The Independent Investor Strikes Back.

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The Independent Investor Strikes Back. Contrast global investing in very hard times to the overall long superior results of Thai smaller cap high yield investing.

Here is an article by our newly invited guest writer, Mr. Warnken located in Germany. He strikes me as a seasoned global investor with more then just Thailand on his radar screen. I hope in the future, among other insights, he can compare valuation and growth levels for us, on other markets he likes. Thereby showing us how our Thai value shares compare to say other promising emerging markets. I much believe superior investment results in the next say 3-5 years will remain having smart exposure in high yield growth stocks away from the mature developed countries and away from institutional dogma’s which have cost many so dearly. After all, there is always an investment party going on somewhere around the world and as an individual you have far less restrictions then institutions do! Thank you Mr. Warnken for this quality contribution.

The Independent Investor Strikes Back.

Some investors, especially those who are still brave enough to read their daily financial newspaper, might ask themselves what kind of financial nightmare happened to them? Unless you were fully invested in cash, government-bonds (hopefully not those of Argentina and Uruguay) and short-only-funds, you have lost a significant amount of your hard earned investment capital.

Some investors are already glued to the screen, watching their favoured financial-news programme and the merciless ticker until their eyeballs are prone to pop out of their heads. All of this happens in great disbelief. Even those professional investment advisors at your local bank can´t help you out with a qualified explanation, they are indeed at least one source of your personal debacle.

The media provides plenty of excuses: the terrorist attacks on the World Trade Center, a slowing economy, the current Iraq stand-off, a looming crisis in North-Korea, deteriorating financial conditions in Latin America, etc. All of these events provided the fuel for a ferocious downward-spiral which will be seen in retrospect as one of the toughest bear-markets in European and American history. Just to keep you with both feets on the floor, the bear-conditions in European and American stock-markets are not over yet (despite the tremendous fall in stock prices) and it will continue for quite some time. Every market-participant who believes that the world´s major intellectual dream-team, consisting of George W. Bush and Alan Greenspan, will solve the above mentioned political and economic problems within a short period of time, should hurry up to escape from the realm of self-delusion. Further, I suggest that anybody who still believes that the Dow Jones will breach the 20,000 barrier within this decade, should call his social authority and ask for the address of the nearest mental-hospital. What we experience right now, is neither Bin-Laden´s nor Saddam`s nasty attack on our personal financial freedom, it´s just the painful aftermath of a tremendous stock-market bubble.

Five years ago, when financial pundits pointed their fingers on Thailand, Malaysia and Indonesia, we were overwhelmed by all sorts of explanations - that the asian markets and their financial systems were deeply rotten as a result of bad corporate governance, excessive credit growth, unsustainable current account and trade deficits, overconsumption of imported luxury goods, sky-high stock valuations, etc. (Dear Reader, just in case you lost me here! This is not a description of the prevailing conditions in the U.S., not yet!). Unfortunately, those financial experts came out with all the negative news, AFTER the markets had already collapsed and at some point in time presented a screaming buy. Thank you experts, we are absolutely helpless without your professional guidance!

Anyway, "Reasoning-AFTER-the-Fact" is a widespread phenomena in todays investment world, so who cares? What´s so important here is that you will get at least a vague idea of what a bursting bubble can do to any country´s economic and financial system. No market or country can escape from the laws of gravity. Well, so far so bad. But is it really that bad? As long as people adhere to the dogmatism of large institutional investors I am not convinced that the average person will ever learn to navigate his ship through the rough seas of market-cycles. Imagine all the hard working people who bought those retail-funds in the late 90´s believing the myth that professionally managed funds are relatively safe.

What made them apparently "safe" was - of course - the well-educated fund-manager and the raging bull-market but the latter is often forgotten as a significant factor. Now, the bull is gone for the time being but the fund-managers still remain in place. I hope you will agree with me when I say that the fund-manager is the key-factor, assuming that bull- and bear-markets come and go.

Today many investors find themselves in a state of shock, still sticking with those well-educated fund-managers who have intimate knowledge of modern financial algebra (e.g. Efficient Market Theory, Modern Portfolio Theory, etc.) therefore it is safe to say that a lot of money has been lost very "efficiently" by "modern market-professionals". The fund-manager somtimes also sticks with something: a portfolio full of "glamour" stocks those you "had to own" in the past. Being focused on his losses, our fellow fund-manager is probably obsessed with holding on and "winning it back". While fighting yesterdays war under extreme psychological pressures, he might be to busy to realize that the world stock markets are already in transition which will bring a change in leadership.

That´s at least what financial history suggests and I see no evidence that "this time is different". Returning once more to our friend the fund-manager, I would like to point out that we should feel sorry for him. This is actually a very tough business. The underlying psychological and social pressures are often underestimated. If our fellow comrade buys shares in Bangkok Bank PCL instead of Deutsche Bank AG and it heads down by 20-30 percent his boss or clients will ask: "Why the hell did you buy this Bangkok-crap? What´s wrong with you?". When he has bought Deutsche Bank AG instead and the stock heads south by 20-30 percent, nobody will ask "What´s wrong with you?". They will just ask "What´s wrong with Deutsche Bank?". The manager is actually more likely to keep his job and therefore buys a more "conservative" and "safe" stock. In other words: he prefers to fail conventionally. Just in case, he has the guts to be contrarian, nobody in his daily social context will give him any positive feedback. He will be regarded as the traitor and experience ultimate loneliness. This can wear down even the smartest guy over time, because mother nature still has a tight grip on our daily social behaviour. Poor friend, my sorrow is with you.

Now, it´s time to get back to our main problem: investment returns and the preservation of capital. With regard to the sub-par performance of many retail-funds during the recent bear-market I would like to state that anybody, who watched his stock-portfolio dropping by 50 percent or more should become familiar with the idea to develop a new investment approach. I am convinced that many asset managers - who still struggle to cut their overhead - will also welcome my approach because it doesn´t need one-million-dollar supercomputers, overpaid rocket-scientists with two-thousand-dollar suits or expensive paintings at the wall as a prerequisite.

So what´s my approach then? It´s plain old value investing, dating back to Ben Graham and the 1930´s. All you need to be competitive with the pros is a normal PC with an internet connection plus a moderate amount of money to spend on books and newspapers besides objective and informed web pages. Then start reading, observing, listening and thinking! You already have a very powerful supercomputer: if you are looking for it, you will find it right in your own head, it´s likely to be located between your ears. I would like to set up a general equation which is probably much less revolutionary compared to Albert Einstein´s E=mc2 , but I will give it to you anyway: Value Investing = Common Sense Investing. 

Go back to the original writings of Ben Graham, create your own valution model and let your "common sense" do the work. Sure, when you ask the pros everybody claims to buy only "good value", even if it turns out to be some 40-times-earnings-high-tech-crap with a questionable business model. Therefore it´s important to develop a personal yardstick for what could eventually be "good value". So far so good, but questions remain: does value investing always work? The answer is no! But I will explain what it can do.

Imagine yourself sitting at a roulette table, betting always the same amount of money either on even or odd numbers. Now, imagine you would have a tiny tool which is able to calculate the outcome correctly 60 percent of the time compared to your own chance of "guessing" correctly 49 percent of the time. This, my dear reader, is just one secret of Ben Graham´s powerful approach to stock-market investing.

Many people still confuse buying "good value" with buying shares in a "good company" or "good country". Buying stocks in a "good company" with a very moderate growth rate at 25-times-earnings won´t get you anywhere. In the long run it´s just the price you pay for a stock (or whole stock-market) which alters the probability of "winning big" to your favour.

A crucial question still remains: How to discover good buying opportunities? Well, this takes a lot of effort and patience but there is a simple tool: Listen to the financial media circus and have your antennae tuned to extremes, review companies and countries after a long string of bad news. Compare stock-market valuations on a world-wide basis and even more important: compare them to valuation-levels at historic market-bottoms. That´s the best road-map I can hand out to you. May be you end up buying Thailand!

Tim Warnken is an independent investor. He holds a degree in Geography from the University of Bremen (Germany) and constantly explores the world for alternative investment opportunities. Mr. Warnken´s investment positions can change at any time without notice. Under no circumstances does the information in this article represent a recommendation to buy, sell or hold any common stock, commodity or other financial instrument. The views and opinions expressed in Tim Warnken`s articles are his own and not necessarily those of Paul Renaud and thaistocks.com. The author can be reached directly by e-mail: timwar@uni-bremen.de


Best Regards to all Members,

Paul A. Renaud.