the bird park. It is the world’s largest open air bird park.  It is a great place to relax your mind and spend the day.   

Why oil price must rise

17 Jan 2016


Dear Fellow Investors, 

 
The direction of the oil price is the number one topic of investors worldwide. The vast majority of speculators and analysts are bearish. 


Below is a link to an interview by Art Berman, a world famous geologist of 32 years and consultant to major oil companies with a different view. Topic is why oil price must rise.

http://www.zerohedge.com/news/2016-01-12/arthur-berman-why-price-oil-must-rise

The recipe to beat the bear

17 January 2016

 

Dear Fellow Investor,

 

We are facing a storm of negative news and events.  Since the beginning of the year world stock markets have lost over 5.2 Trillion USD in value.  

 

They include the oil price collapse, expected US interest rate rises, China Yuan devaluation, collapse of commodities, Middle East violence. Junk Bond collapse in the US especially the under capitalized smaller oil companies, mining companies and commodity producers.

 

Many household names have been hard hit including  Amazon, Google, Apple, Intel, GM, Wells Fargo Bank,  Wall Mart, etc.  

 

The bulk of the onslaught of mindless selling by machines has taken place in the US, Europe, Japan and China. Asian markets are also effected.

 

The catalyst for the asset market turmoil was the interest rate rise in the US on 16  December 2015 and tightening of liquidity which resulted in the slow down of credit growth.  

 

Since 1950, every recession in the US was precipitated by a drop in credit growth below 2 %- no exception. Today credit growth has slowed to 2.2 % but if inflation adjusted would be less than 2 %

 

The recipe to beat the bear :

 

How do we protect ourselves ?  Reduce exposure to large cap popular shares.
Avoid companies with high debt and high PEs.  Look for small to mid cap companies off the radar screen that consistently have shown increased sales and earnings, have a market niche and a management focused on increasing returns for shareholders.  

 

They must pay a dividend but retain at least of 30 % of their earnings for growth.

If executives hold shares in their company that is a plus.  Try to visit the company you are interested in to understand what they do.  That is what we do.

 

This is how we survived the 48 % drop of the KLSE in 2008-2009 and earned positive returns after the bull returned.  We did not sell or panic but waited for recovery using this strategy.   This is what investors such as Warren Buffet and Larry Fink CEO of Blackrock do. Fink manages over 1.2 trillion USD in his equity funds.

 

For 2016 there is a high probability of a positive year.  Since the inception of the KLSE there has never been 3 consecutive down years. 2014 and 2015 were down years so the odds favour 2016 will be up.

 

High probability of a positive year in 2016

Valuations have become attractive
Inflation low
Value cap likely to support market
No recession likely

The US election is in November 2016  and Obama controls the US Fed and Treasury. To keep his party in control and avoid recession   he is unlikely to raise interest rates and might even lower them and restart QE. All he has to do is pick up the phone as he is the Emperor. World equity markets will reverse

 

His main objective now is to stop Trump from winning and taking over.  If Trump takes over, Obama’s  party and his cronies  will go down in flames. 

 

Invest well and grow your wealth

Bill

 

 

Charlie Russell with his companion, a grizzly bear in Russia. Charlie has lived with bears for over 20 years and even written a book on bears. Contrary to what most think, bears are very intelligent, loyal and not as fierce as most think. As investors we need to learn understand the nature of bears and how to coexist with them as the bears have emerged in the markets . 

 

 

My greatest year end - relaxing & lighthearted vacation

10 Jan 2015


Dear Fellow Investor,

Dolly and I took a relaxing holiday to Taiping and Cameron Highlands over the Christmas and New Year holidays.

The benefits of traveling in Malaysia are low costs, no visas required, no long airport and immigration lines and expensive airport taxis. Also by driving there are no firm and rigid schedules and you have the freedom to travel at leisure.

Highlights include the eagle sanctuary at Port Weld, just a short drive from  Taiping. Port Weld is a bustling fishing village with of course fresh fish on the menu.

We also visited the Taiping zoo with a large collection of exotic animals and the Taiping museum to see the former King’s car, a massive Rolls Royce in mint condition.

In Cameron Highlands we visited the Rose Garden with many jungle flowers including  gigantic roses in full bloom.

Below are 3 photos from our trip: The baby elephant from the Taiping Zoo, The rose from the Rose Garden in Cameron and the King's Rolls Royce from the Taiping Museum.

 

Understanding to know money flow

10 Jan 2016

Dear Fellow Investor,

Our theme for 2016 is to realize that good companies can do well in a bad economy and we need to spend time looking for them.

It requires understanding and knowing trends of money flow. Another word – where are smart money investors allocating capital?

Do a scan every week of the KLSE sector indexes. Look for sectors breaking out from consolidation from a stage one.  Look for volume coming in.

Volume is the fuel of the market. Volume means participation. It is like gasoline in a car. Without gas, your car will not move.

Once you narrow in on a sector, look for individual stocks in that sector that are having 18 day line changes on volume. Your IVSA platform will identify immediately these shares.  Detail a trading plan with risk defined and hold until money flow dries up or your risk is hit.

In this way you do not need to worry about the oil price, interest rates, politics, price of gold etc.

To do this you need to tune out the media reports, broker recommendations  and crowd fears.  Just trade the price.

This objective method will put the odds in your favor and save you a lot of time.

If the shares you find are strong fundamentally and pay good dividends that makes it even better.

This is like treasure hunting with a gold metal detector.

Invest well and grow your wealth , Bill

PS: my new blog is www.asianequity.blogspot.my . I will post the newsletter on the blog plus articles on animals/ nature/travels  and hobbies which may interest you. This week I will post a photo of

Jonathin a 185 year old tortoise.  

 

 

Important to find a good fund manager

3 Jan 2016

Dear Fellow Investor,

This is the time of the year for market forecasts.  Most of them will turn out wrong.   They cater to the needs of the investment crowd to forecast the future without having to think or do the work to be successful.

When Warren Buffet bought Berkshire Hathaway for USD 19 a share in 1965,  he realized he had made a mistake buying a low margin  shirt making business but he was determined to turn it around. 

With his business skills he invested the profits into insurance, tobacco and a host of other profitable businesses.  Today each share is worth over USD 200,000.

Most investors spend most of their time thinking about what something is worth right now and over short time frames.

They ask things such as:  Can the share trade higher in the next month ? What is Bank Negara going to do with interest rates ? What about the ringgit exchange rate ? What about China ?  and so on.

All these are important questions but they are fundamentally unknowable. 

What is knowable or at least worth working on is the task of finding a manager who can successfully produce earnings growth and reinvest these earnings properly over long periods of time.  

This is what Warren Buffet did.

There is a metaphor which  this:  Assume you were on the committee of the Sistine Chapel with the task to paint the ceiling.  Would you focus on training various painters, what kind of paints to use, how many people to hire or would you go out and hire a Michelangelo ?

In the world of investments we need to find Michelangelos such as Warren Buffet, or Teh Hong Piow CEO of Public Bank.  Ride with them.

At least this puts the odds in our favour. Our investing business is all about the odds as the future by definition is unknowable. We focus on what works.

Right now crude oil is in contango. That means the price of Brent crude oil is trading higher for December 2016 future delivery at USD 46.50 while the spot price in Jan 2016 today is  at USD 37.03.

This is  a normal market which reflects all the costs involved in storing the commodity . It means commercial traders who are the smartest and most profitable traders on the planet believe crude oil has limited downside at the moment. 

They have the best sources of information as they actually deal in the product. Commercials include Exxon, Petronas etc.

Bottom line: probability favors oil  price stability at the current level with limited downside.  This also supports the Ringgit .

For 2016, we must focus on good managers with proven track records in industries which benefit from unfolding economic trends.  We must be mindful of macro trends and be willing to ride with them.

Based on world growth trends, the developed markets are slowing while Asia still shows positive growth. 

 

 

Above is a chart from the Economist which shows this trend of world market growth..  

This supports our Asian equity investments including Hong Kong, Singapore and Malaysia.

It is also a contrarian view as most world fund managers managing billions of dollars believe we should invest in developed markets such as Japan, US and Europe.  There is an investment bias against Asia but the growth facts speak otherwise.  Over time growth drives earnings and earnings drive share prices.

Invest well and grow your wealth,

Bill