Master Rider Blog

It’s Homework Time

November 22nd, 2007 NW Teong

I have posted this question in my previous blog, “Can the emerging markets continue to surge when US markets are declining?” and my view then was that a gradual slowdown in US should be fine for emerging markets but a severe slowdown in US would have negative impact.

While my view on US remains the same, i.e. US would slow down gradually, the stock markets were going through sizable corrections in the last few days due to concern on huge provisions by financial institutions. It seems that the problem emanating from the subprime debacle is a bottomless one. All those who live through the financial crisis in Asia in 1997 and 1998, the scenarios in US are all too familiar. In fact, I have a friend in Singapore who used to own a bungalow and drove a brand new Mercedes Benz with a nice car plate number right before 1997. However, he lost lots of money in the stock market during the Asia financial crisis. The worst nightmare was that the value of his house dropped to half of the pre-crisis level almost instantly after the eruption of the crisis and ultimately his bank decided to foreclose his bungalow. Needless to say, he was also forced to sell his new Mercedes car which he no longer can afford. It takes many years for this friend to come out from this mess. The biggest mistake he said he had made was over-leveraging, i.e. he financed 90% of his purchase of the bungalow from the bank when the property price was sky high and the credit was easy to obtain.

We should know how a bank operates when the value of an asset fell by half in the case of an asset mortgage loan. The moral of this story is that leveraging is a mighty tool. Use wisely, it can speed up your process to accumulate wealth, if not it can torpedo you to an abyss (worse case scenario is that one will never able to come out from that abyss again!). In short, the subprime problem in US will take some times to settle down.

While the corrections in US markets are not too surprising, why must the stock markets of the emerging markets fell in tandem too? If we are still positive about the growth prospect of the emerging countries, especially the Asia pacific region, then this is really a perfect time to do our homework. This is time to re-evaluate those companies with good fundamentals and prospect. Yes, it is time to adopt the so-called value strategy which may also mean we need to hold on to our investments for some time. A case in point is that, look at how those companies stocks performed pre and post Asian crisis. Many stocks have surged 4-5 times from the bottom of the crisis (holding period in this case is about one year). Bear in mind that these are solid blue chips company that did well after the crisis. In short, we need to be selective in our stock picking in order to pick the winners. The biggest assumption is of course the global macro picture needs to remain positive.

However, we need to note the differences between now and the Asian financial crisis time. During the Asia financial crisis, many stocks were decimated, i.e. they fell from 50% to 90%, blue chips included. Thus, the buying opportunities are plentiful during that time. However, at the moment, most of the blue chips were at record high before the recent corrections. Hence, we need to be very selective in terms of buying as many blue chip stocks are really not that “cheap” yet. This is where we need to do our homework to sieve through those good ones with attractive valuation.

Please also note that there are many hedge funds that make money by shorting the markets. They are likely to paint many negative scenarios to their advantage. Mind you, these guys are expert in using media as their mouthpiece to convey the message they want to the public and other investors. They know that in order to make huge amount of money, they need to create a panic or near panic situation among other investors. After many rounds of bombardment of negative news, one will naturally get panicky especially if we are not so strong mentally. The next thing we are likely to do is to sell indiscriminately, even those stocks with good value. Thus, we should not fall into traps like that. Instead of panic selling, this is the time to do homework so as to buy good value stocks.

Cheers!

p.s. I am busily engaged in some tasks and may not be able to blog as often as I like for the next few weeks, so sorry for that.

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Entry Filed under: US Stocks, Macro, Stocks, Singapore