Value and Growth investor, all at once.
June 17 ‘07
Thailand’s stock market offers two long proven astute investors' style, all in one.
Real Thai market inefficiencies.
Just as there are different schools of architecture there are 3 great and distinct serious stock market investment religions: value investing, growth investing and momentum investing. I suppose a forth one is agnostic, which tends to chose the style all depending on the current stock market cycle. Day trading in shares is not an investment theorem -as this is considered a speculative activity with marginal long term results.
Growth stock investors argue that you want to own shares in growing companies for the long run, as their earnings and dividends are on the up and, despite some occasional setbacks in some years, in the long run they outperform everything else. The key they is properly identifying such companies more so then being overly concerned how expensive they are. With expensive we mean their earnings per share as compared to the current stock price. This is called the p/e ratio.
The higher a p/e ratio the more expensive a stock is valued in the market. US academics have proved that if you had perfect foresight and bought shares of companies with the fastest earnings growth, regardless of valuations, over the long run you would outperform the S&P 500 (a broad US stock index) by 11 percentage points per year, which is a huge amount. Obviously the problem is that nobody has perfect foresight, as identifying growth ex-ante is very difficult.
By contrast, value investors want to own shares which are cheap not only on an absolute basis but also as compared to others trading on the same stock exchange. Its like an informed consumer going to the supermarket/shopping-center looking for items on sale, which are truly a bargain. By investing in undervalued shares, a value investor so creates for him/herself a margin of safety in case something goes wrong, like a sudden market correction or a change in the economic outlook. Value investors look for firms which can be purchased below their intrinsic fair value. Value investors never fall in love with their stocks, as when they get discovered and move up in price they are sold, purely on the basis that they are no longer cheap. Value investors are often called "contrarians" as they invest in companies which are not currently in vogue.
Momentum investors are just the opposite. They look for shares which are in fashion now and on the go and so the flavor of the times. They like to buy shares which are trending up now and so extrapolating the past into the future. Momentum investors are not concerned much with low p/e’s or high dividends or what the business outlook is. They are most concerned in what is working just now -and to ride the trend. The trend is your friend, they say. In a true bull market this works well.
"A trend is a trend is a trend
But the question is , will it bend?
Will it alter its course
Through some unforeseen force
And so come to a premature end…"
Sir Alec Cairncross, Chief Economic Advisor to the British Government in the 1960’as.
The agnostic investor believes everything in the investments business, as well as in life, is temporary. "This too shall pass" is their mantra. They believe there are fashion swings between the different styles, influenced by the times of that era. They think they can correctly identify the style in fashion just now, change their ways in time -and not get left behind. This self acclaimed intelligent investor thinks he can capitalize on the mood swings of an era and adapt and so excel. The hard core growth and value investors claim this switching back and forth is a loser’s game.
Now it is true that the growth stock investing style has worked very well for many professional investors over many decades. The trade-off however is five fold: 1) Growth stocks in developed countries are almost always trading at a premium price -as compared to the average stock in that market. 2) Growth stocks in developed markets pay no or only a miniscule yearly cash dividend, so holding on to them gives you no current income. 3) Very true, identifying true growth companies, for the long run, is difficult as many fall from grace. 4) Growth stocks are usually smaller in size and have less market liquidity, but this is only most important to larger institutional investors. 5) Growth stocks in developed country stock markets are often more price volatile and -price volatile so entails more risk.
This hence so requires a full time commitment of regular attention, checking, discovery and monitoring, along with the further limitation of no or little annual dividends, higher volatility and lower average daily trading volume. Yet, as you can see from the below chart these trade offs are well compensated by increased returns, over time.
Here is the punch line on why the Thai stock market offers unique opportunities:
The beauty of the Thai stock exchange, as an investor, is that you can be both a value and a growth investor -all at the same time! The trades offs are virtually eliminated. Some believe this is too good to be true?, but consider these facts:
1) Thai smaller capitalized (cap.) companies whose earnings often growth faster then large cap. SET stocks, almost all trade at a discount p/e, not a premium, as compared to the larger cap. SET stocks.
2) Thai smaller cap. stocks listed on the SET and on the secondary smaller cap. exchange called MAI (Market for alternative investing) almost all pay a higher cash annual dividend, as compared to their large cap cousins. The average annual dividend yield on the Thai SET is currently around 4%, but many of these smaller growth companies pay yearly dividends in the rage of 5-8%!
3) Surely smaller cap Thai shares have far less average daily trading volume, but if you are an individual investor this is hardly the same handicap an institution has. And unlike with a consumer product or real estate you can dribble-sell and accumulate-buy, shares.
4) The SET smaller cap stocks most often have lower then average SET market Beta’s. Meaning historically they have been less volatile then the larger cap stocks.
"The SET index is highly influenced by a number of volatile large cap. stocks. Unlike in developed countries the large cap stocks are among the most volatile". Mr. Montree chief executive of Kim Eng, Thailand’s largest broker dealer by market share.
Thailand has a number of profitable and leading smaller cap. companies in important industries and some with years of good earnings and dividends. In many ways these represent the real Thailand and they make up some 2/3 of Thai economic activity. The problem is that for the most part the transaction oriented local brokerage community does not focus on long term investing -as this does not promote broker commissions. Further, many broker reports are geared for the institutions; the very larger investors whom are and must be share liquidity obsessed.
Identifying, analyzing and knowing of these smaller growth companies are therefore the real challenge. A challenge once addressed, along with using a fully diversified portfolio approach, has resulted in a superb investment mix of value and growth, along with high dividends all at once. This been so for many years, and looks likely to continue to be, a true wealth creating experience.
Paul A. Renaud.