You can contact the author (Teguh Hidayat) by email, The author live in Jakarta, Indonesia.

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Conservative? What is That?

In this sunny Thursday morning, I casually take a look at the price of shares of the Bakrie Group. Andd.. Whoaaa.. Bumi Resources (BUMI) seems like getting closer to the bottom price of Rp50 per share! Because it is currently traded at Rp103 per share. Previously, several other Bakrie-related stocks like Darma Henwa (DEWA), Bakrie Sumatra Plantations (UNSP), Bakrie Telecom (BTEL), Bakrie & Brothers (Bakrie), until Bakrieland Development (ELTY), they all had already reached the ‘dead’ level of Rp50 per share. If we take a look back at the years of 2009 - 2010, the stocks of Bakrie Group were so dominating the trading volume on the Stock Exchange, where people are even more interested to see the movement of BUMI than Jakarta Composite Index (JCI) itself. So this condition of course begs a question: What the hell happen???

For those of you who are new visitors to, then lemme tell you that, since I entered the stock market in 2009, I never bought BUMI even for a single lot. When in fact BUMI was one of the most popular stock, where registration data in a particular month in 2009 showed that BUMI is held by more than 50,000 different investors, both individuals and institutions, both foreigners and locals. Because the number of stock investors at the time was under 300,000 people in Indonesia, then we could say that, out of every five or six investors/traders on the stock exchange, there is at least one person who owns BUMI.

However, a friend once commented like this, ‘Dear Sir, if you already entered the market in 2006 or 2007, then you are most likely would also hold BUMI. Because, BUMI is the most phenomenal stock in the history of the Indonesia Stock Exchange, where the price went up from 700’s in September 2006, to 3,500's in the same month a year later (2007), or gained 5-fold in just one year! And it was in line with the then good fundamentals. On the other hand, because the trading volume of the stock were very liquid, then everyone can buy BUMI, including large mutual-fund or hedge-fund, and it makes the price even go higher until reached 8,000’s in May 2008. At that point everyone was insane, where the mutual-funds, investment banks, and brokerage firms keep releasing research and analysis which, at the conclusion, recommend BUMI. One of large brokerage firm once also said that BUMI could gained further into Rp12,000 per share.’

My friend continues his words, ‘If you already entered the stock market at the time, and could refrain yourself from buying BUMI, then everyone will think that you’re crazy.'

The point is, regardless of the share price that is slumped today, along with the poor fundamentals of the company, but at a certain period in the past, BUMI was a company that is worth to buy. It was actually a good company! Including, in 2009, Gita Wirjawan also made a huge success after buying BUMI at price ranging from Rp500 to 1,000 per share, then sell it at Rp2,500 per share in just about a year later (and that's why he became very rich). So the question is, what’s happening to BUMI, and also any other Bakrie-related stocks?

The answer of this question may back to the history of BUMI itself. In 2001, the Bakrie Group tries to reorganize their business empire which was shattered by Monetary Crisis of 1998, with the acquisition of a coal company called Arutmin, using a loan of Rp2 trillion from Bank Mandiri and Social Security/Jamsostek (so Bakrie took over Arutmin by way of debt). The Bakries previously bought a small hotel company that is listed on the Stock Exchanges with ticke of ‘BUMI’, and changed its name to Bumi Resources (but the ticker remains the same). Through BUMI, Bakrie issued new shares to acquire Arutmin (backdoor listing), so BUMI became a coal company.

Shortly thereafter Arutmin start generating substantial profits, so the Bakrie Group began searching for new ventures. In 2003, the Government of Indonesia at the time asks two global mining company, British Petroleum (BP) and Rio Tinto, to divest their shares in Kaltim Prima Coal (KPC), the largest coal company in Indonesia. With their extraordinary expertise in negotiating, Aburizal Bakrie and his younger brother, Nirwan Bakrie, successfully took over KPC (through BUMI) at the price of US$ 500 million, even though they did not have that much of money. So where the money came from? You might guess: Another debt!

Anyway, KPC later successfully became the largest contributor for BUMI’ earnings, where in the next few years the net profit of BUMI continues to rise significantly. And of course the stock also follows the company’s fundamentals, where BUMI gained from Rp200’s per share in 2003, to 8,000 in 2007. At this point, Mr. Ical and family had successfully brought themselves back into the Forbes list of Indonesia's richest business person, even Ical had once topped the list.

But well, sometimes one success story only bring out the curiosity, or to be exact, the greed, to make another. By holding KPC, the Bakrie Group was already very successful to make themselves billionaires one more time. With the coal reserves of more than 2 billion tons, KPC is more than enough to provide fixed income for the Group for years to come.

But perhaps because of their easy take over of Arutmin and KPC even though they did not have the money, they then continued to buy many assets. After KPC, the Bakrie Group through BUMI again acquired several assets, such as two coal mining companies PT Fajar Bumi Sakti and PT Pendopo Energi Batubara, two gold mining companies PT Gorontalo Minerals and PT Citra Palu Minerals, an iron ore mining company PT Dairi Prima Mineral, and the most hot, a minority interest in one of the largest gold companies in the country, PT Newmont Nusa Tenggara. In this case I think that, if the GoI could somehow force Freeport McMoran to divest its stake in PT Freeport Indonesia, then Bakrie will be in the front of line to take over the shares sold, once again, even though they do not have the money.

Then where Nirwan cs have cash for these acquisitions? From none but debts and fund rising, of course, either in form of bank loans, bonds, IPOs, or right issue. As the central figure of Bakries, Mr. Nirwan only need to make a deal with the owner of assets/companies which he likes to acquire. And after the deal, he can easily call the bank to provide the money. Not only through BUMI, but also through other companies such as Energi Mega Persada (ENRG), ELTY, BNBR, until, Visi Media Asia (VIVA), Bakrie Group is diligently acquiring various type of assets (BUMI for assets related to coal mines and mineral resources, ENRG for assets related to oil and gas, ELTY assets related to land, property and infrastructure, etc.).

The problem is, Bakrie did not limit themselves in taking new debts. They continued to take over the assets so that their debts continue to grow, including debts with the high interest expense, such as loan to China Investment Corporation (CIC) with 19% of interest per annum. Because the value of the loan itself was US$ 1.9 billion, the Bakrie Group had to pay US$ 361 million, or approximately Rp4 trillion per year to pay the interest only, and it does not include the interest of other debts! So it is not surprising if the Group became busier in refinancing, delaying the payment of interests, etc., rather than taking care of the companies itself.

And when the assets under BUMI (and also under other companies) started to have a declining financial performance, for example due to a decrease in coal prices, then the negative impact can be very deep because the company does not have sufficient funds (from the operating profit that is declining) to pay interest on the loan, which lead to tremendous loss. When the losses/deficit accumulated, then of course it has negative impact on the value of net asset of BUMI, so heavy that led to capital deficiency. With negative value of equity, then  of course the shares of BUMI became worthless, and that’s why the stock kept falling down. I do not know whether the Bakrie Group could survive or not, but certainly for this time they are falling apart because of their own acts. You can see that the coal companies in the IDX are having hard year, so their stocks were all down, but nothing that dropped as low as BUMI today.

Okay, so what lessons we’ve got here?

In business, or investing, greed is commonplace. Even Gordon Gekko once said, "Greed, for the lack of better words, is good’. I myself has often met young guys who are not enthusiastic when I say, ‘My target is conservative, like about 20 – 30% per annum because, frankly, it’s not that easy, you know'. When I said that, maybe they thought, ‘If my gain is that small, when I become rich?’

Well, the same thing also happened on a higher level of investors, such as Bakrie Group (we're just petty players, which can only take over the assets traded in the market with small money because we do not have access to Credit Suisse or Deutsche Bank). The Bakrie Group has been very successful when they took over KPC, where they’re back on the Forbes’ list in a matter of years, but the success was causing them to go several steps further. It’s like, if necessary, all the good assets in Indonesia are all held by them! For the funding, it’s not a problem because the banks are even queueing to give loans.

Actually some other conglomerate groups, let say the Astra Group, they are not allergic to debts, but they only take a reasonable amount of debts, and only acquired the assets when they have sufficient money. They are not interested to 'jump' using high leverage (a fancy term for debt), but prefers to keep stepping forward, one of them with the continuous development of existing assets, and it is different from the Bakrie Group that is more interested to continue to acquire new assets rather than developing existing ones. In short, the Astra Group doing the business (and invest) in a way that is much more conservative than the Bakrie Group.

But the result? Well, you can see for yourself how large Astra now. While BNBR, which once referred to as 'Berkshire Hathaway of Indonesia', the stock is dead at Rp50 per share. Actually this is not the only case when the method of investment like the Bakrie Group did, which using heavy leverage, in the end only made nothing but destruction. Lehman Brothers went bankrupt in 2008 because they were taking too much debt for mortgage credits, which reached US$ 900 billion. Enron Corp., a giant oil and gas company in the United States that was popular in the 90s, also broke mainly because of their extreme ‘appetite’ in acquiring and acquiring more assets, using debt. WorldCom Inc., a large telecommunications company went bankrupt in 2002 after failing to pay their debts amounting to US$ 41 billion. And so on.

While in Indonesia? Well, besides the Bakrie (although I could not understand why they do not go bankrupt until today, but the bankruptcy laws here are not as restrictive as in America), there is Berlian Laju Tanker (BLTA), a shipping company that has a long and excellent history, but everything changed after in 2007, the management of the company decided to 'jump higher' by taking debts up to billions of dollars. Another story is Borneo Lumbung Energi & Metal (BORN), a coal company with tremendous prospects because it is one of the few owners of coking coal in Indonesia. But the company destroyed immediately after the management decided to participate in the 'disaster cooperation' with Bakrie and Rothschild, where BORN is now in debt of US$ 1 billion to Standard Chartered Bank, but the company could not afford to pay. In the monetary crisis of 1998, there were hundreds or even thousands of large companies who go bankrupt, and again with the same cause: Because all of them are in heavy debt.

So what is the conclusion?

Like I said before, greed, in investing, is commonplace. However, history proves that the investors who are able to control his greedy nature, would eventually be the winners. The action of leverage, as long as it is in a reasonable limit, is allowed. But if you doing it without sense, you’ll end badly. Bhakti Group, which has now changed its name to MNC Group, a company belonged to Hary Tanoesoedibjo, is one of investor who also uses the leverage either in form of bank loans or bonds, but they doing it in a prudent way. And the result, although Mr. Hary political venture seems to be a total failure, but his business keep running smoothly. The stock of MNC Investama (BHIT), the holding company of all subsidiaries of MNC Group, although only moving sideways at the current level, but does not fall into Rp50 per share like BNBR (or BUMI, soon).

Therefore, as an investor in the stock market, please take a look at the amount of debt of the company that you will buy its shares. As Warren Buffett said, 'We like companies that are able to produce consistent profits by using a little debt, or no debt at all'. I always avoid the companies that have huge debts which bear interests (bank loans, bonds), especially if it was larger than the value of their net equity. On the stocks of bank, I always look for banking stocks with large CAR, say above 15%. Please note that, when the company have debt but only in a small value, then it is still allowed. So you do not need to limit your investment in stocks/companies who do not bear a debt at all.

It’s from the side of the company that you will buy its shares. In terms of your own as an investor, just try to be as conservative as possible. Perhaps I should mention once again that, this strategy of defense is not a popular idea, especially because most of people always like to become rich quickly. As in the game of soccer, the match will be more exciting if both teams are attacking each other than if one of them just park the bus. But trust me, no matter whatever tactics used by the coach, whether it's a total attack, playing in the middle, or counter attack, but the defense still could not be forgotten,  could it? A soccer coach can not just keep thinking about how to score a goal, but also about how to keep their own net clean. Well, in value investing the concept is the same: You may keep searching for the profits, but the strategy of margin of safety so that we would not suffer losses is important as well, or even more important. We are not interested in the potential for huge profits if we can not measure, how much the risk.

I myself, when I was very young, also not interested in the concept of a conservative play like this, because: When I will get rich? However, after being taught by experience over the years, including after took a look at the history of 'conservatism vs. greedism', which in the end the conservative gang is always be the winners, I decided to join this winning team. We prefer to invest by using existing funds only, without margin, leverage, or the like unless it was absolutely necessary (Warren Buffett at certain times also issue bonds, but that’s it: at certain times only). We are also not interested in making a 'huge profit in a short time' or the like, but just keep walking. What is important is that we enjoy, relax, and do not stress in doing our investment activities.

And I'm inviting you guys, to join me to the club! Just do your investment like Astra does instead of Bakrie, and see the results! Aanndd oh, do not play politics, please?

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