In my every training of value investing, I
always give an opportunity to the participants to ask questions related to the
material presented, either in the event or after the event (through email).
Some questions required short answers, and some others require long answers.
Here are some of them. Please check, you may have also had the same questions.
I only want to buy liquid stocks, in this case the stocks that enlisted in
LQ45, or blue chip stocks. But why their prices are so high? It is so hard to
find a blue chip stocks that the price reflected PER of less than 7 times, or
PBV of less than 1.0 times. If I found one, the fundamental of the company is
usually bad, so it is not worth to be bought as well. What should I do?
Actually the answer to this question lies in the
question itself, ie when you say 'I only want to buy liquid stocks'. Now, if
all investors have the same thought (only want to buy liquid stocks), and
that’s the fact, then of course the price of liquid stocks will never be too
low, is not it? Because there are always some guys who want to buy it.
That is why in value investing, liquidity is one of important elements
in assessing the value of a stoc. Two stocks could have different valuations
even if they have fundamentals/financial performance that are equal, if one
stock is more liquid than the other, where the liquid stock is valued higher
because investors are prefer to buy it than the illiquid one.
There are at least two reasons why investors,
both retail and institutional, prefer liquid stocks. The first is because of
the ease to buy or sell it. Liquid stocks are much easier to be sold or purchased
at any time because there were always people who places bids and offers. The
second is because the liquid shares are relatively safe from the ‘stock making’
practice, so the price could move in line with the company’s fundamentals or
the market, so that the movement patterns can usually be analyzed using
technical analysis. Different things happen to non-liquid stocks, where the
price can be very fluctuative, influenced by the actions of certain large
investors who sell or buy it. If you are accustomed to use technical analysis,
you can see for yourself that the price charts of LQ45 stocks LQ45 are usually
more 'smoother' than the charts of the penny stocks, are not it?
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For large insitutuonal investor like Schroders, their stocks are none but ASII, BBRI, UNVR, etc |
One more thing. Sometimes it is not the liquidity
that caused a stock to be less valued (compared to other stocks with
fundamentals that equal but more liquid), but: The stock price has been too low
until the holders are no longer willing to sell it, usually because they hoping
that the price could still go up again (if a stock is labeled 'no hope', then
the price will continue to slide down until stuck at Rp50 per share), and on
the other hand also no investor who place bid to buy it. Thus there are no
transactions, and the stock becomes illiquid.
This condition often occurs in companies with
good fundamentals in the past, but its current financial performance is poor so
that its stock was down significantly to the level that is 'could not be more
lower'. Stocks like this are usually moving sideways in a certain time period
(and with thin liquidity), and eventually rise back if the relevant company's
performance improved (which makes the investors to buy the shares). The stock
of Elnusa (ELSA) may be a good example. ELSA had dropped to below Rp200 per
share (from about Rp500 per share) due to loss suffered by the company, and
stays at the price level for a number of months with a very small frequency of
trading transactions, but the stock eventually rose (with sizable liquidity) after
the company's successfully making profits.
Other than liquidity, a stock deserves to be
valued higher if it represents a well-known
company, or in my term, has big name.
It's so simple: If you are asked to choose a Samsung mobile phone or another brand
at the same specs and price, which one will you buy? Samsung, of course. And
despite the fact that Samsung (or Apple) phones are valued higher than Huawei,
Evercoss, Xiaomi, Advan, etc, but still they sold better. Well, the same thing
also happened on the stock, which you will not be able to equalize the
valuation of shares of Bank BCA (BBCA) with Bank ICB Bumiputera (BABP), for
example, even if the two banks have an equivalent quality of financial
performance.
However, this does not mean that you can value a
famous and liquid stocks and with exorbitant valuations. If you consider that
stock A can be bought at 1.5 times of PBV, where A is a non-liquid and the
company was not well known, then stock B, which has more or less equivalent fundamentals
to stock A but more liquid and the company was well-known, you may buy it at
PBV 2.0 times. But if the price (of stock B) stood at the level of 2.5 times of
PBV, then maybe you better hold your cash. In essence, after you gave
'tolerance' that the LQ45 and blue chip stocks are deserved higher price than
most of the other stocks, but still none of them are fair enough to be bought,
then wait a minute. Please check the position of Jakarta Composite Index (JCI),
usually in bullish.
Sir, you once said that we can buy Astra International (ASII) at a price of
Rp6,000 per share, or below. But yesterday when the stock was down, the decline
stopped at 6,150 before it then rebound. How’s that?
One of the basic principles in value investing
is, there is never an exact figure
about how much the price of a stock, whether it ASII or other, can be said to
be low/fair/overvalue. Fair price of a stock is nothing else but opinion, where
two investors could give two different figures when asked about fair price of a
stock. For example, although I assume that ASII’s price could be said to be low
enough at 6,000 or below, but if there was a large number of other investors
who think that ASII’s price under 6,500 is already low, and that's why they
continue to buy it at the price range of 6,000 – 6,500, then of course the
stock can not go lower than 6,000, can it?
In contrast, although I assume that ASII’ price
is already low at 6,000, but if there are shareholders of ASII who take off
their shares in large, then the stock can go down deeper, may be up to 5,500,
5,000, and so on. The point is, just because you (or I) assume that ASII
already low in 6,000, it does not mean ASII can not go lower (or higher) than
that.
The solution to overcome this issue is to buy the stock gradually. If we are
using ASII case, then even though you think that the ideal price is below
6,000, but if ASII already traded at prices below 6,500 after a long stay at 7,000's,
then you may buy it using small money first. In this way, if later ASII
continue to fall to below 6,000, then you can continue to buy, this time in
larger quantity. But if ASII quickly rebound instead of dropped to below 6,000,
then you still gained some profit because you already own the shares. And the
rest of your funds (because ASII did not dropped further) could be allocated to
other stocks.
But what if ASII continues to fall down to
6,000, 5,500, or even 5,000? For example, if the market was down? Well, if it
happens so, then at some point you will (eventually) run out of cash, and your portfolio
position becomes stuck. But do not worry because in the end, as long as you buy the right stock at the
right price, your stock will rise again. Last year I began buying BBRI gradually
when it traded at below Rp7,500 per share, and buy more when the price already
under 7,000. But in fact, in line with the weakening of JCI weakening, BBRI continued
to slide down until touched 6,150 as its lowest point. As a result, our position
became loss! But well, can see for yourself, what is the today’s price of BBRI?
(although, I must admit, I already take it off to buy it later at the lower
price).
May I ask for confirmation about how long are 'short-term', 'medium' and
'long-term'?
Some literature states that the short-term are 1
– 2 years, medium term 2 – 5 years, and long term is more than 10 years.
However, because the performance of Indonesian stock market, including the
development of the sectors in it, are very volatile, I chose to be more
realistic. In my opinion, the short term
is less than 3 months, medium-term is 3 months to 1 year, and long term is more
than 1 year. There are some stocks in our portfolio that we have held for
more than one year, but to be honest, the number are small compared to other
stocks that we may sell/buy it back in less than a year. You know, every time
we see that the market may be dropped, we may do the 'clearance', do not care
if the prices of our stocks are still low.
And one of the misconceptions that need to be
clarified here is that value investing
is not about long-term investment or short-term trading, but a strategy to buy good stocks at lowest possible price.
When you buy good stocks at bargain prices, then it just a matter of time
before the stock price will go up until it can not be said to be low again. The
'time' here can be very short (you buy the stock in the morning, and it already
skyrocketted in the afternoon), one or two weeks, a few months, to a few years.
Most people remember only that 'a few years', so they thought that value
investing is an investment strategy in the long-term. However, if you bought
some blue chip stocks when the JCI was dropped in early 2014, hence, less than
one year, you’d earn sizable gains, right? And you will always have the option
to exit you position at any time, if the price of the shares you hold is no
longer undervalue.
But of course, value investors tend to avoid excessive trading, like swing
trading which applied by a trader who thinks that he was Michael Schumacher. We
do trade, only with a little bit patience.
Do you applying the Discounted Cash Flow (DCF) or the Discounted Dividend
Model (DDM) in calculating the value of a stock?
No. I do not even understand what DDM is (DCF, I
do understand a bit). But as far as I know, Warren Buffett did not use the two
techniques. If you read the Berkshire Hathaway annual letter (which written
directly by Buffett himself), this old-buy-youthful man never mentioned the
techniques of valuation outside of PBV, PER, and the dividend yield, plus one
more, a technique to calculate the intrinsic value of shares as described herein. If you read books
about Warren Buffett's investment strategy that are written by someone else
(not Buffett himself), that’s when you will find the DCF, DDM, and possibly
other valuation techniques. However, I assume that the author may deliberately
add those techniques so that the book looks thick only.
Okay, I think that's all. I’ll see you next
week.
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