Questions of Beginners, and The Answers

Every time I held a seminar/training of value investing, I provide an opportunity for participants to ask questions through email about investing in stocks. And well, there is an incoming email which seems to represent the majority of questions from investors, especially beginner investors aka the newbies. Therefore, I write this article. Actually, for those of you who are new in the stock market (has become an investor less than 1 year), you may have hundreds of questions in your head. But hopefully this article can at least answer some of these.

How does the influence of BI Rate to the stock and Jakarta Composite Index? And what about US/Federal Reserve Rate? What will happen if Rupiah weakened against the US Dollar?

About the influence of the rise and fall in the BI Rate to JCI or certain stocks, read again the explanation here. In essence, the BI rate is an instrument of the central bank, in this case the Bank Indonesia or BI, to control inflation in the country and, at the same time, encouraging the economic growth. To make it simple, if BI rate can be set at a level that effectively suppress the inflation, while on the other hand maintain or stimulate economic growth, then the national economy in general will be improved, and later it will have a positive impact on JCI.

About the change of United States Rate, or the Federal Reserve Rate (Federal Reserve, or the Fed, is the central bank of United States), then it is related to the funds belonging to foreign investors who invested here, in the Indonesian stock market. As a developing country, Indonesia offers a very high interest rate ie 7.75% (according to BI Rate), compared to the Fed Rate that is only 0.25%. But on the other hand the risk of investment in Indonesia is also regarded as relatively high. This means that in the view of foreign investors, investment in Indonesian equities offer high returns, but the risk is also high.

Now, if the developed countries, say like the United States (US), raising their interest rates which the Fed Rate rose to 0.50%, for example, then it could be an enough reason for foreign investors to move their funds from here to the US, because it means that the country offer a higher return on investment, while on the other hand the risk is considered much lower than Indonesia.

And if foreign funds are getting out of Indonesia's stock market, the composite index will also go down.

But based on experience, the effect of the change in the Fed Rate is usually only temporary. In the end, as well as domestic funds also continue to enter the Indonesian stock market (along with the increasing number of investors, both retail and institutional), foreign funds are also still come in here. From 1997 to 2014, there are only two years where the foreign funds recorded net sell, ie 2005 and 2013. In other years, the foreign funds continued to get in here with a number that continues to increase from year to year. In 2014, the value of foreign funds that flowed into the Stock Exchange recorded Rp42.6 trillion or about US$ 4 billion, the biggest net buy (of foreign) in the history of the Indonesian stock market.

About the influence of impairment or strengthening of the Rupiah towards the stocks or JCI, we've discussed the topic many times on this website. Try to read more of the article of this, and this. Actually, the impairment of Rupiah, as long as it is within reasonable limits, then the effect is also limited to certain companies, ie companies that: 1. Buying products/raw materials that are imported from abroad, and 2. Having large debts denominated in US Dollars. Beyond that, then it is no problem. In the last three years, Rupiah has plunged deep enough from Rp9,000's until recently has penetrated Rp12,500 per US Dollar. But still, the economy in Indonesia is still running normally, without any crisis or something like that.

What is the effect of the change in oil price on the stocks/JCI?

The effect? Well, the price of oil has dropped from US$ 90’s until now below US$ 50 per barrel, or dropped almost half. But in fact the index is still okay, is not it? So why worry?

But.. okay, here you go. We could say that crude oil is a primary commodity among various other commodities which traded on the spot and futures markets (what is the difference between the futures and spot? Ask Google!), such as natural gas, coal, palm oil, nickel, tin, copper, gold, silver, soybeans, corn, rubber, cotton, sugar, aaaand so on. We may call crude oil as the 'primary commodity', because for some reason all of the stock market participants around the world has always pay more attention to the price of oil rather than other commodities. Included in the IDX statistics which always show the latest oil price, but not coal or CPO prices. As a result, if oil prices fall, it would be a sign that the commodities markets are down as a whole, so (though not always) the price of other commodities also fell. And when the price of coal and CPO down, for example, then the stocks of coal and oil palm plantations will also be inevitably affected. If this happens simultaneously on many stocks at once, then JCI will also be depressed.

However, the point here is, we can never predict whether the price of oil (and other commodities) will rise or fall in the foreseeable future. The analysts and chief economists of banks or large investment institutions usually have their views about oil price in the future, but if you ask Warren Buffett, then the answer is only one: I.. do not.. know. And if you ask me, then my answer is the same, plus: ..and I do not care.

What is the impact of the Russian Crisis on Indonesia's stock market?

Since 2009 until today, I’ve had enough of market issues such as the European Crisis, Greek Crisis, Debt Ceiling, Fiscal Cliff, United States Shutdown, the economic slowdown in China, tapering, and now the Russian crisis... only to arrive at the conclusion that most of the issues will not effect anything against JCI. Even the global crisis that hit the world in 2008, it does not really affect the national economy and also JCI, except in the short term only. The proof, back then although the JCI once lost more than a half of its value, but in less than two years later it was about to break the new high again. The story is different from the monetary crisis of 1998, where Indonesia was the one affected by the crisis. And at the time, JCI needed about five years (until early 2004) to completely recover.

My point is, once you’ve become a stock investor, you’ll hear about the word ‘crisis’ often enough. But as long as there is no extraordinary cases, for example like the bankruptcy of Lehman Brothers in 2008, then there's nothing to worry about. As long as I could observe, if you read related news carefully, Russia is not in crisis after all. It is only a ‘story’, and later there would be another story of another 'crisis' again. But we as investors only focus on the fundamentals of companies, as well as economic development in the country. I also used to often pay attention, even sometimes to confuse myself, when I heard the news about Greek crisis, United States crisis, Russia crisis blah blah blah.. (the economy of the world is about to be collapsed!). So if you are a beginner, then I can say that it is fair if you pay attention to the issue of the Russian crisis etc, because I used to be so. But someday, you would say the same as I said above: I do not care.

Data from ft.com or bloomberg.com, which is more accurate?

Professional investors usually retrieve data directly from the company's financial statements and other related documents, but rarely or never take the data from a third party (such as FT.com and others). So for us, the data presented by third parties are not accurate. Tips for beginners: Although it is difficult at the beginning, but just try to make your own stock analysis using data from primary sources, namely the financial statements and other documents which are retrieved directly from the company. Of course you may still take the data or the analysis from third parties, including from this website, but use it as a second opinion only, not the main reference in determining which stock would you buy or sell.

And if you can not or since the beginning did not have time to do the analysis, then consider to open an account in mutual funds. Although there are no guarantees that the funds will bring you profit, but the risk of the investment will be lower than if you buy your stocks by your own, because your funds are now managed by professional fund managers.

Can we predict when exactly the market will down/corrected? If can, how?

Since 2009 until today, we have had sizable market correction of at least four times, ie in May 2010, August – September 2011, May 2012, and June – December 2013 (the year of 2013 was the worst). While in last year of 2014, there were no significant market correction.

However, after got hit four times in almost a row, in the end still: We can not predict when the market will be corrected. And we think, nobody can.

However, we can say that JCI, at some price level, is already too high, so it is likely that it will be corrected. Although we can not precisely predict when the market will go down (or up), but we usually will do some massive clearance, if we see that: 1. The valuation of JCI is already too expensive, 2. Its movement also began to move down (downtrend), that is characterized by failed break-outs which, although the JCI is closed up in a given day, but the closing position remains lower than the highest closing position a few days earlier, and 3. JCI has decreased significantly (up to 1 or 2%) in just one day. That’s it, no more than three.

Then when is the time to buy back the stocks? Well, if the decline is enough already where the valuation of JCI become fair or even undervalue, and technically its trend also began to turn again into an uptrend. In the practice, the implementation of the above strategy is not that easy because at the bear market conditions, you may feel panic and it inevitably affects the way you make decisions. In the end, to be able to overcome the correction of the JCI then the solution is just one: You should experience it by yourself.

Okay, anything else?