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?