For top-down/market-timing investors, Malaysia’s economic growth prospects for the next 12 months remain positive, as shown by Malaysia’s leading index. At the same time, such investors should be mindful of the double- edge impact of a stronger Ringgit and the 2018 general election.
Externally, we are remain convinced that China’s economy will perform well and stay as the strongest in the world. Investors should be mindful that the yield on the US 10-year government bond has jumped to its highest level since 2014 and is poised to rise further (figure 3). The 10-year bond yield is seen as a benchmark bond for the US economy, and helps price all sorts of loans and mortgages and the current rise represents a critical sign that the prolonged spell of low yields is coming to an end. The key question for market-timing investors to answer is, what will the impact be on the NYSE and NASDAQ?
Although a highly successful and proven investment philosophy all over the world, value investing is not well understood or appreciated in Malaysia. In the 6th edition of the Benjamin Graham’s classic, “Security Analysis”, Seth Klarman wrote a useful explanation : “Value investing, today as in the era of Graham and Dodd, is the practice of purchasing securities or assets for less than they are worth – the proverbial dollar for 50 cents. Investing in bargain priced securities provides a “margin of safety” – room for error, imprecision, bad luck, or the vicissitudes of the economy and stock market. While some might mistakenly consider value investing a mechanical tool for identifying bargains, it is actually a comprehensive investment philosophy that emphasizes the need to perform in-depth fundamental analysis, pursue long-term investment results, limit risk, and resist crowd psychology.”
“Winning, in a sense, was accomplished by not losing. Investors could achieve a margin of safety by buying shares in businesses at a large discount to their underlying value, and they needed a margin of safety because of all the things that could – and often did – go wrong.”
Value investing requires an independent mindset and a long term investment horizon. Value investing is not always in favour and does not always outperform over shorter time periods. Linked to value investing is the fund manager’s decision to hold cash. When bargains are scarce, value investors must be patient and holding at least a portion of one’s portfolio in cash equivalent awaiting future deployment will sometimes be the most sensible option.
Warren Buffett views cash as a perpetual call option, according to his biographer Alice Schroeder in her book “The Snowball: Warren Buffett and the Business of Life.” Schroeder says that one of the most important things she
learned from many years of studying Buffett is that he perceives cash as a call option with no expiration date or strike price.
Some professionals getting paid to invest other people’s money feel they are actually required to stay fully invested even when there is a lack of attractive opportunities. Being fully invested at all times goes hand-in-hand with a professional’s focus on relative returns or beating an index. For example, if the market index drops by 10% in a year, but a fund drops by only 8%, the said fund is seen as providing value because the fund had a better return
relative to the market index. However, had you invested in this fund, you would still be 8% poorer. Individual investors should care more about absolute returns and less about relative returns, that is, beating a benchmark.
