Sunday, April 26, 2009

Start Buying Now. Seriously. Part II

Let’s look back at the Asian Crisis. The Asian Crisis bottomed in the year 1998 for Singapore. Which month was the bottom?

Before I tell you the answer, let me ask you another question. If I gave you the chance to buy at any point in 1998, would you?

You would, and you should, because no matter which month you bought in 1998, you would have made from +60% to +200% by the end of 1999, the year of recovery.

Let me give you another example. The economic slowdown associated with the bursting of the tech bubble, Iraq war and SARS bottomed in 2004. If I gave you the opportunity to buy at any point in time in 2004, would you? Of course you would, because you would have made up to +200% over the next three years to end 2007.

This is my point about investor psychology. When you look back in time, the difference of a few months means very little. But when you are living in and experiencing a recession or a financial crisis at the moment, the feeling is very different. Day-in, day-out, you are bombarded by the doom and gloom, and even one month of seeing the market go down feels like an eternity.

It’s like a kid who hates school. Six weeks of school could feel like six months, and six weeks of holidays feels like six days to him. It’s actually the same amount of time, it just feels different.

Now we are in an economic crisis. I don’t know when the exact month of the bottom is. For all we know, it could be over, in early March 09, or it could be ahead of us.

If you have the money to invest over the next few years, it comes down to this question: do you think the economy and the markets will recover? Your answer should be yes, because they always do. It’s no magic that they always do, it’s just that human beings want economic growth, and work very hard to attain it. Any kind of problems that crop up are dealt with in time so that we can increase our consumption and improve our way of life.

Already we are seeing some signs of economic improvements. This crisis started in the housing market in the U.S., and the latest numbers show an unexpected increase in housing starts and existing home sales. The banks, who were amongst the worst hit, are also variously reporting that they will make profits in 2009.

On 23 March 2009, various key markets around the world jumped 6 to 7 percent, including Japan, Hong Kong, Singapore and the U.S., reflecting some of these improvements in economic numbers.

Where is the absolute bottom? Did we miss it? Now that we are past the lows in March, and markets have jumped significantly, will you refuse to buy and wait for the same lows in March to come back again? What if it doesn’t come back?

You have to realise that it is a fool’s game to try to look for the absolute bottom.

There’s no way to catch it, and there’s no way to be faster than the market when the turn comes. The only way is to buy when valuations are low enough, and then hold till the recovery comes.

Some years down the road, when you look back at late 2008 or the whole of the year 2009, it’s going to be a blur to you which month it was that the market actually bottomed and turned.

You are going to wish that you have invested around this time.

Tuesday, April 21, 2009

Start Buying Now. Seriously.

Start buying equities now. I have.

So have investment legends like Warren Buffett, who bought in October, John Bogle, who said in this month that equity markets are too low and Bill Miller, who recently said that he sees great value in equities. (I am nowhere near an investment legend, but I am following their lead).

This is opposed to the doomsayers who say that the worst is yet to come. These doomsayers are … who are they again?

It’s interesting for me that there are always “investment experts” who criticise Warren Buffett. They say he was irrelevant to the new economy in 1999, when he refused to buy technology shares. They say he didn’t understand the situation when he said that financial derivatives were “financial weapons of mass destruction” back in 2002. And now they say that he is simply trying to talk up his own investments, when he said recently to “Buy America”. These things they say of the world’s most successful investor, the world’s richest man. Nobody remembers these “they”, but Warren Buffet continues to make loads of money from his investments.

Let’s look at the reasons why “they” say things will get worse.

“This time it’s different”

You’ve heard this one. “They” say this time it’s different because it’s an unprecedented global economic slowdown not seen since the Great Depression. To this I have two responses:

  1. It’s always different. If it wasn’t different, no one would panic, and no one would sell their shares, and stock markets wouldn’t fall. For example, if a plane slams into a major building somewhere tomorrow, (it would be a tragedy, but) world stock markets would not crash the way it did in the aftermath of September 11th. The Asian financial crisis, tech bubble bursting, Iraq and Afghanistan wars, SARS, sub-prime crisis, they were all different.
  1. It’s never different. What doesn’t change is that the human race has always been able to find solutions to these problems and emerge stronger. This is a unique trait that human beings have. If we did not have this trait, we wouldn’t have evolved as a species. This is one of the reasons world stock markets grow over the long term; we always grow and thrive as a species, and we always find solutions to problems.

“We don’t have clear signs yet that a recovery is in sight”

This is what many analysts say. Again, I have two responses:

  1. If we had clear signs, the stock markets would have gone up a lot, and you would have missed the opportunity to make inordinate profits. Stock markets always anticipate economic recoveries. By the time the analysts are able to report clear signs, we would be more than halfway to the top.
  1. We do have some clear signs of action. We know that these actions are being taken.
    1. Monetary policy actions: We have seen governments across the globe cut interest rates and increase money supply. In recent weeks, we have announcements coming out of the U.S., the E.U., the U.K, Australia, China, Korea and others. These are extremely expansionary.
    1. Fiscal policy actions: More and more governments are injecting billions into their economies. Usually they will do this by funding infrastructure projects, reducing taxes, and so on. This will increase overall demand and stimulate the economy.

In a short time, the global economy will feel the effects of these actions. So yes, we do have a recession. But a lot of smart people at governments all over the world are working frantically to address it.

The fiscal policy actions are easy to understand, but if you always wondered why interest rates have such a big impact, the reason is this: private companies always have expansion plans. They may be reluctant to borrow funds to expand if borrowing costs are high. They will be particularly cautious in a recessionary environment. But when rates decline, many will start borrowing, start hiring and start expanding.

“The recession will extend for another 3 quarters”

This seems to be the consensus economic forecasts. But let’s say this is true. Three quarters means the last quarter of 08 and the first two quarters of 09. Let’s budget another quarter and say it goes on till the end of 3Q 09.

I don’t want to forecast when the economy or the stock markets will recover. But I can say this: the stock markets always recover before the economy does.

So if stock investors all thought that the global economy would recover by end of 3Q 09, they would …

“I wish I had bought …”

If you are old enough, I bet that you have said this phrase “I wish I had bought equities” during any of the points below. We are now at point no. 7, and the Malaysia market is trading at a very low PE.

I am bullish on Malaysia because:

  1. The population is growing. This means that the domestic economy will be growing.
  1. Top blue-chips have successfully regionalised. Sime Darby, Genting, Gamuda, Public Bank, YTL Corporation, these are no longer just local companies. They have tremendous presence in the region and the world.

Do not regret again and say “I wished I had bought …”


Has the market reached a bottom? I feel strongly that either:

  1. We have passed it. October could have been the bottom.
  2. We are very near it. A lot of the bad news has been priced in. Given the very low valuations now, there’s not much downside, which makes the upside over the next two years very interesting.

Do not “punt”. Make sure you invest with money you can set aside for at least three years. This is because:

  1. You don’t want to be caught having to sell at the wrong time.
  2. You need time for the markets to realise its full recovery potential.

This is the time to invest profitably. Seriously.