Planning Begins In Spring: Exercise Caution And Patience!
By Dr Chan Yan Chong
How much wealth is enough? To have ‘enough’ could probably be when your income from the interests generated by your assets each year is higher than the income from your job, for by then, you do not have to work and still be able to maintain your current lifestyle. As the Chinese saying goes, ‘The planning for the year begins in Spring’. As we celebrate the Spring Festival, I encourage you to make your plan seriously and calculate how much wealth you need to make so that you have ‘enough’.
When you have a clear goal, it will decide what level of risk you should take. If you are far away from your goal, you may want to take a bigger risk; when you are near or already achieved your goal, you should guard your assets. If you have surplus, you may want to take smaller gambles, just to test your sense of judgment. Over the past 30 years, I have kept to this principle of long-term planning, gradually accumulating wealth with my long-term investments and eventually achieving financial freedom successfully.
In this Year of the Horse, we do need patience, like the Chinese saying ‘A long journey tests the ability of the horse’, as this is a year in which your patience will be put to the test. Recently, many concept stocks in Hong Kong have been hugely popular, while quite a number of initial public offerings (IPOs) were also hotly sought after. As long as you are in control of the amount you invest in these shares, there is no harm trying your hand. What you should never do is to stake your livelihood on the current fever, for shares that can appreciate by five folds within two to three months may fall by as much as 90 percent of their highest values to end up worse than before the Bull Run. Currently, a number of junk stocks that have already gone through a few rounds of speculative fever in 2007, 2000 and 1997 are starting to stir, so investors need to be cautious.
Over the past year, the US stock market went through a meteoric rise. Apart from the US Federal Reserve printing money to fuel this Bull Run, another source of the momentum comes from the listed companies themselves. These US listed companies have earned more last year than in the past, with record-high profits pushing share prices to new heights. However, are these record-high levels of profit due to more business? No, not really. The profits of many companies grew not because their businesses are better than before, but due to lower costs. The union is very powerful in the US, so companies do not lay off workers easily, which often leads to a large number of redundancies. The 2008 financial tsunami presented companies a golden opportunity to lay off extra staff, while trade unions were presented with the dilemma of accepting these layoffs or facing business closures. Ultimately, the majority of trade unions accepted the proposal of laying off staff to save the businesses.
For the Chinese Shanghai Composite Index, the number ’2,000′ is like a kind of magic number; for it has rebounded promptly every time it fell below this level several times since last year. The source of this solid support is none other than the central government. Late last year, many people were talking about how the deluge of Chinese A-share IPOs will crash the A-shares market and cause investor to withdraw their capitals from an already-tight capital market. However, I held that these Chinese IPOs will set off a round of speculation not unlike the present situation in Hong Kong.
The torrent of Chinese A-shares IPOs have since gone public, and have indeed set off a wave of speculation that is at least as enthusiastic as the fever in Hong Kong. Speculating on IPOs is easier than on old stocks, on the grounds that there are too many lemons among old stocks, making it unattractive for institutional buyers to take over shares held by minority shareholders. On the other hand, it is easier for institutional buyers to buy up IPOs, since only 10 percent of the total number of shares are available to the public, of which institutions are major buyers. When it comes to distributing shares, since one less portion for retail shareholders means one more for institutions, it is thus easier to start a bidding contest that drives up share prices, which also encourages institutional buying. For this reason, even though the performance of the Hang Seng Index was lacklustre over the past few months, speculators who dare to invest in IPOs are still able to make a tidy profit.
Regulatory requirements in Singapore are stricter than China but more lenient than Hong Kong. Thus, most of the Singapore-listed Chinese stocks have performed quite poorly. As I have said repeatedly many years ago, investors in Singapore have lost confidence with these counters. I think investors are better off trying their luck with the H-shares in Hong Kong than the S-chips in Singapore. In the last issue, I cautioned that when everyone else has gone mad, you should be conservative. Keep in mind this quote by Warren Buffett: “You never know who’s swimming naked until the tide goes out.”
On 24 January, the US Dow Jones Industrial Average went into a panic selling-like free fall that plunged below the 16,000-mark. On 27 January, stock markets all over the Asia-Pacific fell dramatically, which saw third- and fourth-rung stocks hitting rock bottom. In this raging bear market, it is a real challenge to find support at any price level, let alone support for counters that had seen huge gains prior to the current fresco. The reason is, the vast majority of retail investors have a ‘first one in makes the money’ mindset. Faced with this slump, retail investors will scramble to trim their holdings and take profit quickly.
For this reason, institutions will need to pump in a significant amount of capital to prop up those counters that had enjoyed big surges recently, and only the truly big players can afford this. Thus, only the gaming stocks in Macau and companies under Li Ka-shing’s group that have undergone strategic realignment are beneficiaries of such support from their respective financially unassailable backers. Meanwhile, second- and third-rung penny stocks are not so fortunate, since retail investors lack the same level of financial prowess and are not foolish enough to buy up all the struggling shares in the market. As a result, these shares are left to fend for themselves as their stock prices plummet.
On 27 January alone, a number of IPOs in Hong Kong that enjoyed a surge in prices at launch have seen their prices fall below their offer prices, leaving those small investors who have forgotten to take profit during the surge kicking themselves in regret. The present sentiments may even dampen the enthusiasm over the IPOs that are launching soon. There are two types of stocks that will appreciate after going public: those with genuinely good business prospects, and those that bet on speculative demands, in particular those with low market capitalisation. Such counters rely solely on the support of institutional buying and are thus not reliable.
Publish date: 07/02/14