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STE says to see crises as opportunities and accumulate.

Sunday, July 3, 2016

I am happy to publish another blog post by a fellow investor and one of ASSI's more prolific guest bloggers, STE:

“Creative Destruction”
and
The Business Cycle

“Millions saw the apple fall, but Newton was the one who asked why.” By Bernard Baruch .

 “The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions.” By Seth Klarman

We have seen market move and swing viciously since mid of last year due to event such as “Yuan devaluation “ , “Oil and Emerging Market crisis “ , “ China’s Debts and Shadow Banking issues”  and the recent one “ Brexit “.

All these event has created huge market volatility and because of investor’s psychology swing together with these market news … we have seen the index swing up and down wildly.

One need to always remember that “"Psychological create 90% market”as quoted by Andre Kostolany.

Whatever things involving “people “ … it tends to be “ chaotic and messy “ , for me .. stock market looks like this :


Nowadays, Stock Market became more intricated and complex due to fast moving news by click of second and much intergrated / connected world by IT revolution in recent years.

News move in Nano-second and always being “magnify “to attract viewers’ attention or increase subscribers …

     


Some of the event may have long term impact on the market but some are just “ noise “ which affect the stock price in short term … but even for those major event , remembered that market always move in cycle and “mean reverting “ eventually .

Joseph Schumpeter, an “Austrian Economics “ coined the phrase of  “ Creative Destruction “ and also written great books like “ Business Cycle “ / “ Capitalism ,Socialism and Democracy “.



According to him , “Creative Destruction is the essential fact about capitalism “ and he gave example like “ blacksmith  being wiped out by factory , the car superseded the horse and buggy, and corporation overthrew by proprietorship “..

And by Wikipedia , according to Schumpeter, the "gale of creative destruction" describes the "process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one". If  you are interested on “Austrian School of Economic thought” , you may refer to this link ..   https://en.wikipedia.org/wiki/Austrian_School  and further reading on works from “Austrian Group of Economist like  Ludwig von Mises  and Friedrich Hayek .


Same for other crisis , eventually , people will need to move on and market will not even remember those crisis e.g Oil crisis in 70s , Asian Financial crisis , Dot-com bubble and the latest GFC caused by Housing bubble .




Look at above chart on Dow Jones since 1884 ,, market gone through many cycles and even with 2 “world war “ and various bubble & panic .  GFC in 2008 may become insignificant if we look at this chart in long term …

BUT ,,, one may argue that as investor ,, we may not have such longer time to go through the market …well , that’s fair enough !! One may need to look at shorter time frame and react to our own investment cycle / need accordingly.

For me , as per previous blog post , I will only use one chart  and react to it accordingly to adjust my portfolio allocation from time to time. That’s the “ Linear Regression Chart on market and Mean Reverting concept “ , by doing this , I hope to avoid buying high when market is in “euphoria “ and taking advantage on situation when market is in panic and over-react.

As rules of thumb , we must also avoiding those “highly speculative and  hot stock “ in the market and be realistic to our “ expectation of return on investment ”.

Also , as I mentioned before on the “Fallacy of Indexing “ … when we talk about long term index return of 8-10% … it is base on average  of very long time frame … in shorter time frame ,, index could swing by +/- 20-30% easily .

There is also “ survivorship “ biases on the stock component in the index… for those stocks who have destroyed by business cycle and lack of innovation (e.h NOL/ Noble ) been taken out from Index and new one being added . I guess this is also part of the process of “Creative Destruction “. When the old one being destroyed and disappear in the Index , the new one being added and continue to create value for the Index. 

“ Crisis = Opportunities “

If we look at  Singapore’s context ,,, market has also gone through many cycles with up and down … if one could take advantage on one or two of these crisis ,, it could really shortern our time to achieve F.I.R.E.



< I have not added the latest event on BREXIT ,,, it may turn out much more serious or may not in the list at all … it is anybody’s guess . I think>

< Credit goes to one of the bloggers who have created this table , which I have forgotten from where I got this >

For the past 20 years , market have corrected more than 9 times which have resulted negative return of -20% to -62%. This is to show that how often and crisis prone our market is.


“ Linear Regression and Mean Reverting “



My investment strategy for coming years remain the same …where I will take advantage when stock index gone down to 2500 level +/- and start to accumulate war chest again when stock rebound from that level .  Please ensure to keep some cash buffer if index went down to 2200 ( which is equivalent to crisis level in 97/00/08 ).

As mentioned earlier , market will be much more  volatile due to “flooded liquility “ couple with psychology effect due to “market NEWs ( noise ??)  “ .

Let’s tighten our seat-belt and ready for this “bumpy ride “ !!!


< Dividend update >

"Do you know the only thing that give me pleasure ? It is to see my dividend coming in …" John D Rockefeller


YES! This is most important event for investors who have invested for “passive income “ ….regardless of market volatility ,,, dividend income continue to flow in …



Total dividend collected for  1st Half 2016 = $102,426 .  (my methodology of calculation is different from AK as I did not include the privitazation return from Saizen as “dividend “ ,, instead , I would treat them as “ return of capital “).

** Total dividend increased substaintialy in 2 Qtr 2016 due to more investment in 1st Qtr 2016 on some of the blue chips by taking advantage of the market turmoil during early 2016 . Also, partly contributed by better div from Accordia Golf Trust.
Lastly , allow me to re-quote below which I have quoted before : by Warren Buffet in 1999

Stock have always come out from crises “Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”

After year 2000 , stock market have experienced another 2 major crises i.e Dot-com Bubble in 2000 and GFC in 2008 … but yet .. Dow Jones stand at above 17,000  while watching at the episode of BREXIT crisis unfolding .

Happy Investing and stay focus on your Long term Investing strategy, hope & wish all could achieve F.I.R.E soon!!

Cheers!!
---------------------------------
AK:
"What does F.I.R.E. stand for? Make a guess. I did and got it right! I so clever. Ya, I know. AK is so shameless! Bad AK! Bad AK!"


Related post:
STE's investment strategy.

21 comments:

1871e1fc-10c3-11e5-a794-7f9fad27c9b8 said...

faster invest, retire earlier :D

CS Lim said...

@ STE, using level of the STI index may be a good proxy, but not a good benchmark of market entry. Using the ratio of total market capitalisation vs GDP will be a better one in my view.
Both figures are easily available from MAS and Singstat. (Of course, one can argue how accurate the GDP figures are).

SMK said...

i like ste.

redponza said...

F.I.R.E. = Financial Independence & Retire Early?

AK71 said...

Hi Tree,

Almost there! ;)

AK71 said...

Hi CS,

I read this in an article earlier this year in March.

A guy by the name of Staermose back then said that the STI which was at 2844 was trading at 107% of Singapore's GDP. At the peak of the GFC, the STI traded at 92% of GDP in 2008.

92% of today's GDP would give us 2445 on the STI.

Interesting. :)

AK71 said...

Hi SMK,

STE is not only thoughtful but generous.

We are very lucky. :)

AK71 said...

Hi redponza,

BINGO!

Sorry, no prize. I took the prize liao. ;p

STE said...

Hi CS , thanks for sharing and very much agree that there is many ways to do or judge the market valuation. As you rightly pointed out , GDP may not be a good indicator to reflex the real economic situation and also , shall we use GNP ( like Warren Buffet's TCM/GDP Market ratio ) or shall we use Earning or profitability instead of Market Cap .. Each way may have they own merit and shortcoming ... Besides, in the context of STI ,, 3 bank + Sin Tel constitute more than 40% of market cap ,, but banking sector in our GDP is less than 20% ..this might also have consequence on the ratio validity . Well , some of the company like HPH , Jardine C&C ,HKG Land may hv revenue or activities mainly out side Sinagpore or some with secondary listing , which may not have influence on Singapore's GDP per-se . Well , I would think one should look at multiple methods as far as valuation is concern ... Thanks for sharing and valuable info.👍👍😃😃

STE said...

Hi CS , thanks for sharing and very much agree that there is many ways to do or judge the market valuation. As you rightly pointed out , GDP may not be a good indicator to reflex the real economic situation and also , shall we use GNP ( like Warren Buffet's TCM/GDP Market ratio ) or shall we use Earning or profitability instead of Market Cap .. Each way may have they own merit and shortcoming ... Besides, in the context of STI ,, 3 bank + Sin Tel constitute more than 40% of market cap ,, but banking sector in our GDP is less than 20% ..this might also have consequence on the ratio validity . Well , some of the company like HPH , Jardine C&C ,HKG Land may hv revenue or activities mainly out side Sinagpore or some with secondary listing , which may not have influence on Singapore's GDP per-se . Well , I would think one should look at multiple methods as far as valuation is concern ... Thanks for sharing and valuable info.👍👍😃😃

CS Lim said...

Hi AK71,

The components of STIs are constantly being reviewed. Hence non-performing constituents are removed from the index.The constituents for the index in 2008 vs now are difference, so you can't extrapolate.

I also don't know how Staermose got the figures. It is closer to 2.27 in Mar 16.

AK71 said...

Hi CS,

Extrapolation issues aside, if it was 2.27x in March, 0.92x means that the STI would have to be at 1152 today to be at the equivalent level of the GFC's. Alamak. Lower than during the GFC ... Hmmm...

CS Lim said...

Hi STE,

Agree that STI index might not accurately reflect the true economic activity in the economy. But you can accurately gauge how frothy the market is. Because the ratio is a also a function of the market capitalisation (price of stock). High market cap/GDP can reflect over optimism. Earnings and GDP are factual. (Again, depends on how much you trust the earnings and GDP figures)

CS Lim said...

Hi AK71,

Again depends on what figures was used by Staermose to arrive at 92%? It was closer to 137% in 2008.
Regardless, our market cap to GDP ratio has hardly went below 2.0 with the exception of AFC and GFC.

AK71 said...

Hi CS,

Then, 137% of today's GDP would give us 1,716 on the STI. This is less mind boggling and, like you said, it would have to be something as severe as the AFC or the GFC before we see something like this. Frightful!

RayNg said...

Food for thought...

Measurements of GDP are becoming outdated with the emergence of the sharing economy...DBS Group CEO Piyush Gupta

The Measurements of GDP Are Outdated

While the global economy is sluggish, Mr Gupta raised the point that a meaningful portion of this could be due to the fact that the wrong inputs are being measured. Gross domestic product (GDP) as a concept was developed in the 1930s, when manufacturing and production were the focus of the economy. This is no longer the case, and hence, most current measures of GDP undervalue and underestimate the service component of the modern economy. Neither have we developed new tools to calibrate such activity, Mr Gupta added.

To illustrate this, he used the example of a maid. When you pay a maid, this is counted as GDP. If the family unit choses to undertake house cleaning work themselves, the work doesn’t get counted as GDP. The underlying point is this – only market-traded goods are deemed as having economic value. Digital technology and the emergence of the sharing economy have also helped created an environment where the market value of goods and services has become ambiguous and difficult to price. The result: a good deal of economic activity is not being measured in GDP.

The emergence of the sharing economy has another consequence – the fulfilment of economic welfare and consumer demand without the need for fresh investment. The Internet has helped individuals and companies with excess goods and services share these without requiring new production capacity. Uber is a classic case in point. Mr Gupta cited that cars were left idle 96% of the time. Through Uber and other car-sharing applications, this spare capacity is meeting the need of consumers.

http://www.dbs.com.sg/treasures/aics/templatedata/article/generic/data/en/GR/062016/160624_insights_where_is_global_economic_growth_heading.xml?cid=aio_twitter&utm_source=&utm_medium=&utm_campaign=&cid=aio_twitter

Andrew Tjhie said...

Hi STE,

Thanks for sharing. Your story has renewed my inspiration on investing for income.

I have been trying to plot the linear regression chart. I managed to plot the regression line but unsuccessful with the +/- 1 SD and +/- 2 SD. Looking all over the internet over the past 2 days without success. If you don't mind sharing, it is most appreciated. Thanks.

-Andrew

STE said...

Hi Andrew,
Glad to know that you like the blog post.. Yes, you are right that excel doesn't provide such function to draw the SD line,, I use the most primitive way to draw it myself by adding these line ,,, after getting the SD figure ,, I just draw the parallel line along the regression line.
I think there must software in the market which could draw such line along with other TA function.
Hope this clarify.
Cheers ! Happy investing.

Andrew Tjhie said...

Hi STE,

I think I am getting fixated in plotting the SD line and after 3 days, I have not been able to do that. If you don't mind sharing how to obtain the SD figure (or maybe a website or a book where I can figure how to do it), I would be very grateful. Thanks and Cheers...

STE said...

Hi Andrew , sure, let me try to explain in more detail .
First , you should be able to draw the "regression line " by using the line chart function , plot the line chart , then go to format and add "trend line " , then just right click on the line and then " insert trend line " ,, choose " regression " .
2nd steps : using the same data set , calculate the SD figure by using this formula " =STDV.S(data set) " ,, you should be able to get the SD figure ,, should be around 726 or 714 ,, depending on the high or low STI closing figure you use.
3rd step : calculate the SD figure . Remember, 1 SD = 68.2 % coverage from the mean , and 2 SD = 95.4% of coverage on the population. eg , current regression mean point at June 2016 = 3200 , then -1SD = ( 3200-726 ) around 2474 .
Step 4 : how to calculate 2SD . 1SD = 726 ( 68.2% ) , so 95.4% = 726 x 1.3988 = 1015
so, -2 SD point = 3200-1015 = 2185
Step 5 : using the same method to get the +1SD and +2SD by adding the SD figure to mean point (3200 )., ie, 3200 + 726 and 3200+1015
Then , you should be able to draw the parallel line along the regression line by plotting the same line at the lower part .
As mentioned , I'm using very primitive way to get these line , I'm sure there is tools in the market to plot such line . I'm not that IT savvy ..
Hope this clarify .
Cheers.

Andrew Tjhie said...

Hi STE, your step by step explanation is much more than I expected. I am truly grateful for your sharing. This is now becoming by barometer while watching the everything going up. Thank you.

Hi AK, I totally agree with you that STE is not only thoughtful, but also generous. We are indeed very lucky. Thank you.

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