The Spirit of 'Fresh 2014'

On Monday, December 30, 2013, the Jakarta Composite Index (JCI) had closed at 4,274, so for the year of 2013, the JCI has decreased by 1.0% not including dividends. The decline of course seems small, no more than one percent. However, if calculated from the peak position of 5,251 in May, then the index was down 18.6%, or already dropped substantially.

The movement patterns of JCI throughout the year 2013 has remind me of the more or less same situation that occurred in the Dow Jones in 1987, which known as the crash of 1987 (my investment career began in 2009, but I was quite familiar with the history of the economic crisis and stock market crashes since the case of the Tulip Mania in the 17th century). In 1987, at the beginning of the year, the Dow opened at 1,897, and then slowly continue to rise until it reaches its peak at 2,722 in August, or an increase of 43.5% in less than ten months.

However, after the month of August, Dow started to declining day by day, but still with reasonable declines. But at the end of October 1987, triggered by the news that Iranian troops attacked the U.S. military base in Kuwait, Dow began to fall sharply, until the peak occurred on Monday, October 19, 1987, in which the Dow plunged as much as 22.6% in just one day. The date was then known as 'black monday'. The 22.6% decline had left a very significant 'psychological impression' in the minds of investors and traders, because even on the stock market crash in 1929, which then triggered the Great Depression in the 1930s, the Dow Jones has never been down that much in one day.

Chart of Dow Jones that including the black monday of 1987

Perhaps that is why, in December 1987, a group of well-known economists from around the world gathered in Washington DC, to discuss the 'crisis'. And in conclusion, they predicted that the economy of U.S. and the whole world will have a very bad time in the few years ahead, perhaps as difficult as major crises that occurred in the 1930s.

But was the prediction came true? Not at all. Still in December 1987, the Dow crept up, until finally closed the year of 1987 at 1,939, or still rose by 2.2% throughout the year. Then throughout 1988 and 1989, there wasn’t economic turmoil at all. Instead, the Dow continued to rise until it finally recorded another new high at the end of 1989. This means, if there is certain investor who bought a stock in the New York Stock Exchange in August 1987, when the Dow Jones was at its peak, then if the stock moves along with the movement of the index, the investor will suffer a potential loss of nearly 30% at the end year 1987. But if he holds the stock, then his portfolio would be green again, only in less than two years later.

Case Study

If compared with the condition of Indonesian stock market in 2013, the Dow Jones crash in 1987 was much worse as the index, at the end of the year, closed at 28.8% below its peak, while JCI only 18.6%. In addition, as already mentioned above, the crash of 1987 had left a 'psychological impression' due to a decline of more than 20% in just one day, which is the biggest drop in the history of the Dow Jones (even to these days). While JCI? In the year of 2013, the largest decline (in one day) was only 5.6% on August 16, 2013, or far below the record of 8.9% in 2011, and also the other extreme declines that happened in the year of 2008 and 1998.

I mean, if in 2013, JCI had peaked higher than 5,250, say 6,100 (rose 40% from the beginning of the year), then whether it's in September, October, or November, JCI eventually fall and back to 4,200, including had to drop as much as 20% in just one day, then how the market reaction would be???

But since JCI  had not reached 6,100, instead went down after hitting 5,250 as its peak, and also without any dramatic decline, then the reaction of investors when the stock index returned to 4,200 by the end of the year, was relatively normal. Of course there are always some pessimistic voices saying that JCI will descend deeper, but at the end of the year, there weren’t a group of economists who predicted that 'The year of 2014 and subsequent years will be tough for the national economy, may be as dire as the crisis of 1998'.

So my point here is, if the stock index peaked at 6,100 instead of just 5,250, so even if in the end the JCI fell into the same position, ie 4,200, but the reaction of the market, newspapers and the media, investors, until the government, would be far more dramatic, including you might also began to think that Indonesia is actually being hit by the crisis. And those who say that the index would drop to 2,500 would be more eager to spread their 'terror', of course, with their each arguments.

But now we change the scenario: If during the year 2013, the JCI rose only to 4,500 as its highest position, then down to the current position, then how how the market reaction would be?

The above examples demonstrate that the investors often look at the position of the stock index from the psychological side, the emotional side! Instead of the valuation. When JCI dropped to 1,111 in October 2008, there were very few investors who are able to think logically, who are able to see that the position is already so low so that it was an opportunity to buy any stocks at a discount price!

Then what was wrong with the other investors? They just simply got feared, because before the decline, JCI had continued to rise until it peaked at 2,810, so that when it was down to 1,111, the minus has reached more than 60%, and it is certainly a remarkable decline (or we usually called it ‘crash’). If only the JCI only peaked at 2,000 instead of 2,810, then perhaps the term 'Crisis of 2008' will never existed.

In conclusion, we can say that if the index of JCI rose too high, then it's just not good for the future of JCI itself. While on the contrary, if the JCI fell and continue to fall, either because of a crisis or whatever, then it is actually good, because the potential profits to be gained when it rebounded, will be much bigger!

Because once again in the end, the stock indices around the world will continue to rise. In 1987 the Dow Jones had touched 2,722 as its all-time high, before then dropped massively until pushed some ‘oracles’ to said that there would be another great depression. But what is the position of the Dow Jones currently???

Thus, although the year of 2013 was the first minus year for JCI since the crisis of 2008, but do not worry because it's not the end of everything. In fact, this is a very good restart for the year 2014 and thereafter! Just remember, the performance of the listed companies on the Indonesia Stock Exchange has continued to increase in both earnings and equity during the year 2013, where the value of the equity of the 10 largest companies (which represents 44% of the total value of the market) has increased by 10.9% (in average) until the third quarter, or 14.5 % if annualized. And because at the end of 2013, the index closed at a position that is lower than the position at the beginning of the year, then that means the current valuation of stocks on the Stock Exchange is lower than a year ago. For investors who are able to remain focused on the value thing, then it is what is important, and not whether the JCI had rose to 4,500, 5,250, or even 6,100, or about whether the JCI will back down or up again in the future. So, remain optimistic, do not worry about anything, just let it flow!

Happy new year! Keep the spirit, it's January!