Shareowl: Moving With the Smart Money

Thu Nov 24, 2005 - 14:07 Sin


Moving With the Smart Money

In my book, Blueblack Chips and Growth Stocks published in late May 2004, I stated on pages 22-23 that Toyota was"truly cheap" at Y3,890. Today it traded at about Y5,850. Since July 2005, the Nikkei 225 has moved up from 11,500 to 14,750 today. (Toyota even crossed Y6,000 for a short while on Tuesday 22 November.)

In Blueblack Chips and Growth Stocks book, I also said that Singapore Telecom looked fairly valued and especially when compared with Toyota then. Today’s share price for SingTel is no higher than its level in May 2004. But Toyota has gone up by over 45 per cent and there is still more upside potential.

BE DECISIVE IN SWITCHING BETWEEN MARKETS

In August and early September, I had been liquidating three quarters of my Singapore equities and putting the funds released into more Japanese stocks. (I had actually gone back into Japanese equities in late 2002 after exiting them in 2000.)

I increased my allocations in favour of the Japanese market because there were signals pointing to an impending surge in the Nikkei 225. Besides improving economic data and highly positive results of Tankan surveys of corporate business outlook, Prime Minister Junichiro Koizumi called for a snap general election. I was confident his political party would come up with a resounding win in the elections. I anticipated that the stock market would respond heartily to his new resolve to step up economic reform.

MOVE WITH OR BETTER STILL ANTICIPATE SMART MONEY FLOWS

I follow business and political news locally, regionally and globally. I try to identify the actual and potential smart money moves into a particular stock market, industry, or company. But we must learn to tell the difference between herd instinct from smart moves by smart investors. With close monitoring and understanding of economic and corporate information and share valuations, we should be able to tell smart money movements from the “irrational exuberance” or"irrational sell downs".

Timing is important to me. But I am not a chartist. I’m an artist cum pseudo-scientist. My timings are based not on stock index charts or stock price charts. My timings are based on the study of fundamentals relating to economies (including political climate), industries and companies.

DOLLAR COST AVERAGING CAN BE SUICIDAL IF DONE MECHANICALLY

Many financial planners advocate dollar cost averaging and advise against trying to time the market with unit trusts or individual stocks. If you had done monthly dollar cost averaging on Singapore equities between January 1994 and September 1998, you would have lost hell of A lot of money. Even if you had persisted and continued with dollar cost averaging until today, you would have just broken even after nearly 12 years assuming that your stocks moved in line with the Straits Times Index.

But of course, if you had started your dollar cost averaging in September 1998, you would have made tons of money by now. It is a matter of timing. The STI was at the 2,600 level in January 1994 (equivalent to about 2,200 under today's STI computation method). But In September 1998, the STI hit rock bottom of just above 800 points in the darkest days of the Asian Financial Crisis.

Dollar cost averaging must be done with a good understanding of the general direction of the stock market that you are investing in. As illustrated above, practising dollar cost averaging on a mechanical basis can be suicidal even over a five to ten year period. In the case of the Tokyo stock markets, Japanese or foreign investors who practised dollar cost averaging from January 1990 (when the Nikkei 225 started that year at about 39,000) must have lost their pants till this day when the Index is supposedly doing well at 14,750. Imagine, after more than 15 years, the Nikkei 225 is only still 38 per cent of its 1990 peak.

You must not put all your equity investments in just one stock market if you want to stay invested at all times. You must change your country allocation each year and sometimes each quarter.

MY EXPERIENCE IN TIMING THE MARKETS

To me, it is obvious that well-informed market timing is one of the most important factors for successful wealth management. It was a carefully studied decision that I made in August to sell a large part of my Singapore stocks to increase my investment in Japanese stocks.

As for Thai stocks, In early 2001, after studying the relative fundamentals of different markets, I decided to move into Thai equities. But in the later part of 2002, there were already signs that Thai stocks have become overvalued in relation to their underlying fundamentals. I decided to take profit and got out of most of my Thai stocks in late 2002.

The very few Thai stocks I decided to keep included Thai petroleum stocks, PTT and PTTEP. These two counters were highly defensive stocks because of the then impending war between US and its allies and Iraq. Under such circumstances, one should hold oil and gold mining stocks.

IS IT TOO LATE TO BUY JAPANESE STOCKS NOW?

Not to worry. Even if you have missed the quick hefty gains of September and October, there is a general consensus amongst global fund managers that Japanese stocks will continue to rally in the remaining weeks of 2005 and even more so in 2006. But be careful. Stock selection is critical.

Although Toyota Motor and Seven and I Holdings have moved up considerably, they are still amongst my favourite Japanese stocks for the short, medium and long term.

Avoid loss making Sanyo and Sony which are undergoing restructuring. Wait until there is convincing evidence that their turnaround efforts are clearly going to work within a reasonable time span. Matsushita and Sharp look alright to me. The large banks like Mizuho have already enjoyed spectacular leaps in share price in September and October. I’m not sure about their near term share price performance. I am going to take a closer look at their current and estimated future fundamentals.

There are many stocks with great fundamentals that are still undervalued on the Tokyo market. In the weeks to come, I’ll try to identify some exciting but safe ones for my own investment and for discussing with the paid subscribers to the website.

WHAT ARE THE MARKET GURUS PREDICTING ABOUT THE NIKKEI 225?

Will there be a major downward correction in the Nikkei 225 in the near future? So far, the rise from 11,500 to 14,700 has taken place within just a few months. When the index touched 13,700 in the first half of October, it came down quickly over a week or so to about 13,000 owing to the weak New York market following the hurricane aftermaths and high oil price worries.

However, shortly after, and in line with better US market sentiment, the Nikkei 225 quickly rebounded and continued its ascent to today’s 14,700 with only very minor corrections along the way. Some Japanese market gurus are predicting that the Nikkei 225 will easily reach 17,000 by June 2006.

Should we go for the strong share price performers of the last few months or should we go for the laggards with good management and good earnings prospects? There is no hard and fast rule in the way I invest. If I go for laggards only and nothing else, there will be many lost opportunities. I will surely miss out on some great gains in the short term during this strong rally. I am basically a fundamentalist but I must confess I do look at charts too. I combine fundamental and technical analysis.

The Japanese economy could grow by at least 2.5 per cent during the current fiscal year and possibly 3.5 per cent in the next fiscal year ending 31 March 2007. It may even go above 4 per cent in the year ending 31 March 2008. My rationale is that not only are Japan’s exports growing. Their domestic consumption is also picking up and the pace should accelerate over the next few years as job creation improves and wages go up.

These are just estimated guesses. But we live in a volatile and unpredictable world. Unexpected events can take place and economic environments are changing all the time. I would be a fool if I do not change my forecasts as things unfold over time. I never cling to any market or specific stock out of sheer sentiment or ego. If it is time to cut loss, then I just act decisively after some thoughtful research and analysis. I do not like to waste time since markets and share prices can move down very fast after bad news hit the market or after initial signals become full blown bad news about a company, industry or economy.

MY INVESTMENT STRATEGY

Japanese PEs are on average around 18 to 20 times current year earnings which is low compared with the unrealistic level of over 60 in the late 1980s. Although the PEs are now seemingly comparable to those of US companies, it must be borne in mind that Japanese accounting practices are generally more conservative than those of US and UK companies. Hence Japanese stocks are still cheaper not only in terms of PE but in terms of P/B (share price/book value or net assets per share) as well. But having said that, I believe there are also some very good buys in the New York market.

To protect my Japanese portfolio, I practise some hedging by holding Nikkei put options all the time. And to take advantage of the Nikkei's upward trend, I also buy call options after each significant market correction and sell them when I feel that the market is overbought and is due for a major correction. I shall explain my Nikkei options strategy and choice of strike prices and expiry months on my website after my paid membership launch.

Where else are the world’s smart moneys moving into? Smart monies are also flowing into Korea, Taiwan, Hong Kong, India, Mainland China and certain other Asian markets. However, I pick my stocks not always by picking the market first. I also pick some stocks based on a bottom-up approach as long as those companies are safe and have exceptional earnings prospects even if they are listed on stock markets that are moving sideways. As I have mentioned above, there are also some good US stocks that have excellent prospects and are currently undervalued. There are also a number of great Singapore listed stocks that look undervalued.