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When Market Price Doesn’t Mean Anything

A few days ago, the management of the Bank Tabungan Pensiunan Nasional (BTPN) announced that Sumitomo Mitsui Banking Corporation (Sumitomo) took over 15.7% stake of the Bank from the hand of TPG Capital, at a price of Rp6,500 per share, or far above the market price at the time, which was Rp4,300 per share. Thus, Sumitomo officially holds 40% stake in BTPN, but the story is not lying there, but: Why was Sumitomo willing to disburse funds totalling Rp15.2 trillion or about US$ 1.5 billion, to take over 40% stake in the Bank at the price of Rp6,500 per share, whereas the market price of the share itself was only Rp4,300?
                
To understand this, perhaps we can return to the year of 2009 when I began my investing career in the Indonesian Stock Market, of course with an extremely small funds, which taken from my regular salary as an employee in a company.

Well, as a small investor, there was one thing that is directly imprinted on my mind at the time, namely: It looks like the fate of my investment is determined by the market, big dealers, or whatever it's called, and I did not have any power against them, including the analysis that I have made ​​before does not mean a thing. For example, when I bought the shares of Bank BRI (BBRI), I was so sure with my decision because BBRI is a very good stock that represents a well-known bank with strong fundamentals.

But then I learned that if the Jakarta Composite Index (JCI) was down, then the stock of BBRI would follow, and as a result my portfolio became red colored. At the time, frankly, it was very difficult to be committed to long-term investment, to be able to see that this BBRI (and also the stocks other with good fundamentals) will eventually rise after a long time. What I thought, If my stock went down, then even though it have not been sold, I then feel that I actually suffered a loss, and that my investment decision was wrong.

That's for the blue chips stuff like BBRI. While for second or third liner stocks, as the movement of the market price is far more extreme, that's when I began to feel helpless against the 'big dealers'. I have had the condition in which I put all the money in a single stock only (because I was so confident about the fundamentals quality of the stock), and then, instead of rising, the price was slashed to about 10%, whereas JCI is rising! Could you imagine how bad my feeling at that moment?

But over time, as my funds continue to grow, my perspective on the movement of stock prices in the market began to change.

So here goes the story. Some time ago, it was long enough anyway, I intended to buy a particular stock that after I’ve learned it comprehensively, it had good fundamentals and the price is also reasonable. The stock is Ekadharma International (EKAD). At the time the price was still in Rp360​​ – 370 per share, and I wanted to buy it in a quite big quantity.

But EKAD was illiquid, where the volume of bids was very small, and also the offers. As a result, if I was about to spend all the available money at once, then I had to take some fractions of the price, that would make the stock rose directly to the price of 400’s.

So if I did that (buy the stock at one shot), then my acquisition price of this EKAD would be higher than 360. So then the strategy was to buy the stock by way of installments. Almost every day, if the lowest offer of EKAD is at the price of 365, and at the amount of 20 lots, for example (at the time, one lot was equal to 500 pieces of share), then I would take the stock at that amount. If later someone sell EKAD at lower prices, for example 350, then so be it, I took the offer. At this point, I’d feel lucky when the price of EKAD is down, because it means that I could buy more.

And it was a strange feeling, because usually when my stock went down, then I would feel stress, confusion, and even depression, but this is quite the opposite!

On the other hand, when I finally succeeded in acquiring this EKAD in a large amount at the price of 360’s, then when the stock rose to 400, it also does not mean anything. Why? Because if I decided to get out, then I would not be able to sell it all at once at the price of Rp400 per share, as the bid volume was not big enough to accept the amount. If I forced myself to sell EKAD at once, then the price would likely to dropped immediately.

So I began to assume that the market price (of my stock) does not mean anything, as it was easily changed depending on my decision (whether to buy or sell it). Just because it went up it does not mean I’m gaining, and otherwise, just because  it went down does not mean I lose. Because, frankly, I am of course just a tiny fish that cannot be paired with big boys like Sumitomo or other institutional investors with unlimited funds. But if I did not care about the price of the stock on the market, then how would they???

Return to the matter of Sumitomo and BTPN, if there was a question, why would Sumitomo acquire the stake in BTPN at the price of Rp6,500 per share? The answer is of course because Sumitomo could not buy the stock through the market, as the offers were very little, while they intend to acquire a large amount, which nearly 2 billion shares. If Sumitomo forced itself to buy the shares of BTPN through the regular market at the price of 4000's, then they will not be able to take that much (up to tens of millions of lot), without making BTPN share price skyrocketed to who-know-how-high. So it’s better to take a package of shares at the price of Rp6,500 per share. And why 6,500? Well, that’s because according to them, that's a pretty reasonable price, considering the fundamentals of the Bank, etc..

On the other, the previous shareholder, TPG Capital, they also did not mind to sell 40% of its stake to Sumitomo on the price, as they cannot sell the stake to public investors without making the price dropped. TPG Capital is a venture capital firm, so they can use the proceeds from the sale of the shares to invest in other small companies for later developed into large ones, just as they did on BTPN, six years ago.

As for Sumitomo, their step into BTPN is to hold the bank for onward, because they are actually in the banking business.

But the point is, once again, in the case of a transaction between the above two major investors, the market price of BTPN does not mean anything. If somehow the market price of the Bank was at the level of 10,000, for example, then the transaction will still be done at the price of Rp6,500 per share, because if the price was more than that, then Sumitomo will not want to buy. Remember that Sumitomo is a value investor who only buy shares if the price is fair or undervalued, not a trader who buy shares if the chart breaks out.

Okay bro, I understand now. But my question is, if I buy a stock in large quantities, and some time later the price rose, then how could I realize the gains if I can not sell it as nobody able to buy it??

Well, to answer this question then you can ask to Mr. Lo Hong Kheng (LKH). You think, why would he spend more than US$ 8 million (a large fund for the size of individual investor) to acquire illiquid stock like Petrosea (PTRO)? It was clear that he cannot quit from PTRO at once because there aren’t enough funds of any other public investors that are able to accommodate that much shares, but why would he quit? Is PTRO gonna be bankrupt or something???

But in another case, LKH had also bought the shares of Panin Financial (PNLF) in installments at the price of Rp100 – 120 per share, until he was succeeded in acquire a large amount of the stock (worth about US$ 10 million), so that he could not get out. But when PNLF finally rose to Rp250’s per share, then that's when he came out, although also through installments as he could not exit at once. But the result? Well, the gain was one hundred percent!

The point is, believe it or not, if you buy a stock based on its value, and you can no longer care at the market price of the stock, then in the long term, the result will still great, often far greater than trading. Remember that Mr. LKH does not hold PNLF for a day, a week, or a month, but for about two years.

Besides that, based on experience, when a stock has been priced very low, either because the JCI was tumbled or there was a negative sentiment, then its liquidity would be low too, usually because the shareholders (that bought the stock at upper price) are unwilling to sell, but the prospective shareholders are also not dare enough to buy, and consequently no transaction occurs. But if the stock is eventually rise, then that's when the transaction volume will be crowded. If we use PNLF as example, take a look at its volume of trade when the price was still at 100's, then compare it when the price is at 260’s, as it is today: Its current volume is much more liquid, right?

So once again, you do not have to worry when buying an illiquid stock, just because you are afraid that you can not get out. Because when the stock is eventually rose, then you will be able to get out because, believe or not, there are many other investors who are happy to acquire them (at high price).

Okay, if the market price is no longer meaningful, then what is the point of a stock? Its value, of course! You can assume that your investment in a stock is actually grow if the real value (net assets, net income, etc.) of the company is growing along the time, not care if the stock price does not go anywhere, or contrary, moves up and down in volatile. In essence, as long as the fundamentals of the stock that you hold are good, and the company also continues to grow, then you can continue to hold the stock forever. And if at any time later it fell, whether it was because the JCI was dropped or it drops its own, then you can buy it or just leave it. Including, when it rose (the market price), just let it be!

And that's how the thought of a great investor like Sumitomo: The important thing is to maintain its excellent performance, or to make it better, and not whether the BTPN’ share price in the market will go up or down. Okay, your fund might be only a penny if compared to their funds. But if we follow their way of thinking and their way of investing, then we might grow to be as big as them someday, don’t you think?

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