Dear fellow readers,
Once
again, these writings are just my humble highlights (not
recommendation), feel free to have some intellectual discourse on this.
You can reach me at :
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Website / Blog : http://www.tradeview.my/
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The
past week has been great for investors due to the relief rally globally
and KLCI. Once again, the positive vibe re-emerged due to US Senate
passing the US 2 trillion stimulus, extended unlimited QE commitment
from Fed and for Malaysia, the drop of SRR by 100 basis point by BNM
helped with the liquidity in the market. In addition, with the oil
market surging upwards due to "potential resolution" between Saudi,
Russia and US being the facilitator, oil traders are factoring in close
to 10 million barrels of cut to help with the oversupply. Question is
can this be resolved? I believe eventually, market forces are effective
and will strike an equilibrium between supply and demand. In the
immediate term, we shall know come this Thursday based on the OPEC+
discussion.
Please
note however that we have advocate caution many times and advised our
readers to sell on strength instead of taking new positions as we
believe the fundamentals of the market is wobbly due our belief of a
protracted downward bear pressure for 6-12 months as a result of
Covid-19, time for a vaccine to be ready for mass production and the
economic aftermath impact from the MCO / lockdown domestically and
globally.
Previously, we advocated Rule 1 - Buy Good Quality Companies That Will Still Be Around in 5 Years. You can read it here http://www.tradeview.my/2020/03/tradeview-2020-my-principles-of.html . Today,
we are moving on to Rule 2 - "Small Is Beautiful, Especially During A
Crisis". Have a short view of the video below on how this UK
Parliamentarian argue about the economics of being small.
Now,
in simpler terms, it is saying what we traditionally view as advantages
of being big is something for us to review and rethink in today's
climate. Why is that so? In fact using Covid-19 as an example, if would
appear smaller countries seems to be handling the crisis and aftermath
of the impact better than large countries. Of course, logically this is
because of the healthcare system for larger countries to cater to the
population as a whole is more challenging, the considerations taken for a
large country with various states and stakeholders compared to a tiny
Singapore or Switzerland has less of these issues. In essence, the
advantage I am trying to exhibit is about being nimble. "Small &
Nimble" - this reminds of the story of the mice and the elephant.
The reasons are as follows :
1. Small but Nimble
As
a small investor, we have the ability to adapt and move quickly,
compared to the large funds or institutions. As a small investor, one
can change their strategy as and when one see the market moving in a
different direction without going through layers of approvals like big
funds. Example : I can decide to go underweight the oil market without
going to the head of investment or even the board to say, "hey, lets
move our money out of the oil market now and into technological sector".
In fact, some big institutional funds have a specific mandate to only
invest in certain sector which limits their ability to navigate out of
the downtrodden sector despite seeing the challenges ahead. Another
interesting point to note, some large funds are not allowed to invest in
stocks which are not covered by institutional research arms, whereby
clients in these funds only allow them to invest in stocks where banks
have published rated reports. All these cumbersome rules of governance
that binds the big boys are not applicable to small investor which makes
small investors very nimble.
2. Taking Positions and Realising.
As
a small investor, one can sell easily because my position is small
without wrecking havoc in the market. For instance, if I decide to sell
off 100,000 shares of Serba Dinamik, it is much easier for me to offload
compared to a fund like EPF to throw 1,000,000 shares. This is because
when small investors throw, the share price does not move in the same
weightage compared to the big boys. The opposite is true, whereby when I
buy into a stock, it barely moves compared to when the big boys enter.
But this will push up the price affecting the average entry price. Being
small allows me to average down as and when or average up, but when you
are big, your funds will push it and it takes a long time before you
can even realise the position (be it sell or buy) at a meaningful price
or entry level. Hence, this is a distinct advantage of being nimble.
3. Investing in Small and Mid Cap Stocks
What
most people do not understand is that big funds do not invest much in
small and mid cap stocks. This because there is lack of liquidity to
cater to their investment size and of course, the risk of small and mid
cap stocks are too high for these funds to bear. An example would be a
stock like CCK, OCK, DKSH, the stock has limited amount of free float
for a big fund to take a meaningful size. This means if the fund enters
at a good level and wants to realise profit, there may be no taker. This
will be a problem as the fund would be stuck with a stock for a long
time. As small investors we do not have these problem. Whilst Bursa has a
rule of 25% minimum public float, but it is insufficient for big funds
to take a meaningful stake for small and mid cap stocks.
4. Disclosure and public knowledge
Most
of who are in the market would know the annual reports and BURSA
periodically exhibits top 30 shareholders of the company and also
substantial shareholders transaction of the company right? This is a
problem small investors don't have. Small investors would know hold a
stake to the point of regulatory requirement for disclosure and can move
freely without worrying about public opinion or swaying the market
direction for the particular stock. However, this is a problem for
funds. If say EPF or Tabung Haji disposes or drop from the list of top
shareholders, this would affect sentiment of the stocks (whether
rational or irrational, this is a topic for another day). Let's take a
more recent example; Dayang where the notable investor is Tan Sri Koon
Yew Yin and UZMA where Brahmal of Creador has recently taken a position.
When Tan Sri makes a comment or write up on Dayang, the entire market
will follow with great interest. Now, imagine what happens if the market
suddenly realises the announcement that Tan Sri no longer holds a
substantial share in Dayang? Would it cause a panic? It would right and
the holders of Dayang may rush to gates. Same goes for Brahmal of
Creador. Imagine, yesterday The Edge reported about Creador taking a
stake in Uzma as the largest shareholder, what if today Bursa announces
Creador has ceased to be substantial shareholder of Uzma, would you be
still confident to hold the stock? So this is another clear illustration
of the beauty of being a small investor.
If
you have followed the article to this point, you must be wondering, all
is good and fine but how do small investors take advantage of the above
mentioned point. Have a look at this video by Peter below :
We
sincerely believe that it is about using what you have to your
advantage. As a small investor, we are nimble, we can take and realise
position as and when we want to, we have no disclosure obligations and
not bounded by governance rules, furthermore, we can invest in small or
mid cap stocks to diversify our risk. These advantages should be adopted
to real life application and not just wait for movement by big funds
like EPF, Tabung Haji, KWAP, PNB to show us the money. If indeed these
funds are doing so well, then there would be no need for the Malaysia
MOF to set up Urusharta Jammah Sdn. Bhd., to takeover poor performing
stocks and underwrite the losses. This is very clear illustration that
not all big boys know what they are doing. I would go as far as to say
many are not even half as good as small investors on various reasons but
amongst those are mentioned above.
Do stay tune for my next write up, "Principles of Investing - Rule 3 : "Diversification Is The Best Defence"
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Food for thought:
https://klse.i3investor.com/blogs/tradeview/2020-04-07-story-h1485846888-_Tradeview_2020_Principles_of_Investing_Rule_2_Small_Is_Beautiful_Espec.jsp
