Thought Processes

U.S. market alongside other Asian stock exchanges recently underwent a Correction. 
Malaysia’s KLSE is down 10.87% 1YR and down 6.64% YTD (28/08/2015 Bloomberg) on Friday and there were no negative surprise events over the weekend “Bersih” rally. 

Such statements should be present in abundance in the media. The following is a brief reasoning why headlines as such should not deter critical investment decisions.

The stock market is not alive. That would seem rather obvious however media always gets the best of investors by using words that portray the liveliness of the stock market. Daily, you will read words that spell out doom or boom in most media coverages. Subconsciously, these may effect your decisions unless you have already developed a rigid investment philosophy that you stick by at all times.

In a recent Bloomberg interview, Tan Teng Boo of Icapital.biz Bhd mentioned the “sell off” began as soon as the July FOMC minutes 2015 meeting minutes were released for public viewing. 

[ Bloomberg TV Live, 27/08/2015,
http://www.bloomberg.com/news/videos/2015-08-27/is-another-global-financial-crisis-on-the-horizon- ]

[ July FOMC minutes:
http://www.federalreserve.gov/monetarypolicy/fomcminutes20150729.htm ]

This form of observation is much more warranted than random media explanations when stocks decline in value. 

However, the writer is NOT biased towards any recommendation by others. The example(s) given is to show the "Thought Processes" that guide fund managers.

[For newer investors; a Correction/Sell Off takes place when fund managers and investors as a group sell more securities than they buy]

For a sharper look at stock markets, read Kenneth Fisher’s 11th book "Beat The Crowd”. 

In regards to media, Mr. Fisher blatantly says CNBC is NOT for serious investors (not his exact words). The point to be made is that the media have their own business which is reporting news daily to gain more viewers and advertisers for more revenue dollars to benefit their stakeholders.

All media companies have a business to run. Assuming routinely the media gave you the break down of companies’ true long term potential and all you had to do was buy and hold those stocks, they’d run out of news, out of viewers, out of advertisement dollars, out of revenues and finally out of business. Possibly a reporter with such skills may find it more rewarding to become a fund manager. The point to be made is don't be easily persuaded by news but always stick to logical, rational and workable investment philosophy(s)/strategy(s).

[Note: Media nevertheless plays an important role in maintaining efficient markets and in dissemination of information]

Warren Buffett’s Berkshire Hathaway recently announced a purchase of Precision Castparts at a price above $30 billion. (As a background story, Mr. Buffett have advised investors before NOT to buy airline companies in the past.) A simple reasoning to his recent mega purchase could be that this company makes important parts for the airline industry in large quantities and that Mr Buffett views the airline industry to continuously grow. In the nearby future, it can be opined that the life spans of aircrafts alongside economic growth in Asia and other emerging nations will lead to new aircraft orders and consequently higher parts sales by Precision Castparts (cheaper parts from competitors is less probable to be consumed by the airplane industry due to high safety standards requirements). In addition, Mr Buffett also acquired a car dealership, Van-Tuyl Group in April, 2015. 

The main point to be seen is the thought process of Mr Buffett’s acquisitions. It is opined that his bet is on the long term returns in 2 major industries in 2 companies that play large and important roles within those industries. He once mentioned in a talk he gave, that the auto industry of US in the 20th century had 2000 companies but eventually only 3 of them survived. How do you choose the winner? By betting on more or less, sure bets: which are as long as the auto industry and the aviation industry prosper, services/sales/parts will be required. Companies fulfilling this increasing requirement of sufficient size and quality will prosper. As long as a company maintains its competitive position & shareholders interest among others, all shareholders will share in the benefits of that company’s prosperity. An added note; Mario Gabelli of GAMCO also uses similar thought processes in his stock purchases.

[ The talk by Warren Buffet : https://www.youtube.com/watch?v=2a9Lx9J8uSs ]

Back to the U.S., Malaysia, and Asian stock market Correction. Look for long term prospects. Holding long term investments saves you numerous costs that compounds over time i.e. capital gains taxes (not present in Malaysia) and brokerage costs. 

Besides below, many investors in Malaysia might be piling into Oil&Gas (O&G) stocks. 

A word of caution: These stocks have been sold as numerous KLSE listed O&G stocks are dependant on PETRONAS for their contracts. These contracts have high probability of revision clauses allowing PETRONAS to change terms during unfavourable events (i.e. current drop in commodity prices). For definite confirmation, ask investor relations of your O&G shareholding company for major O&G contract documents that should be available to all shareholders from respective company head offices. This is to ensure your stocks of contract-dependant companies are secured in times of low oil prices. Some companies may have already be forthright in disclosing their exposure to recent oil selldown.

Solar related and renewable-energy-based Companies might present an opportunity looking at advancements in technology, reduction in production costs comparable to non-renewables sources and the increasing necessary awareness in global pollution. Identifying winning companies is still in progress as cheaper non-renewable natural resources (e.g. oil) tend to depress solar stocks and vice versa.  

Stocks in View

MajuPerak Holdings Bhd 

• Receivables from sale of land not yet realised in 2Q.
• Long Term: Joint Venture (JV) businesses still in progress. They should provide sufficient investment returns in coming years. Realisation of JVs depend on project speed, quality, etc (check for any negative development as company has a history of negative earnings).

Perak Corp Bhd

• Have recently pared down debts and booked gains from disposal of securities held (Integrax Bhd stock) for first half ,H1 2015

IBM (U.S.)

• Have substantial return on equity policy and strong and large client/customer base
• Despite declining revenues, efforts are continuously taken to remain competitive. 
• Have a complex network of businesses that require extensive research for full business comprehension. 

Happy investing until next time. 

[DISCLOSURE: The writer currently owns minority stake in MajuPerak Holdings Bhd and Perak Corp Bhd among the mentioned stocks as of 31/08/2015 under his personal account. JR Capital LLP does NOT have any interest in mentioned stocks as of mentioned date.] 

[DISCLAIMER: Everything stated in this blog is purely the opinion of the writer and any decision taken should be based on sound judgement with risks fully born by the decision maker. The writer shall bear no responsibility for any losses due to adherence of advices blogged by the writer or any commenters.  Informational discrepancies are possible and will be corrected if any.] 

First published on 30/08/2015.