Wednesday, 4 May 2016

Book Review : $how Me the MONEY (Book 3) - Teh Hooi Ling

Recently, I finished reading Teh Hooi Ling’s $how Me the MONEY (Book 3) - Fighting Paralysis in a Market Meltdown and other curious facts.

Below is a summary of extracts from the book more related to the stock market.  There are also sections related to the macro global landscape, which I have not reviewed here. 

Hope the points laid down are useful for the readers. 

About the Author

Teh Hooi Ling is an ex-SPH scholar and journalist for 22 years with Business Times, before she joined Aggregate Asset Management as a partner in 2013. Just recently, she was appointed the president of Association of Women for Action and Research's (AWARE).

During her time as a journalist, she ran investment column Show Me the Money in 2002 for 12 years which became very popular. This book contains articles written during the Global Financial Crisis (GFC). Teh named the book “Fighting Paralysis in a Market Meltdown”, for GMO Jeremy Grantham’s commentary Reinvesting When Terrified, published near the bottom of the market in March in 2009, left a deep impression on her.
  
The Importance of Market Timing

November : Record of positive Nov followed by positive Dec is 100% for the last 29 years for STI since 1985.
January : Positive if December is positive is 88% in last >20 years
May: Sell in May? Not too bad a call. Makes money 64% in last >20 years (1985-2007)
August : Since 1985, 14 out of 23 were down.

The benefits of buying on the dips

AFC recover faster than GFC. This shows that the impact of USA is great. 1998 (STI 800) 2009 Mar (STI 1456). Still on both occasions, stocks rise later.

Do not underestimate a downturn

But nobody can guarantee economic slowdown will not turn out to be Great Depression or WWII or 1870s.

Recession can be the best time to start a business

Many great companies founded during recession. HP, Disney, Microsoft, Oracle, Cisco etc. Singapore : Sakae Sushi in Sep 1997

Most important is not to lose hope even when you are retrenched. Maybe can start business. Best time to start a business is actually during a crisis.

Cash is still King

Be patient and there is always time to deploy cash.

Bull vs Bear Market

Bear
Bear not necessary V bottom capitulation. Most bear final month fall is 10% then followed by relatively modest move off bottom. Smaller “v”
Bear rallies normally bigger V
Bear market bottom is accompanied by a healthy increase in volume

Bull
Tend to be explosive during 1st couple of weeks.  Significant increase corresponds to increase in volume. E.g. STI in Jul 2007 trading volume is 2.4x average of previous 9 months.

Crisis

2007, STI at 3800 but in 2009 Mar , STI at 1500. A decrease of 60%.

STI,
2001 dot com : PB ~ 1.25
2003 SARS     : PB ~ 1.16
2009 GFC       : PB ~ 0.9

The most times the word recession appears in newspaper, the higher the stock market return in 12 months later.

Never forecast the market

Buy when price below net worth of company and sell when price significantly higher. Have anchor of buy and sell. Do not be affected by emotions.

Cut loss Vs New Capital Injection (or Average down) Philosophy 

From an article contributed by a young financial planner:

"If stock loses 80% of value, they have to climb 400% to get to where they use to be at.  Almost impossible to recover. Better to cut loss at 20-30% mark."

THL:

Market turned during darkest moments. 
But if invest during peak. E.g. in 2007, and do nothing, by 2015, you still sit with 58% loss.
So THL countered and use a table to illustrate that if equal amount of new capital was injected into the assets at significantly lower market price, the climb back to initial capital is actually less arduous and not totally impossible. 

Using her table and average down strategy (which I did not present here), E.g if a stock has fallen 80%, the stock will actually only need to rebound by 67% to recoup losses. And if 90% loss initially, only need 82% rise to recoup initial capital. And if market recovers 100%, may even sit with profits. 

To invest or Not  

It pays to stay invested. Never cut losses in good stocks during crisis. Stay invested in fundamentally sound company. 

Despite the numerous market worries in the last few years, asset prices have continued to move up and those who were invested have been rewarded.

Better to sell early than late during a bubble

Sensible value investor will always sell too early in a bubble and buy too early during busts. But no problem and do not worry. In return, you can lower average risk exposure and also make important extra money on a round trip.

Risk management

In any investing or trading, risk management is the key. Never ever overexpose yourself. “Market can remain irrational longer than you can remain solvent!”

The more STI falls, the lower the probability it will continue to go down and the probability of rebound increases. The reverse is true.

Time the market using Equity risk premium

Equity risk premium = inverse PE – (1 yr interbank lend rate)

Eg PE = 15, lend  rate = 1%, then ERP 15 = 1/15 – (0.01) = 5.67%
If PE = 10, ERP = 9%
If PE = 20, ERP = 4%

The higher the ERP, the better!
Do note that interbank lend rate is at historical low never seen before, hence ERP has to be higher to justify our purchase.

Example of timing the market using ERP :
0-5% - S$100% cash
2-3% - S$100 pm
3-4% - S$200 pm
4-6% - S$400 pm
6-9% - S$800 pm

If you time the market using the ERP method, it is compounding at 11.2% since 1992 to 2010 compared to dollar cost averaging of 6.3% p.a.

Who to trust – sell or buy side analyst

Normally sell analyst more correct!

In my view, the analyst’s work is a lot of guesswork. The situation is quite comical. Analysts forecast x earnings. Actual earnings came in below expectation. Analysts downgrade earnings forecast. I now read analyst reports more for amusement than insight” – Teh HL.

Acquisitions during upturn?

Most investor or companies make acquisition during upturn. This is wrong.

Rights issues need Right Timing

During Bear period, stock price usually plunge after RI.
During Bull period, stock price usually surge.

If you believe a company has good fundamentals that will get through the current crisis, that the cash it collects through the RI will give it more currency to pick up prized assets down the trail, it make sense to subscribe the rights.

However Temasek linked companies will have more RI because they have more cash. Subscribing to the RI, and thereafter normally the stock price will increase after the crisis.

Small S Chips

Good profit margin in China will not last for small company. This is because once margin is good, it will attract competition as new entrants barriers to entry is usually low. Therefore Buy and Hold small Chinese company is not a good strategy!

Spotting red flags / frauds

3 conditions
1. Pressure or incentive to commit fraud
2. Rationalization on the part of fraudster that they are doing good for the shareholders or that they deserve what they are asking.
3. Opportunities to commit fraud

Common fraud traits
Asset inflation via account receivables and inventories
History repeat itself – Ponzi and Madoff
Operation cashflow out of line with reported earnings, deferral of expenses, and classification of expenses or losses.

Be careful
Read footnotes on accounting policies examining disclosure of balance sheet
Evaluate negative side more than the positive side. Is it good to be true?

Note that the objective of auditor is not fraud detection.


During past downturns

Using 18 STI companies, between 1997 and 2008, earning declines occurred through 2 years. And earnings decline take place via extensive period of time and not just over 1 or 2 quarters.                        
Peak to trough is 25%.                                                        

Different sectors
Utilities and healthcare sectors earnings always rise during recession
Consumer staples earnings fell only once.
Cyclical sectors have borne the burnt of declines.
Commodity sectors particularly weak
Energy decline 30% and material decline 35%

The impact of Earth Quakes

The negative impact on stock prices from the quake does not last more than 10 days. More like a kneejerk reaction!

Advice to have a mixture of everything

“To have some cash, have some debts, have some investment in stocks, some in property, some in commodities and most of all keep your core income intact!

If you have in 2010,
100k cash in the bank, 600k loan for a 1.2mio property, 200k in SG stocks and 50k in gold,

By 2015, it will be appreciated by 25%.

Rolf's Thoughts

This is undoubtedly an excellent book reviewing the GFC from a local Singaporean perspective. It prepares us for the next crisis to come. Very suitable for mainstream Singaporeans. The book is easy to read and concepts are easy to comprehend, a typical Singaporean style of direct and to the point. 

I also think that the macro and micro views from the author will give readers a more complete picture about investment and not just seeing stocks from bottom up. 

Thumbs up for a rare female investment guru. 

If any downside I were to pinpoint is probably the "lighter stance" from the author seemingly stem from journalist trait that articles written tend to lean towards lightly opinionated and somewhat regulated manner. After all, we have to remember that the most of the work are actually from local newspapers.  

I personally prefer authors who are slightly more critical and opinionated with unorthodox intriguing styles of writing. Yes...not so mainstream lar! 








7 comments:

  1. Rolf,

    1. I don't know whether it's your typo or THL's.
    Under "Cut losses", if our stock loses half its value, we need a 2 bagger return just to breakeven. See? I'm only writing in English instead of % ;)


    2. Again under "Cut losses", we say it's better to cut when we hit our 20-30% loss point.

    But under "To Invest or Not", we say never cut losses in good stocks during a crisis!?

    Not even when we hit our 20-30% cry uncle point?

    A bit spear/shield don't you think?

    LOL!

    ReplyDelete
    Replies

    1. Hi Jared,

      You are absolutely right. It was my typo and reading errors. I apologised for my mistakes. As I read the book, I actually jot down notes with my illegible handwriting. Furthermore the book was read during my ICT period.

      So typo = 80% and not 50% that I mistyped.

      And for the contradiction of "cut loss" THL actually highlighted that an average down strategy can also work.

      See updated corrected wordings in blue.

      Thanks for pointing out. It is very helpful. :-)

      Delete
    2. Rolf,

      Averaging down strategy in the wrong hands of amateurs, combined with bad luck, well good luck!

      I rather not get myself into situation where I am down by -80% ;)

      Delete
    3. Well, everyone got to learn through the hard way. :-)

      Delete
  2. Hi Rolf,

    Great summary and highlights, haven't got the chance to read the Book 2 and 3 yet.. will try to get hold of them and read one of these day.

    Cheers!

    ReplyDelete
    Replies
    1. Hi Richard,

      Hope you enjoy reading once you get hold of them.

      Delete
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