(CHOIVO CAPITAL) Surviving Market Volatility as well as Economic Recessions and Depressions.

Talk about an interesting six months.

This year, the ACE Index, hit a peak of 7,041 on 10th January 2018, before hitting a low of 4,884 on 4th April 2018 (sei sei, haha) before settling at 5,050 today. That’s a peak to trough swing of 30.6% and a to date drop of 28.3%.

The KLSE index on the other hand, appeared much less volatile. Starting the year at 1,775 points, before hitting a high of 1,895 points due to pre-election support by funds, and falling to 1,756 points today due to the incredible outflow of roughly RM4.312 billion since the elections.

However, I think for most of us, the ACE index is likely to better mirror our experience, compared to the KLSE index, as that index only tracks 30 of the largest companies in the BURSA by capitalisation, most of the overpriced, and most of them not owned by the average investor.

On a personal level, my 2018 Stock Picks are currently in unrealised loss of 9.82%. While my personal portfolio, which is very different, is currently at negative 18% loss. Granted, I still beat the index, at least the ACE Index.

However, I compared my previous year performance to the KLSE index (I definitely lost to the ACE Index last year, which gained 50% while I only gained 14%), and the only person I’ll be lying to by changing the goalpost, is myself.

In addition, as I’ve only been truly active in the market since September 2016, its safe to say, all my gains thus far has been wiped out. For all we know, I may actually not possess alpha and should just put everything into the S&P index.

Judging by the numbers, I should perhaps stick to trading used audio equipment, electronics and luxury watches. My record there is definitely way way better!

However, money is just a number on a screen. And I definitely enjoy the process of investing, and studying companies.

I also happen to have this possibly irrational belief that I’m actually good at this, so ill just keep sticking with it. Not like I have anything else to do with the money anyway. I live cheap.

So, how do you cope with this volatility, and potential Recession / Depression ?

US is raising rates, which results in money is flowing back, interest rates around the world such as Europe and Canada is also increasing, and overleveraged companies are find it harder to service debt.

As most borrowings is in USD, due to the lower rates, many companies may now want to pay it back in view of the rising rates and increasing strength of the USD.

And the act of wanting to repay USD denominated debt creates a demand for the USD and results in the currency rising which the further increase the debt, and thus further motivate repayment and repeats ad nauseum.

What we have now may only be a taste of the consequences of prolonged zero to negative interest rates. As Warren Buffet (everyones favourite investor to quote) says,

“You can read Adam Smith, you can read John Maynard Keynes, you can read anybody and you can’t find a word to my knowledge on prolonged zero interest rates—that is a phenomenon nobody dreamed would ever happen
That doesn’t mean I think it’s the end of the world when it ends, but I don’t think anybody knows exactly what the full implications of negative rates will be. I hope to live long enough to find out.”

Things may very well much more interesting!

So how does one survive this?
For the traders.
If you’re a trader, especially one in KLSE. I’d suggest you pack up your bags and put your money in FD. You cannot short for any meaningful amount of time in the KLSE, nor buy options. In addition, in times where uncertainty and fear seems a little heavier than greed.

Things that used to work in the past does not really work anymore. Gambling on one or two quarters does not work anymore as a good quarter does not result in increased prices, or only increase prices in an insignificant manner, while any bad news send the prices tumbling.

Traders do well in bull markets, and get murdered in bear markets. It is in bear markets, when the tide rolls out, do you see who is the swimming naked. And these people don't tend to stick around.

Notice how OTB and KYY is still around. They are very good traders.

I’m not going to talk about those on margin, as they are likely to have margin called until bankrupt and at the current point, don’t even want to see anything on KLSE.

In addition, for those who stick very closely to cut loss, you are likely to keep cutting loss, and thus cutting your base capital like salami slices, until you are left a tiny bit of the sausage at the bottom of the market. Leaving you unable to properly take advantage of the potential subsequent boom.

For those who don’t cut loss, I hope you don’t mistake yourself for an investor. The intrinsic value of a company is far beyond the next quarter result or the results of the next 3 quarters. You may think you know what you own and its value.

But you don’t, unless you can see 3 red quarters in a role (that does not result in deterioration in fundamentals) and still hold.

Or you could start investing!

For the Investors
Make sure you know exactly what it is your buying, its intrinsic value, and make sure you really understand it.
The easiest is buying valuable assets at prices far below book value. For this one, you can listen to calvintaneng, and make up your own mind. The man is like a bloodhound for super undervalued companies in terms of NTA. But remember, because a lot of them are there due to bad management etc, you MUST diversify very widely. Walter Schloss and Benjamin Graham who practiced this diversified very very widely. I personally hold about 30% of portfolio is a diversified group of net asset companies.

The next part is buying earnings. Which is the hardest thing, as earnings have a way of evaporating suddenly. And its orders of magnitude harder in determining its value. As you now have to understand the business, the management and life. All of which you can spend your whole life and never finish learning.

You need to now identify the resilience of the earnings, which part of the cycle you are in, and the intrinsic capability of the business and management. All of which do not have easy answers.

As Howard Marks says, you only need 3 things to be successful in investing,
  1. The ability to determine the intrinsic value of a company
  2. The ability to hold and buy more as prices drop
  3. To be right.
You need to be making your money when you buy the stock not when you sell. And for this case, it’s far far easier to purchase high NTA stocks selling for prices far far far below book value.
Make sure you are using long term money only. For the only real advantage one can really have is patience, assuming you did your research.

Thank you for reading this piece by a greenhorn, unexperienced investing young ciku, who still drink mother milk. I wrote this mostly for myself as a way of crystallizing my thoughts. I hope it was of some enjoyment and help to you.

Let me know below, what other things you think I should take note off, key factors I failed to identify and also any investment ideas you have!