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
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