Why should investors get out of the stock market?

 

3 influential factors that can make or break your stock market investment

My sole intention for writing this piece is to prevent investors from losing more money in the stock market.

Allow me to tell you briefly my back ground so that you can accept my advice to ask you to cash out from the stock market.

Dato Yap Lim Sen, my collegemate and I were the original founders of Mudajaya, Gamuda, IJM, IGB, Rubberex, MBM Resources, major controlling shareholder of Perodua Cars.

I have been investing in the stock market for more than 50 years. This is the first time I have practically sold all my stocks holdings and cashed out.

When you buy a stock, you hope to gain from share price increase and also dividend yield. In Malaysia all listed companies give out very small dividend. On record, Public Bank gives out the best dividend yield of about 5% per year. So, unless the stock price goes up, investors cannot make money.

What pushes the share up?

Among all the stock selection criteria such as account balance sheet, cash flow, NTA, no debt or cash rich etc, profit growth prospect is the most powerful catalyst to push up share price. Never buy any stock that has no profit growth prospect.

Why investors must believe in price chart?

Price chart cannot lie because it is a record of the daily trading. Down trend means there are more sellers than buyers in most days. Never buy a down trending stock.

A stock price can only go up if the company has reported increased profit. But if it reports reduced profit, its share price would drop because there would be more smart sellers than stupid buyers.

In the last 6 months, almost all the listed share prices have been dropping as shown on the KLCI Chart below. Why?

 

There are 2 main reasons for the listed companies’ share prices to drop.

1 Covid 19 pandemic

Covid 19 pandemic frequent lockdown restricts people’s movement and all listed companies’ business operation. Workers cannot go to work and business activities are reduced. As a result, almost all listed companies cannot report increased profit in the next few quarters until Covid 19 pandemic is fully under control. Many medical experts predicted that the pandemic will not be under control for at least 1 or more years. That simply means our stock market will be depressed for at least 1 or more years. The above KLCI chart shows that it has been dropping for the last 6 months and it will continue to drop for another 1 or more years.

2 Political Uncertainty

Investors do not like political uncertainty. In the last general election about 2 years ago, Pakatan Harapan won the right to form the Government and Dr Mahathir became the Prime Minister. Within a couple of months, he resigned suddenly and Muhyiddin became the PM by the back door. Currently he is seriously terminally ill with cancer in KL Hospital. Apparently, he has pancreatic cancer.

Who will be the next PM?

As you know, Politicians make rules and regulations which often affect business operation and their balance sheets which is creating more difficulties in making investment decisions.

That is why many investors especially foreign institutional investors are constant net sellers and some of them have already left the stock market. 

Yesterday I posted my article namely “A safe strategy during the pandemic” in which I said the Covid 19 pandemic lockdown is affecting everybody’s movement. Workers cannot to go to work and all business operation will naturally slow down. Almost all the listed companies will not be able to report increased profit in the next few quarters until the Covid 19 pandemic is fully under control which will take at least 1 or more years.

For example:

All the steel products manufacturers have reported increased profit in their latest quarter due to the steel price increase. Currently, due to Covid 19 pandemic lockdown, workers cannot go to work to make steel products and construction workers also cannot go to work. Contractors will not require to buy steel products. As a result, all the steel products makers will report reduced profit in the next few quarters. Many smart investors already could foresee this situation. That is why Leon Fuat, the most profitable steel company price chart is showing down trend as you can see below.

 

Leon Fuat’s last traded price is 99 sen and its latest EPS for quarter ending March 2021 was 11.65 sen. Even if I assume its EPS for the next 3 quarters is the same as 11.65 sen, its annual EPS will be 46.6 sen. Leon Fuat is selling at PE 2.

Other Industries also suffer the same fate

In fact, almost all other industries also suffer the same fate as steel companies. For example, Supermax and Top Glove have to close down a few times because the government authorities found Covid 19 cases in their factories.

Supermax price chart below:

 

Investors must always remember price chart is the more important investment consideration than financial analysis. Down trend price chart means there are more smart sellers than stupid buyers.

Statistics shows that in the stock market, there are about 70 % of investors lose money, 10% of investors break even and only 20% of investors are real winners. But under the current condition all investors including myself are losing money.

All investors must examine their track record to their performance. Even if they have been winners, they should sell all their holdings as soon as possible before they lose more money and get out of the stock market completely.

My mistake

I must admit my mistake in recommending Leon Fuat recently because I did not foresee earlier how Covid 19 lockdown and our political uncertainty can cause serious damage to the stock prices. That is why I sold practically all my stock holdings and cashed out of the stock market.

A best strategy during the pandemic for all investors is to cash out because all listed companies will not be able to report increased profit in the next quarters..

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More articles on Koon Yew Yin's Blog >>

• A safe strategy during pandemic - Koon Yew Yin - Jul 10, 2021
• What is the fastest way for Malaysia to stop Covid-19? Koon Yew Yin - Jul 10, 2021
• What do women really want? Koon Yew Yin - Jul 07, 2021
• Glove supply exceeds demand - Koon Yew Yin - Jul 06, 2021
• Leon Fuat is best steel stock to buy? Koon Yew Yin - Jul 05, 2021
• I had heart bypass surgery in 1983 and how pineapple prolongs my life - Koon Yew Yin - Jul

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Investing during turbulent times

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Tips on how to invest during turbulent times

STOCK markets around the world lately gave investors that sinking feeling again, weighed down by deepening woes of Europe's sovereign debts, an anemic US economy and new fears of a sharp economic slowdown in China.

Many investors sold shares to hold more cash, despite cash earning very little interest. In Singapore for example, six months USD fixed deposits of less than US$1mil earns zero interest in some banks.

In the United States, 10-year Treasury bonds are yielding 2.1% per annum; despite misery returns, many investors prefer the safety of US Treasuries during crisis times, while waiting for policymakers to act boldly and markets to stabilise.

At the same time, we see many economists and other pundits offer a whole host of predictions about today's global financial predicaments. The many predictions range from the slightly hopeful to the pessimistic, right down to the disastrous and absurd.

Does it sound familiar? Did we not hear many such predictions during the 2008/2009 global financial crisis? Who should we listen to? What should one do?

No doubt in hindsight, a few forecasts will be correct; and as the dust settles, many extreme predictions will also likely be forgotten. Yet for investors today, separating much of the “noise” from facts is one of the more tricky parts of steering through these very challenging times.



Fundamentals and valuation takes a back seat during a crisis

Volatile stock markets today are driven by latest positive or negative news flow affecting sentiment. Uncertainties during a crisis causes investment risks to spike, stock investors tend to sell first and ask questions later; fundamentals and stock valuation typically takes a back seat in the short term.

No doubt many investors worry about negative impact to a company's fundamentals in difficult times. For example, a manufacturing company's stock with a present price earning (PE) multiple of six times can change drastically to 60 times PE if earnings were to collapse 90% because of a global financial crisis.

Similarly, a property company's price to book value discount of 60% can easily drop to 30% if asset value is marked down by half in troubled times. Monitoring, reassessments and analysis of a company's financial progress is obviously important during tumultuous times.

Share prices of companies (even those with good fundamentals) may continue to fall indiscriminately, due to many reasons such as panic selling, fund redemption and repatriation. Investors should tread cautiously, even if stock prices may appear to be at very attractive levels.

I relate a challenging experience from the last global stock market plunge. In 2008, I invested in the largest luxury watch distributor and retailer in China (at that time 210 stores and sales amounting to 5.5 billion yuan a year or about 30% market share).

This Hong Kong listed Chinese company sells luxury watches (such as Omega, Longines, Bvlgari) from global brand owners Swatch group of Switzerland and LVMH of France (both by the way are also 9.1% and 6.3% shareholders of this Chinese company respectively).

As the US sub-prime mortgage crisis deepens by end-July 2008, many stocks around the world plunged. This company's shares similarly dropped from HK$2 to HK$1.50 in a matter of weeks.

We vigorously reassessed the company's fundamentals, including visits to retail outlets in China and Hong Kong. The result was an affirmation of our conviction to invest in the company for the long-term, despite short-term price weakness.

By late September 2008, we decided to purchase more shares when valuation proved so attractive at HK$1.15 per share (at a PE multiple of eight times).

Unfortunately, as the global financial crisis worsened, the company's shares continued to plunge and bottomed to a low of HK$0.51 by Nov 26, 2008.

This stock eventually recovered back to HK$2 per share (by June 1, 2009) and went on to exceed HK$5 per share by late 2010. The company's share prices recovered partly because Asian equities rebounded quickly in 2009, but also reached new highs because the company's fundamentals continue to improve with strong sales (+49%), profitability (+26%) and expansions (+140 stores to 350 stores) from 2008 to 2010.

A lesson if you will that during a crisis, one should be prepared for short-term (weeks and months) stock market volatility.

It is essential for bargain hunters to have long-term holding power, good understanding of company fundamentals and strong conviction on a company's prospect. In the long-term, we know fundamentals and valuation does matter.

How does one invest during a time of crisis?

My approaches to investing in turbulent times are:

• Search for and invest (when valuations are attractive) in well managed companies that will not only survive but emerge stronger from crisis times;

• Be prepared to stomach stock market volatility in the months ahead;

• Have a longer term investment horizon (perhaps two to three years); once this crisis dissipates, reap the rewards as stock markets recover.

In Asia, macroeconomic fundamentals likely will remain resilient as many Asian economies have strong foreign currency reserves, coupled with more fiscal and monetary policy options to support growth.

China is also likely to withstand any fallout from Europe better than most would think. China's economy is still growing at a strong 9.1% gross domestic product growth for the third quarter of 2011; speculations about China's economy crashing may be somewhat premature at this stage.

Similarly, I think many established Asian companies have sufficient resources be it cash, borrowing powers or human capital, to emerge out of these turbulent times faster and stronger than before.

I believe with increasingly attractive valuation, the investing risk-reward equation (potential downside risk versus long term return prospects) favors Asian equities in the long run. I have confidence investing in Asia's fundamentals and Asian companies for many more years ahead.

Teoh Kok Lin is the founder and chief investment officer of Singular Asset Management Sdn Bhd