Greece

The Greeks will go to the polls on Sunday to decide for themselves if they wish to remain in the Eurozone and in order to do so, they have to accept the terms that the "troika" offered. Opinions are split and personally I feel if austerity works, it would have worked years ago. There is no point in proposing more austerity measures knowing well that Greece has an impossible task to repay their debts. Its equivalent to a creditor loaning more of their money to you while you are still in debt yet the creditor EXPECTS to be paid back somehow someday. Refusing to accept their money is futile as they INSIST that this is the only way out (and more austerity measures). I guess this is seriously flawed in a way as a country technically will never run out of money and the worse case scenario would be for Greece to print the drachma which they have been using before joining the Euro. Greece can also "sell"/"loan" their country's assets and use them as collateral in any negotiations.

The media can be used to instil fear in investors as daily headlines would always be something like:

As investors ourselves, we should always learn to ignore the short-term market noise and remain convicted to our portfolios. It is always through panic that the most profits can be made if one is calm and collected. Balls of steel sometimes might help too.

Back to Greece -

Exiting the euro wouldn't be a big deal as how many people portray it to be as Greece's GDP accounts only 3% for the whole of Europe. Reverting back to the drachma would be a short-term pain but long-term gain for Greece as this would enable them to get out of this misery since it started in
2011. Austerity has failed and major change is needed however the uncertainty of exiting the euro can be too much for the Greeks to take. The Syriza government have also failed to impress their creditors with their amateurish negotiation skills and regardless the outcome of Sunday's referendum, I wouldn't expect them to stay in power for much longer. Exiting the euro will cause chaos is utter nonsense, just look at how Poland, Denmark and even Turkey are faring now - none of them are deemed as insolvent nor in a recession. Greece will do just fine with their devalued drachma for a start.

To conclude, I feel the biggest loser would be Germany regardless the outcome and if "Grexit" really were to happen, the euro will be higher than where it was  hence Germany's exports will be deemed as more expensive and we all know what that does to export driven countries when their goods become more expensive. Germany and probably the rest of Europe would of course prefer Greece to remain so that the risk of "hyperinflation" is low.

Random

We know that the world has changed drastically to where it is today and will continue to do so in future. What kind of investment ideas can we generate and profit from then?

Population growth will increase at a rate not seen before - The United Nations forecast that by 2050, the global population will reach 9.6bn from the current 7bn now. (that's a lot of sexual tension going on!). When global population grows, food consumption will increase and hence we might face a serious shortage of food and water. In fact, I read an article by Jim Rogers recently claiming that he is bullish on agriculture in the long term and he mentioned that the best job to be in by then, would be a farmer! Basically its a demand supply theory as typically nobody wants to farm now as we do not see an immediate need nor the financial reward to do so. We all want to be bankers/lawyers/doctors - jobs that gives us more financial support. How many people that we know of are actually growing crops and profiting from it now? None I would say and hence this creates a supply demand imbalance and it will play out in the long run when the world needs more food and water. Pretty interesting I would say - to consider farming as a career. A solution to this could be the use of more sophisticated  technology to increase productivity whereby we could do "double or triple cropping" which some parts of China and India are currently practicing.

Clean renewable energy will be the key energy source - this is not new as we are already exploring solar/wind/water whatever elements that can be harnessed will be converted to energy. In fact, I like the Tesla idea of a battery to supply the energy needed in our everyday lives. We might not be sure of how this will play out but recent developments have so far been positive and we are a step closer to reducing our reliance on crude oil and coal. With China and the United States starting to look into cleaner energy sources, OPEC and crude oil could soon be a thing of the past.

Artificial Intelligence - the rise of the machines to facilitate and aid in our daily lives could soon be a norm in the future. Companies that are dealing with AI could soon experience a boom in their products/technology/sector as machines have proved to be more reliable and could outperform humans both physically and intellectually. Low skilled workers could soon be replaced with robots and many will be left unemployed creating social unrest. As scary as that sounds, it could soon be a reality within the next 5-10 years.

The rise of Africa - Africa remains the world's largest untapped market and it is still in its infancy phase of urbanization. Infrastructure, energy, food and water as well as education are lacking in this continent. With its large land area and an abundance of natural resources, Africa has no reason not to grow as rapidly as China or India. What it lacks is stability to lure foreign investments into their continent. As volatile as it may seem, I am keeping a close watch on major developments in this continent as a whole to look for new investment ideas. Just take a look at how the BRICS have done over the past decade and Africa could be the last emerging market that we have missed.

Recap - Irrational Exuberance - 25th April 2015

Remember this chart a few weeks ago?  http://myalphafund.blogspot.sg/2015/04/irrational-exuberance.html

Here's what is looks like today: a 7.5% fall from its peak...it might be a pullback but if the Shanghai Composite falls further, a bear is near........

An Analogy of Gaming and Investing

We have all played computer games during our free time, every single one of us. The end objective is always the same with gaming - to clear stages and win as an individual/team. I would like to draw an analogy on how investing can be similar to playing a game. No disrespect to the market here but its more for an illustration purpose.

When we embark on a new game, normally your game character/avatar (or whatever you call it) will be just stark naked and without any real "power"/"skill". The same can be said for investing whereby as a novice, you often feel "lost" and lacking in technical/fundamental analysis (that's a skill).

As the game progresses, you will gain experience and level up to boost points to your character's stats. Games now are also MMORPG with players from across the globe and all games have their own "landscape". In the investing world, the "game" is played regardless of language, race, gender, religion or nationality. Your "landscape" is limitless where you can trade in any markets across the globe that has an exchange. As you gain more experience in your investing journey, you'll feel more accomplished and often add new set of skills to your "arsenal".

Games have clans - last I goggled, it means "a group of people with strong common interest". Clans are often powerful as they rule by the law of numbers. If your clan has a "good reputation", you will gain items that are deemed as rare/unique and your clan is your family in the gaming world, often helping you clear objectives and protecting you from other clans.

The term we use for "clans" in the investing world can be your hedge funds, asset management firms, private equity firms - the larger/reputable the firm, the ease of information and more sophisticated tools are used to find good companies to invest in. Of course, the so called better "clans" are your Goldman Sachs, JP Morgan and Morgan Stanley while good private equity firms would be your Blackstone Group, KKR and Carlyle Group. *Enough said about what they can do to global financial markets.

You can also choose which "class"/"type" of character you like to play the game with. Your "classes"/"type" will have different advantages/disadvantages in the game. With investing, we can choose different ways to do it - dividend investing, trading, value investing or growth investing. The different approaches taken by the investor will yield different results and not everyone will be interested in a specific approach. Some like to mix it up a little while others are purely following a strict strategy that yields them returns. Each and everyone of us possesses a different level of risk adversity and no matter what, as long as profits are made - everyone is happy.

All/Most games have an ending/last stage or whatnot whereby you're judged on how well you cleared the stage or how "decked out" your character is. People playing the same game as you will most likely be envious and respect you - some to the point of worshipping.

The difference in the investing world is that - you do not have an end game. We invest for as long as possible, to generate income passively/actively as much as possible. Every decision made will have an impact on how your returns/losses snowballs. There are no fixed rules to "play" this game and anyone can just walk out of it and never to return - (those who got badly scarred by the 2008 GFC).


However, more people are joining this "game" NOW. We are in a secular bull market for close to 6 years now and although this "game" does not state when it will "hang" due to server maintenance, we should be nimble and watch for signs of a change in trend/sentiment. Stay safe and remember to "save your game" (by taking profits)

How Disciplined are you?

Just read an article on how the most successful and profitable people maintain a strict daily routine. That's the reason why algorithms are doing most of the trading now and more beta funds are entering the market. Leaving the trading to the machines seems profitable as they are unaffected by emotions and are rational in their decision making - they are run based on binary codes 0 and 1 and nothing is vague or left to chance. This can also be seen as a form of discipline I guess.

Back to reality where most of us are just humans - basic fear and greed or herd mentality usually takes precedence. How often did you try to buy a stock and tried to catch its bottom? When it's selling at say $1, we queue at $0.995 or even $0.99 just to save that few dollars. Or when it's time to take profit at $1, we tried to sell at $1.05 or $1.10. We all have that same exact experience before and this is extremely common since humans are greedy by nature and are always looking out for the best deal around - be it the Great Singapore Sale or the IT Fair. Of course, we can never time the market and those who proclaim that they can, are delusional and lucky at best.

Discipline

Having a disciplined investment strategy differentiates the professional from the do-it-yourself investor. An investment strategy does not have to be complicated. If you were to sum up Warren Buffett's investing strategy it might be to "buy good businesses at a fair price with the intention of holding them forever." An investment strategy helps provide focus and ensures emotions are held in check when making decisions.

It is like a gym routine whereby you basically train the same body part week in week out. Biceps/Triceps on Mondays, Chest on Wednesdays etc...and for those who do gym regularly, you will realise that you are actually building muscle mass. The same can be said for investing/trading - find a successful strategy and implement it, week in week out and soon enough, instead of your muscle mass growing, your bank account/portfolio grows! It is not magic nor by chance, it is discipline. Let's see how long term discipline investing works in the chart below:

Growth of $1 since 1970 - 2013

Investors are often their own worst enemy as the human brain will start to take over and make irrational decisions - sometimes for the better but many a times, its for the worse.

These are some findings which I found online and I have extracted them as follows:


Anchoring is a bias that causes investors to either hold onto an idea longer than they should, place a disproportionate amount of value on the piece on information they receive, or anchor their perception of value to a specific price point. The inability to fully incorporate new information causes investors to hold onto poor investments longer than they should.

Availability Bias is a mental shortcut in which investors use readily available information and media to make investment decisions, rather than a disciplined research process.

 

Familiarity Bias reflects an investor’s tendency to invest in the known. Investors may perceive investments they are knowledgeable about as either less risky or more rewarding, and oftentimes both. Typically the tendency manifests itself in investors concentrating their holdings in their own country (a home country bias) or in the stock of their employer.

 

Herd-Like Behavior reflects the tendency of investors to follow the crowd by chasing the latest investment fad. Driven by greed and fear of missing out, individual investors project past returns into the future and pile in together. The behavior results in investors consistently buying into the most highly valued segments of the market, leading to sub-par results. Herding can also lead to selling at the most inopportune times, making investors their own worst enemy.

 

Hindsight Bias occurs when events that have occurred in the past look predictable and obvious from the present.  Hindsight bias leads investors to overestimate their ability to discern the likelihood of events occurring in the future, causing overconfidence.

 

An Inability to Control Emotions is common. Most individual investors are easily controlled by two emotions:  fear and greed. While everyone would like to “buy low and sell high," very often investors, even very intelligent and well-educated investors, do the exact opposite. They, in effect, “buy high and sell low.” Investors would be wise to heed Warren Buffett’s advice to “be fearful when others are greedy and greedy when others are fearful.” Unfortunately, most investors tend to be fearful at the moment of greatest opportunity and greedy at the time of greatest risk.

 

Loss-Aversion is an investor’s reluctance to realize a loss. Investors who exhibit loss aversion hold onto losing investments in the hope that they will recover. They may even engage in risk-seeking behavior by “doubling down” on a poor investment in hope of recovering losses faster.

Overconfidence is a cognitive bias that causes investors to err in a number of ways, usually with financially damaging results.  Overconfident investors are frequently over-concentrated in a specific asset class, sector, or stock. They often disregard the risk and seek out confirming evidence while ignoring any contradicting evidence. More times than not, this increased risk taking is punished with losses. Overconfidence can also lead to increased trading which may result in excessive taxes and fees.

 

Recency/Vividness Bias reflects a tendency to focus on events that are most recent or easiest to recall because they left a psychological impact.  In investing, the event is typically a recent market correction or recent run-up.  Since the events are recent or vivid, the tendency is for investors to overestimate the likelihood of the event occurring again and position the portfolio either too conservatively or too aggressively.

 

A Status-Quo Bias is inertia, or a lack of decision making. In many cases, this is because investors seek to minimize their regret. By maintaining the status quo, they avoid the mental anguish associated with realizing an adverse outcome after making a decision. For example, a regrettable event would be a market rally after selling out of equities or market correction after investing in equities. Unfortunately, this bias can result in investors maintaining the status quo with investment portfolios that are not suited to meet their goals and objectives.

Conclusion

I have always maintained the view that although the smart people do get a head start in life and their career but the "normal" folks can always make it up by hard work and discipline. The smart people can get an A by studying for 1 hour but most people need to spend at least 3 hours to score an A. The end result is the same but the question is - how willing are you to work hard for it?

"with great discipline, comes great returns"!

Irrational Exuberance

I guess the chart says it all for the Shanghai Composite. Definitely not the time to enter now but rather take profits or prepared to short it once the candles turn bearish.

 

Watch this space...

 

 

Small is Good

Why do people tend to invest in  blue chip companies with huge market capitalization? The reasons might vary - because it is stable? Gives out good dividends? Not as volatile? Too big to fail? Government backed?

Blue Chips

Blue chips, like in poker and other card games, are the most expensive chips. Similarly, blue chip stocks are worth the most and come from larger companies.Blue chip stocks are the most valuable stocks on Wall Street and are usually from companies that are household names, such as AT&T, McDonald's, and Starbucks and tend to be large or mid-cap stocks. Blue chips have a long operating history, steady earnings, and a good reputation. They also have high liquidity, or the ability to trade large amounts of a stock without any problems. Blue chips are considered safe bets, especially if the market is falling. However, some blue chips do not always perform well.


I feel that blue chips are suitable for investors who are planning for retirement/retired or very risk adverse group of people who cannot stand to see volatile and wild swings in their portfolios. Blue chips in today's market are relatively fully or over priced and hence there is no need to even buy into any of them now. They are the best to invest once a bear market comes into play and panicky investors/fund houses are selling them off.

Small Cap Stocks

Personally I do like to pick small cap companies over larger ones as they are in the midst of creating a piece of history and are in the infant stage of their business. Most of these companies are volatile, does not pay a dividend, has low liquidity and earnings are sporadic. However they offer more upside potential than the blue chip companies. These sort of companies are not for the faint hearted and you have to be prepared to lose most/all of your invested capital in the worst case scenario/black swan event.

 

Advantages of Investing in Small Cap Stocks



Over the past 80 years, small cap stocks have outperformed larger cap stocks and this trend looks set to continue as the growth rates of smaller cap companies tend to develop at a much faster rate.

 

 

Huge growth potential - Big corporations like Wal-Mart, Microsoft, Apple Inc, Home Depot, P&G were once small cap companies too. I prefer to uncover diamonds in the rough and see them being polished - foresight is needed and crucial to uncovering the next Microsoft which possesses such potential. The difference in growth is that you're unlikely to see a large cap company with a market cap of $10bn doubling to $20bn within a few years but a company with a $500m market cap to double to $1bn seems possible if the circumstances are right and with prudent management teams in place.

 

Mutual Funds do not invest in them - Mutual funds are not allowed to invest in small cap companies as mutual funds have larger fund sizes to invest hence investing a $50m stake could potentially end up with them buying 20% of the company. This causes imbalance in the markets and increases market manipulation. Therefore as a retail investor, not having mutual funds invested in them could be a blessing in disguise.

 

Lack of Analyst Coverage - Fund houses or banks have analysts to cover large cap companies but smaller cap companies are often neglected as they are deemed as volatile and often unprofitable. However I feel this creates an opportunity as the most undervalued and neglected stocks with high profit margins are often overlooked just because they are smaller in size. (size matters apparently to the big boys). You can buy them at discounts and when your smaller cap stocks grow big enough to garner the attention of the big boys, you'll be laughing all the way to the bank. In investing, it doesn't matter where you start, its the end that matters. Some friends I've spoken to had scoffed at my idea of wanting to buy/watchlist/read up on smaller cap companies but on hindsight now, who's having the last laugh - bitches!

  

 

Risks

As always, I will end with the risks involved as some might be thinking about just going into any smaller cap stocks and buying them like candy. They are cheap for a reason and often riskier than blue chips simply because they require lesser volume to move prices. Those with smaller floats tend to fluctuate 3%-5% in a single day. Unless you can stomach the volatility, you are better off putting your money somewhere else and always risk what you can afford to lose in small cap investing. I wouldn't bet my farm on a single or multiple small cap companies right? At the end of the day, we got to be rational and understand the downside risk in the event of something unexpected. Total annihilation can occur in small cap investing.

 

The issue of finding these type of small cap companies with a compelling growth story is hard work - be prepared to read, research and question irregularities. If you are thinking that it'll be a walk in the park, it isn't. To even find one that is even worth looking at, I have spent and read and dumped more than a few hundred stocks that were really crap. But when you do see one, you know its the one - like how you guys met your wife/girl friend/gay buddy or whatever man. Bottom-line is, hard work is required but the rewards are often very appealing and it can be an addiction to find diamonds in the rough.