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Well, what a couple weeks it has been. Whatever paper gains from the previous bounce, have been paid back in full and more.
From peak to trough, the Bursa Malaysia MIDS index (Companies with Market Capitalization of RM2bil to RM200m) have fallen by 30%. I believe this is much more representative of the retailer experience.
The entire Malaysian market, as per the Bursa Malaysia EMAS index, have fallen by 14.4%
Well, let’s reflect.
There is a few reasons why this is happening for example,
- Rising interest rates in the US due to deleveraging by federal reserve causing an outflow from foreign markets into the US.
- Equities in general being somewhat inflated since the start of the year, with record gains in 2017. These days every market is correlated in terms of short term performance. If China sneezes, everyone catches a cold.
- In Malaysia, some small measure can also be attributed to the breath holding waiting for the new budget, and our new and more austere government.
- But most of all, it is due to the current trade tensions between US and China.
Trade War Between the US and China
For the last few decades, the US have historically run a trade deficit. And this has the effect of spreading prosperity of the world at the expense of the US, and no other country have seen a bigger effect of this than China.
In exchange for running this deficit, countries worldwide, via the Mashall’s Plan (US version of One Road One Belt back in the day) and the agreement from the Arab’s to use USD when trading oil, have started treating the USD as the reserve currency of the world. Even today, most trade and debt is denominated in the USD.
This enabled the US to withstand shocks that would kill most countries. And build up debt that would have bankrupted almost any country by now.
Having said that, historically, China have always played dirty. For at least 2 decades, they have been hacking US companies and government organizations in an organized manner in order to steal Intellectual Property.
Keith Alexander, a former NSA director has called it the greatest transfer of wealth in history.
Instead of having to pay the hundreds of billions or trillions of dollars for R&D as well as the decades needed for technology to develop, this theft of IP has allowed Chinese industries to become instantly competitive and steal businesses from US. And now, many of these businesses have even been bought over by Chinese companies.
To top it off, while the US does not charge much tariff to China (and much of the rest of the world). But, China on the other hand charges a lot of tariff on US goods such as milk etc, in the name of protecting their own industry.
For the most part, most US presidents, for lack of a more concise way of explaining, have no balls. They just allowed China to go this way without calling them out.
Enter Donald Trump. The first US president with balls. He called out china and imposed some long overdue tariffs and taken steps to equalize this relationship. Correctly identifying, that China has a lot more to lose than the US.
So how will this end?
Right now, people seem to think this will last forever. But remember, this is a money problem. Unlike Israel and Palestine, this is not a race, emotional or religious problem, which forever cannot be solved, because no one is willing to compromise, otherwise they go to hell.
If they were fighting over Taiwan of something, I will be worried. That one, there is no way handle correctly, as it’s an emotional problem.
But this, it is just a money problem, can discuss. My guess, China will need to stop acting like a samseng little brother, and they will need to find a face-saving way for Xi JinPing to do this.
Historically, if you look at global money arguments, Weimar Germany in 1925, Greece etc. Within 2 years or less, problem settled. This is a much smaller problem.
My guess, give it a couple months to a year max, and everybody happy again. Except, I’m perfectly fine for it to run 2-3 years or even 10 years. I can just keep buying, trap me in wonderful companies selling for 4PE please!
Bear Markets and Getting Trapped
One of the things I love about bear markets, other than the constant discounts, is that bear markets forces one to be very honest with yourself.
People who bought stocks at high prices, after suffering massive losses. Is forced to finally admit, that they knew pretty much nothing about what they bought.
Some, take it as a signal to start studying a lot more, like a friend of mine, who decided to turn over his portfolio to me, while he goes and spend 3 months reading and studying.
Others, start to think of stocks, not as somewhere to make money, but where you can only lose money. They stop caring about whether any money will be made, rather whether of their capital can be saved.
They decided to get out at any price.
It is in markets like this, you have no choice but to determine if you’re a trader of investor.
My 500% trader friend, is up 20% this year. He keeps very tight cut loss, and as it’s a bear market, he only trades technical rebounds etc when he is sure about it. And when asked if he’s going to start investing, he answers, “I need to be willing to lose the big money buying stocks cheap, if I want to be able to make and keep the easy money in bull”.
Me on the other hand, on a fund unit basis, am down 18% this year. Still way ahead of the MIDS index, so I’m satisfied. Most of my investment this year is also at much lower fund unit prices, so my actual loss is much lower.
The one thing about investing versus trading. Is that if one is an investor, one must be willing to get trapped. Because there is no cut loss. In fact, as prices fall, you need to buy more. Investing is inherently “Trappy”.
While in trading or speculating, because one is gambling and don’t know the real value of what one holds, or knows its real value is far below the quoted prices. A cut loss is essential.
The problem is when traders or speculators think they are investors, and what is a trade, turns into a mediocre investment.
And as prices fall and the investment becomes more and more attractive on a risk reward basis.
His trader mind is unable to process it, as ultimately, he can only see the number on the screen. Before he capitulates at sells at the bottom. The worst possible time.
Oh well, if one does not go bankrupt or die, life and the markets will teach you all that you need to know.
Conclusion
To my fellow investors, good luck, I hope the traps we are in are warm and cozy! Remember the immortal words of Howard Marks:
To succeed in investing, you need 3 things
- The ability to estimate the intrinsic value of an investment
- The ability to hold and buy more as prices fall
- You have to be right.
There is a Latin saying I really like “Gradatim Ferocitas”. Step by step ferociously. To move quickly and purposefully, without compromising on your due diligence, and not skipping a single step.
Research deeply. Check and double check twice. Buy and do something else.
If you’re wondering if prices are going to fall further. Ask this. 5 years from now, are you going to wish you were more aggressive or more conservative?
Are you a seer who can (or thinks they can?) predict where prices will go? I don’t think so, since you’re not a trader.
If you’re scared (i feel nervous too), buy slowly.
And for those like me who have lined up financing. Remember, safety and survival is paramount. Go slow and check even more!
Choivo Capital 
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