The coming Differentiation

The coming Differentiation

Not long ago a subscriber wrote, "CM was a looser" because his Thai Bank shares did far better than this August '98, advocated "top recommendation". (This during the comparable period he owned CM stock.)

Fact is, including some currency gains; CM may well earn 15 Baht per share for all of 1998. This firm's operating earnings are soaring yet this man calls it a "looser". The banks will take years to report any profits, as they are flooded with huge problems of non-performing loans. Yet, the Bank shares are called "winners" as they went up more in price than CM during the same time period last year. How does one reflect on this?

Part of my answer to him was: you define losers strictly in stock price movements during an arbitrarily chosen period, vs. an analyst who is mostly interested in earnings prospects and the firms qualitative and quantitative fundamentals. And of course how those relate to the current stock price. If you reflect on this it has to be that way. A professional in my line of business will not recommend shares based on "irrational exuberance" or simply on an initial euphoria called "re-liquidification".

This subscriber further stated in late 1998: "…I still think your approach has real value in a downtrending market, but this does not appear to be the case for the past two months." To which I answered: while I did write in August '98 that Thailand's stock market has bottomed, nobody can over the long run predict short-term market movements. Preservation of capital is the stated foremost and primary objective. This is achieved by owning perceived value and never hype or show me stocks! Often a stated objective is in conflict with other fluid themes of the times. In the long run you want someone like me to be "steady on deck" and not "seat of the pants" by advocating trading & speculating. Speculating on the SET doe not have a few of the required parameters, as such this is even more risky.

For one, in Thailand more than any place I have known, punters routinely and actively trade and speculate on stocks that are too often the least rationally priced. Over the years I have often noticed that the worse the stock fundamentals are, often the more actively they want to trade them. I mean to say: often the most active, most speculated on shares have the worst fundamentals on the whole exchange. Why cant' the SET die-hard-traders not at least chose and find a good share to trade and speculate on? As if you end up wrong at least you own some value.

Actually, I never advocated not trading any "big bad 'bear' caps.". I recognize it can be profitable albeit tricky. What I have implied is one does not need thaistocks.com for this obsessive activity. Since the SET brokers do not have stop limit orders, since their phones are too often busy, since some brokers have in the boom now past, not follow established SET rules, I have long ago determined not to be part of that hyper-activity.

Also, most of us do not want to sit in some brokers office all day, drinking coffee and popping Thai cookies and in general, feel like "working" when in it's just all gambling.

The local TV channel 9 no longer shows the running stock prices during the trading session. So traders end up moving-into their brokers office just like McDonalds Hamburgers designs ways so people get glued coming to eat there in an unhealthy way. It must be said: for the most part Thai brokers are extremely skilled inducing investors to trade and not invest. Suitability laws are not practiced, as all are considered traders.

Tisco research - which I consider above average - has for example written on all Banks, in their October 9-22 '98, issue: "overvalued". While the SET was already then heating up and while they firmly thought the Thai market would rally still they wrote as we have told you here long ago: the big banks, as the finance companies, as the real estate sector are not worthy for fundamental stock buying at this time. Furthermore, the alternatives are just too attractive.

Why be part of the herd mentality?

At the time of this initial draft (Nov.26 '98) all Bank shares looked dead set to burn out at their current neckline prices. All the graphs on these Banks look to me like a major short-term top. Up until now a skeptic (me) could call it a "dead cat" bounce. Or, as I would prefer to name it: the initial euphoria is -not at all a confirmed true breakout. While things are better than a few months ago and while I am convinced the SET has bottomed in 1998, still it looks dicey to me to trade shares in the "bloated big bad bear caps". Back to this subscriber, who then further wrote: "Paul, as you well know, it is ALL speculation. Some do it on a daily basis and some do it on a yearly basis, but it is ALL speculation. It is just on a different time frame".

To which I answered: Here I much disagree. My advocated style is investing which is very different than speculating via trading. Those who mix the two together set themselves up to a rude awakening one-day. Just look what happened in early 1998, all speculators I know of are sitting on huge loss positions. This either by holding on thinking the market had bottomed then or, by keep buying on the way down. Thinking the worst was over only to see shares collapse much further. "At this point these banks are screaming buys" one such person told me early in 1998. I replied, at some point certain troubled shares will stop screaming…. as they are dead in the water. For a few banks like SCIB, this is what happened. And it surely happened with the defunct 56 finance companies; previously the most speculated on. How long did they scream.

A Traders many traps: Even traders with strict price-limits often get regularly whipsawed as actively traded shares fluctuate widely during any trading day. They often hit mental stop loss levels. This perhaps just for few minutes or seconds - only then to close the day much higher. The trading position is hence most often lost and so cash is held while the market broke out to higher levels. This leads to much frustration as "cash is truly trash" when any new bull market soars above an old resistance point. So I ask to mental stop loss orders really work.

This then almost always leads to compromises on preferred better choices and to buy something else with even worse fundamentals. The dogs are so retained, winners are traded-out - and in no time, you own a collection of semi-trashy, ill understood and eventually big lagers in your portfolio. I personally believe life is too short and money to precious to adapt this "Johnny-trade" mentality.

Often it works for a while and so more and more investors become speculators, who then become greedy and increasingly "piggish". Bulls make money, bears make money but pigs in stock markets get slaughtered. "But I have mental price limits in place". Besides the whipsaw factors described above, markets can and often do open at much lower prices than the previous day. So then there is often no chance to limit-losses. Or as explained before, markets suddenly soar above resistance levels and the speculator gets cashed out way to early. Can the speculator fire himself? To get sold out early only to see the market rise substantially is one of the worst mistakes.

A trader in Thailand is basically saying: forget extreme solid values, forget Baht devaluation's beneficiaries (no big cap is a big exporter, nor a pure manufacturer), forget what Thailand is best known for and most competitive at; forget the most undervalued shares in the world. Yes, even forget about the risk vs. returns' golden rule. My favorites' have real and growing earnings and besides are horribly undervalued for all the reasons long explained. Forget, the "invisible hand" that high dividend paying shares come bundled-up with. Here I mean to say: how far cans a stock drop when it's expected to pay around 20% in annual dividends? When stock prices correct, high dividend yields supports greatly those share prices.

One Thai broker once even told me convincingly that "dividends in Thailand do not matter whatsoever". Totally ignoring that any stock is simply the discounted present value of all its' future expected dividends.

Group Think.Traders often get together and talk about so called trading strategy as they are watching the market go by. These groups are immensely subject to the dangers of "group think". Group think is a monster which creeps up and affects greatly objective thinking of a group of people who get together to discuss a fluid subject. This is discussed and warned about at any first university level Sociology course. US President Kennedy was a victim of it in the early 1960's. I urge self acclaimed traders to look-up this subject; they are most vulnerable to the evils of groupthink.

The SET market will sooner or later correct.If and when we do get a sell-off over the next few weeks, my advocated positions will look very attractive. We then have shares, which are holding marginally higher just when all the big cap.'s got slammed. (Just like when CM shot up 5 points in mid November, as the bank shares were then stalled.) If at that time some of the big liquid shares look oversold I could see making a slight portfolio shift by selling on strength some "jewels" and buying on a mini-panic now dumped bigger cap. stocks. When this sell-off inevitably does occur, my advocated investment style allows for some attractive shifting. If the market goes way high and does not correct, at least we did not get sold out early like most speculators invariable are.

Subscribers can trade if they wish and if they feel they have the time and inclination for this. During my tenure in New York, Dallas and Chicago, I saw some very gifted traders. During my stockbroker-training period I sat next to Merrill Lynch's most successful broker. He was a registered options principal. He had more discipline than an Olympic gold medal winner.

All Thaistocks.com advocates is that for your serious investment capital, where the rational parameters call for least incurred risk along with the most potential return, here we know Thaistocks.com can add much insights and value.

Do not confuse trading gains with investment gains and never mix the two. We know Thailand has unusually good investment opportunities, not available in more price efficient developed countries. Hence yes, I favor investing here over trading.

Best Regards,

Paul A. Renaud.