Unit 7: Active vs. Passive Investing

Unit 7:  Active vs. Passive Investing.

Successful Thai stock market investing for the medium to longer term -the assumed investor objective here -can be tricky as there is a fine line between being too stale -or over-active.  

The Thai market has pricing inefficiencies and through experienced attention, returns can be increased. Thai stocks, like markets elsewhere, often overshoot or undervalue its shares due to sentiment, greed -or fear.  I know that on Thai SET these gyrations (opportunities) are higher then say on US markets where all kinds of seasoned investors are paying closer attention. 

Ignoring or not taking advantage of this (i.e. taking some profits) is a good recipe to lessor returns.  The same is true by investing in only large cap stocks -or a SET index funds and walking away.  Index funds just mirror the market's index performance.  Security selection and de-selection, profit taking and bargain hunting and entry timing  (but not market timing as this is much more difficult),  often increases returns.  Sometimes substantially so as I have shown here again and again since 1997.  Also strictly paying attention to academic geared valuations will not help that much as markets are often sentiment and liquidity driven.

Too often brokers advocate an over active trading approach that disregards individual client investment objectives.  It also ignores investment values, some rules of thumb and parameters.  Traders too often end up with short term gains -but long term losses as they sell out all their winners while keeping their laggards.  Again: winning stocks are sold too early for profit, yet the laggards are held on to.  This is the investors curse/trap as it invariably ends-up in time being a portfolio of laggards.  Too many Thai brokers believe everybody is or should be a trader -as this is the only way to "play" the SET.  When a member here once asked a local broker where to find good long term investment ideas, the answer she got was "nobody invests like this here...if you want some long term investments I can introduce you to my Uncle who sells land-plots".   Alas, the local broker culture is advocating trading -not creating long term new wealth. 

Also, one big disaster can take its toll and remove all trading gains made by the many winners (which were sold out too early).  As a longer term stock investor you must constantly beware of the traders trap, the sellout the winners too early trap -and the getting-in too late trap.  At time we must also recognize mistakes and cut losses. For our members here I much help with this.

Broker buy/sell commissions are lowest in history, hence the temptation by some is ever present to take the heavy transaction approach.  Brokers research can have conflicts of interest so they should never be used as the only source in decision making.  So what is the best approach to take?  Becoming a contributing member here is the first wise step. 

The proper balance of both long term and intermediate term investing takes some investor discipline.  If you are going to trade shares,  always separate the investing account from any short term trading account!  Do not co-mingling these two activities!   If you are going to trade, at least chose to trade a stock which you think has some investment merit -just in case you get stuck with it.  Realize as well that day-trading is always a form of speculating which is different then investing. 

Yet, taking some profits after a price surge can be good,  as frequently there is another chance to buy it back later.  Frequently but not always.  But this assumes you are interested in paying more close attention to the daily market moves which is not for everybody.  Balance this with the saying "let your winners run"  but regardless, never get over greedy or "married" to a stock.  Example, in March of 2006 I turned "neutral" on Ticon stock around 17-18 Baht per share, this after being very bullish around 6 Baht per share in Oct-Nov. 2004.  Members took profits and this stock has languished ever since.  The same was true in March 2013 when I stated to take some profits on DEMCO at 16.50.  It peaked at 18 a month later, but ended up correcting as low as 4, not longer after.  Last year, as just one example, I liked Thai Optical Group (TOG) which I wrote up at length in May 2021 at 5.85, but at 10.30 lately, I still like  it as the p/e is still low and its earnings are rocking up.

Regardless of how high a stock might go if I sense its fully valued in the shorter term, I often dared to view profit taking and posting this for members.  Another rule of thumb I have is to nail some profits when a stock has increased 50% above your cost.  Especially so if it was not long ago.  But recently I viewed keeping TOG as earnings are far from peaking.   Always diversify....and remember there is never only one correct way to invest that is why it is in some ways a form of art.  Its the delicate balance of Active vs. Passive Investing and I give regular guidance on that to members.

Besides regular good/fresh ideas, I help my members by pointing out excessive price surges -or sell offs as time goes on and what action I would take.  In the past this has often worked well, even if it meant missing some further surges or buying too early.   Its never perfect and its always only my own objective opinions!  Of course I can be wrong.  

“The better a company’s record and future prospects, the less relationship the price of its shares will have to their book value…Thus we reach a the final paradox, that the more successful the company, the greater are likely to be the fluctuations in price of its shares”.[/i]Benjamin Graham.  This shows that a popular company with a known fast track future expected growth rate can in the end be a far more volatile and so a risky investment, then one which does not have these seemingly positive attributes.  Key point being that often it pays to take profits before earnings peak and visa versa, accumulate a stock where the worst seems over.

We see,  none of this is very easy nor straight forward and there are variations and plenty of mistakes in hindsight. The investor process is full of mistakes, in hindsight and yet even at that, good returns can be generated over time.  Yes, through ups and downs, good and bad choices still, over time, superior returns have been achieved with the help of a Thaistocks.com membership.  (January 13 2022).