You can contact the author (Teguh Hidayat) by email, teguh.idx@gmail.com. The author live in Jakarta, Indonesia.

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Indonesia, Ten Years from Now

Berkshire Hathaway has released the annual letter for the year 2015 on February 27 (luckily, at the age of 85, Warren Buffett is still in good health and still regularly writes), and there are some interesting points in the annual letter. One of them, which we will discuss in here, is about Buffett’s viewpoint about the US economy, which, in my opinion, we can use it as a reference to look at the economy in Indonesia in the future. Okay, let’s get it on.

2016 is an election year in the US, and the candidates can’t stop talking about the country’s problems. As a result of this negative drumbeat, many Americans now believe that their children will not live as well as they themselves do.

That view is dead wrong: The babies being born in America today are the luckiest crop in history.

Today, the US GDP is approximately US$ 56,000 per capita, or six times greater than in 1930 (in real terms), the year I was born, a leap far beyond the wildest dreams of my parents or their contemporaries. US citizens are not intrinsically more intelligent today, nor do they work harder than did Americans in 1930. Rather, they work far more efficiently and thereby produce far more. Real example: Our partners at Kraft-Heinz has been successful in reducing inefficiencies, which in turn increases the volume of output per hour of work.

Another example, in 1900, America’s civilian work force numbered 28 million, of which 11 million, or 40% of them worked in farming. The leading crop then, as now, was corn. About 90 million acres were devoted to its production and the yield per acre was 30 bushels, for a total output of 2.7 billion bushels annually.

Then came the tractor and one innovation after another that revolutionized such keys to farm productivity as planting, harvesting, irrigation, fertilization and seed quality. Today, we devote about 85 million acres to corn. Productivity, however, has improved yields to more than 150 bushels per acre, for an annual output of 13 - 14 billion bushels. Farmers have made similar gains with other products.

Increased yields, though, are only half the story: The huge increases in physical output have been accompanied by a dramatic reduction in the number of farm laborers. Today about 3 million people work on farms, a tiny 2% of our 158-million-person work force. Thus, improved farming methods have allowed tens of millions of present-day workers to utilize their time and talents in other endeavors, a reallocation of human resources that enables Americans of today to enjoy huge quantities ofnon-farmgoods and services they would otherwise lack.

Indeed, most of today’s children are doing well. Allfamilies in my upper middle-class neighborhood regularly enjoy a living standard better than that achieved by John D. Rockefeller at the time of my birth. His unparalleled fortune couldn’t buy what we now take for granted, whether the field is – to name just a few – transportation, entertainment, communication or medical services. Rockefeller certainly had power and fame; he could not, however, live as well as my neighbors now do.

And in the future, there will be more types of products and services to be enjoyed. Though the pie to be shared by the next generation will befar larger than today’s, how it will be divided will remain fiercely contentious. Just as is now the case, there will be struggles for the increased output of goods and services between those people in their productive years and retirees, between the healthy and the infirm, between the inheritors and the Horatio Algers, between investors and workers and, in particular, between those with talents that are valued highly by the marketplace and the equally decent hard-working Americans who lack the skills the market prizes. Clashes of that sort have forever been with us – and will forever continue.

The good news, however, is that even members of the “losing” sides will almost certainly enjoy –as they should– far more goods and services in the future than they have in the past. The quality of their increased bounty will also dramatically improve. Nothing rivals the market system in producing what people want – nor, even more so, in delivering what people don’t yet know they want. My parents, when young, could not envision a television set, nor did I, in my 50s, think I needed a personal computer. Both products, once people saw what they could do, quickly revolutionized their lives. I now spend ten hours a week playing bridge online. And, as I write this letter, ‘search’ is invaluable to me.

How about Indonesia?

Through his writings, Buffet indirectly convey that although the US is currently one of the most prosperous countries in the world, but in the years of 1900 – 1930, it wasn’t a developed country. And the progress achieved by the Americans in the last 100 years is not because they work harder, but because they work more efficient and therefore more productive, and ultimately improve the living standards of American society as a whole.

And while there will always be competitions for the ‘pie’, but the losing parties will still experience an increase in their living standard. For example, television and computers, which regarded as luxury items in the past, but today almost all Americans can afford it, including the less fortune people. And although Buffett himself had been a little late in utilizing the internet, yet he is getting used in using the Google.

And what about Indonesia? Well, you can see for yourself: How is the current living standard of Indonesian citizens compared to the year of 1990s, or even longer, the year of 1970s? An easy illustration: In the 1970s, a motorcycle was a luxury thing that costs, after the inflation, about Rp100 million (US$ 10,000) per unit. So at that time only the rich can afford a motorcycle. But now? Everyone can buy a motorcycle, or even more: Today the motorcycle is like a symbol for the middle-low class, because the people in the upper-middle class only ride the car. Another example, in the 1990s, only certain people can have a cell phone. While now? Well, do you know a person who do not have a cell phone?

The existence of motorcycles, cars, mobile phones etc, ultimately improving the living standard of citizens in Indonesia. And it was due to the increase of technology and quality of labor, which in turn encourages efficiency, which led manufacturers to produce more motorcycles with lower costs (previously, a motorcycle had to be fully imported from Japan, but now it can be assembled in the country), and consequently the selling price also dropped so that it became more affordable.

Interestingly, today approximately 40% of Indonesian workers are still working in agriculture, or just like the US did in 1900. And the quality of human resources is still low that we can not make downstream products from the mining ore or plantation crops, or to produce automotive and electronic goods (can only assemble). While the stock markets? Just the same, where the number of ‘successful investors’ in Indonesia Stock Exchange is only a few. And these conditions, once again, are like in America 115 years ago. Before Ben Graham began teaching the value investing at Columbia Business School in 1928, and eventually published the book 'The Intelligent Investor' in 1949, Wall Street had had no really successful investors, even though the US Stock Exchange has been existed since 1792.

Back again to Indonesia. In some 10 or 20 years ago, we could not see that Indonesia was ‘going to somewhere’, but currently there are several positive developments. At first, Indonesian workers had absolutely no idea about the technology, but today there are many local developers of applications, one of them is the famous Gojek. At first the property developers had never been trying to build modern housing estates (they only make it habitable), but now, you can see for yourself, there are many residential areas that are not only convenient but also integrated with various public facilities, and a variety of modern buildings such as apartment, office towers, hotels, malls, all of them has become common building types (at least in large cities). And if at first the Indonesian people only save their money under the pillow, today even the villagers are used to go to the banks, and also used to using an ATM machine.

An office of Bank BRI in rural area in Cianjur, about 100 kilometers south of the City of Bandung, West Java

Most stock market participants may not notice the changes above, but these are fundamental changes that may lead to further improvement (of Indonesian living standard). You see, as some people began to be able to build an application, in the future there will be other technology products created by local workforces, and the existence of these products will further enhance the living standard of the Indonesian people. If today we can easily find some modern public facilities (such as the mall) in big cities, in the future some smaller towns will have it too. And as people are getting used to go to the bank, then in the future they will begin to know the insurance, investments (including in stocks), and other financial products.

In short, Indonesia is currently in a phase of take-off to become a developed country in the future, just as the American economy began to advance rapidly since the 1950s (after the second world war). Indonesian GDP itself was US$ 1,866 per capita in 2015, up more than doubled compared to 1990, and during the last 25 years the trend has been up steadily (only dropped once in the crisis of 1997 – 1998). But of course, these GDP are still very low compared to many developed countries, so the space for further growth is still wide open.

Conclusion

When this article was written, the Jakarta Composite Index (JCI) was rising steadily in past month, so the market was in a good mood, and some analyst started to ‘predict’ that the JCI was going to 5,000. But as we've discussed in the article entitled smart money, savvy investors will focus on fundamental factors rather than the ups and downs of JCI, and can look far ahead when most people only focus on short-term fluctuations. And in the above we've talked a little about the fundamental factors, where the conclusion is that our country is on the right track to become a developed country, someday.

While about ‘to look far ahead’, let me give you an illustration: If in the next 10 years the JCI will gain about 12 – 13% per year (excluding dividends) just like during this time since its inception in 1982, it will reach 14,000 in 2026. Thus, if an investor is able to generate investment gains that match the average performance of the market, his portfolio value will increases by about three fold in ten years, not including dividends. However, since there will be plenty of stocks which perform better than the JCI, then if you are able to focus on those ‘wonderful’ stocks, you will generate more than just three folds in ten years, perhaps five to six folds or even greater, and you can make it without take a look at your stock prices every minute, but simply buy when the market was in a panic state, and sell later when the market is in euphoria.

Okay, I think that's enough. Through the comments field below, I also invite you to share your thoughts on what the country (Indonesia) will be in the next 10 years, based on the progress that has been going on for 10 – 20 years.

Any inquiries about investment in Indonesia Stock Market, please send an email to teguh@averepartners.com

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