Common stocks still among the best investments.
Reflections of a long term stock market investor -as the new year 2005 gets going.
During the past many years more then a few times various Phuket Hotel owners and others here have told me again and again that the SET is nothing but a "gambling den that "real men only buy real & tangible assets" -and that "serious & smart money will never seek SET investments" etc. Usually I just listen and don"t answer much at all, as these people have made up their own mind long ago anyway -and there is nothing I could say or show, which would change that. But they have their facts very wrong. (See more on this below).
So I listen a bit, let them politely know I disagree on some of what they say, and just move on. Pass me the rice, please. Yes, the SET brokers & marketing officers are for the most part a gambling gang and nurture such behavior, yes a much better stock exchange should be desired and hoped for etc but no I say, you are wrong, as great investments have, are, and will be had on the SET. Probably so -no precisely so, because the SET and their brokers are such "young un-behaved kids". But this reasoning is beyond their comprehension so there is no need to waste time and energy in showing them anything different. Besides, I really don"t care anymore what others wrongly think.
The natural disaster horror wave event of December 26 "04 shows that it does pay over time to diversify geographically -as well as within different asset classes. While many here have lost, if not their Hotel then the whole year 2005 tourist season, the Thai stock market was not affected. Indeed, the main benchmark just passed the 700 mark for the first time again since February 25 "04. Many solid shares have been flirting with new high prices and this during a time when one of the worst natural disasters ever hit one of the most important Thai tourist destinations.
With the table below I show how various crisis’s affected the USA’s S & P 500 index and how this broad US stock index reacted during the six months, following a series of key US crisis.
Cuban Missile Crisis: +24%
Assassination of John F. Kennedy +15%
Richard Nixon Resignation +13%
1987 Market Crash +15%
Declaration of the Gulf War (1) +19%
Oklahoma City Bombing +33%
September 11, 2001 New York +34%
This shows that events/shocks which should affect antsy stock markets, in fact more often then not are "forgotten" within half a year later.
Critical investors here and abroad have long been proven very wrong to avoid the Thai stock market. I have shown again and again over the past 7 1/2 years how "bargains often go begging here". The Thai stock index (and our select stocks even more) have overall far more then doubled in value over the past 3-4 years (inclusive of year 2004 which was a downer but not inclusive of high cash dividends which have regularly been an upper). And if you look at the results in US Dollar terms its even better! As a side note, "The New York Times" is full of baloney on reporting recently that SE Asian currencies have "not appreciated" in value, when in fact the Thai Baht is about 8-9% dearer to the US Dollar, during the time they mentioned. Same old Western distortions and wrong innuendo. During this same time, the US broader indexes have hardly moved up much at all. The real investment risks/traps are the many "lame ducks" in the long stagnant West.
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Fear and greed are the most deadly investing sins and work dead against the speculator.
"An Investment is a purchase based upon thorough analysis, which promises safety of principal and adequate return, any other type of purchase is speculative the speculator’s primary interest lies in anticipating and profiting from market fluctuations. . The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices.." Benjamin Graham.
In an article published on Jan 5 2002, in "The Business Times" the main newspaper in Singapore, Professor Joseph Lim (Finance professor at the National University of Singapore), revealed an interesting research report on the behavior of equity investors/traders which applies to global stock markets. Professor Lim monitored 1000 retail investors from a local broking house to assess trading habits between 1998 and year 2000. The results were not flattering. On average, these investors lost 16%, per year. Professor Lim concludes that a majority reason for the losses was a strong tendency to realize gains quickly -but cut losses slowly.
This is an investment behavior renowned US fund manager and author Peter Lynch calls, "cutting the flowers and watering the weeds". Realized gains outnumbered realized losses 11 to 8 and paper losses outnumbered paper gains 5 to 1. Incidentally, older investors and women had the best performance, perhaps because they traded stocks less frequently than younger men but this group still under performed the overall market by about 20%.
This universal tendency is in fact one key reason why I have pounded on the table long and hard in having you members never co-mingle your trades with your long term investments.
Investors are too affected by strong emotions like pride and regret. Pride can lead one to lock in a profit fast, often selling the winners far too early and so leaving your portfolio filled with mediocre holdings. Regret can lead one to hold one’s losers far too long , thus avoiding facing-up to a poor decision. Two financial economist confirmed these emotional tendencies when they studied a sampling of 300,000 sell trades on the Finish stock exchange a few years back. The researchers found that if a stock outperforms the market by 10% then the investor’s likelihood of selling increases by 26%, call this pride. On the other hand, if the stock underperforms by 10% then the likelihood of selling is reduced by 14% (call this regret). In little time this entrenched human practice leads to more losers then winners. Hardly a strategy to make serious money.
Working in the World without being affected by the World.
A daily deluge of global events threatens to distract investors, making it far more challenging to experience and observe the world, without being affected by it. Look back in time to study market reactions to wars oil shortages natural disasters, currency devaluations, inflation ,interest rate changes political instabilities recession and most recently acts of international terrorism and rampant accounting irregularities
According to Frank Knight a respected economist at the University of Chicago in the 1930’s there is "a sharp distinction between risk and uncertainty". Risk involves analyses of outcomes that can be identified and their probabilities gauged, uncertainty involves outcomes with probability that elude analysis. Risk can be insured uncertainty cannot. Risk can be systematically minimized while uncertainty can only be prepared for. The point is trading in the medium and longer term involves allot more uncertainty then risk.
Consider the following three US investors for three different people, each investing $2000 US per year. Here is what would have actually happened over the past 20 years:
1) Super Timer. He invests his 2000 US$ a the very lowest point of the market, each year, for 20 years straight. Results, 40,000 US$ invested grows to 387,000 US$, 20 years after.
2) Market Maven. He invests his 2000 US$ on January 1, every year, not wanting to lose a single day out of the market. Results, 40,000 US$ invested grows to 362,000 US$, 20 years after.
3) Cash Man. He puts his money into fixed bank deposits as he is scared of stocks.
Results, 40,000 US$ invested grows to 76,500 US$, 20 years after.
Another academic study performed by the University of Chicago showed that for 70 years (1925 to 1995), a period of 840 months, the average US stock market return was 12.1 %, per year. However if a market timing speculator had been unfortunate enough to just miss the best 35 months (only 4% of the whole period!) he would have missed 99% of those gains. As unbelievable as this sounds, a passive long term investor would have seen his market returns increase from say 100 US$ original investment to 110,000 US$ by 1995, while an unlucky speculator missing just the best 35 months would only have 1000 US$ to show, out of his original 100 US$. While the above are US studies, they firmly, I believe, show what happens in the long run on the Thai SET as well, only perhaps more so.
The above two examples teach us two powerful lessons:
a) The extra return gained from perfect market timing is not as much as we think, more like far from it.
b) One of the greatest risks to a long term investor is to be out of the market when it makes dramatic and un-expected surges.
Wise & seasoned investors stay mostly clear of speculative surges via market timing and, will get their principal invested as soon as attractive investment candidates are identified and then leave them alone until something (like a price surge) changes this.
Historical Facts. Common stocks have been over the past 100 years among the very best overall investments in the world.
And since we are on this important subject -and I still have your attention, here are some other interesting facts to remember. (Again this is based on the large US market, but I am convinced that if anything it is and will in many ways be even more true, here in Thailand).
1) Over any historical 30 year period, stocks outperformed bonds 100% of the time.
2) Over any historical 20 year period, stocks outperformed bonds 94% of the time.
3) Over any historical 5 year period, stocks outperformed bonds 71% of the time.
4) Over any historical 1 year period, stocks outperformed bonds 59% of the time.
5) Fully invested portfolios from 1925 to 2002 the S & P 500 return was just about 16% per year.
Anyway you look at, and including some dire periods of drastic stock market price declines, over the long run picking a portfolio of value shares with good dividends should (and has for 100 years in the past) provide substantial returns along with flexibility which few Real Estate investments can compete with.
Best Regards as always welcoming any constructive comment, dissent or side observations.
Paul A. Renaud.
www.thaistocks.com
