Stock Market Musings

I’ve been following the news about Glencore the last two weeks, and its been a wild ride.

Is there a mis-pricing here?

I remember hearing the pitch for a couple of commodity stocks over the years. One of them was for the embattled Noble Group by Eastspring (subsidiary of Prudential). Orbis, a fund management company I respect greatly owns a big chunk too.

While management once indicated it was a temporary setback, I am not so sure any more with even the titans of the industries coming to their knees.

One of the things that has always puzzled me is the business models of these business.

Plenty of revenue. Check. Net profits. Check.

Free cash flow? Well, that’s a different matter altogether.

Glencore’s 5 Year Financial Summary, Source: Morningstar

Every time I see a stock like that, I instinctively think about Enron (not indicating that Enron or Noble Group are frauds like Enron, just highlighting some similarities in their cash flows here..)

Coincidentally, I wrote about it six years ago here.

Enron 1996 – 2000, Source: Enron Annual Reports

Its a simple enough metric to calculate, but surprisingly robust. Cash rarely lies.

So how about our own Singapore listed Noble Group?

Noble Group Financial Summary, Source: FT


Maybe its me, but I don’t understand businesses that seem to burn ever more cash as they increase their revenue.

Ten years is a pretty long time for me to see persistently negative free cash outflows.

Still, stock prices are down so much that I had a look at them again to see if I was missing something. However, I can’t wrap my ahead around what these businesses actually do.

Simply put, I can’t figure out how it is that they actually make money.

I think this tweet pretty much sums it up:


Rusmin from the Fifth Person did a great re-cap on the SGX (Singapore Stock Exchange) AGM 2015, which I was not around to attend this year.

SGX: 8 Things I Learned from its AGM 2015

I would like to talk briefly about his first point which I’ve reproduced here

SGX has a dual-role as a regulator which protects the interests of shareholders of publicly listed companies in Singapore and as a profit-driven enterprise that is held accountable to its own shareholders.

I’ve previously been critical of the failure for the authorities to protect minority shareholders. Investors in S-Chips have seen little recourse. The Blumont Saga has dragged on with little updates to minority shareholders.

Has Justice Been Served?

One of the few updates on it is a case involving Goldman Sachs, and Quah-Su Ling, CEO of IPCO who indirectly involved in the penny stock rout.

So imagine my horror when I read in the newspapers that the SGX was actively seeking more listings from Chinese firms. Considering the sad and sorry tale of financial and corporate fraud of Chinese firms listed overseas, this was depressing.

Still, its hard to blame the SGX, and Rusmin’s point highlights it:

The only stable recurring business for SGX is market data which contributes 10% of the revenue and corporate action services (i.e. processing dividends) which contributes 4.6% of revenue.

A lot of SGX’s revenue derives from activity. The same inherent problem with getting non-bias advice from a barber arises.

If you ask him whether you need a hair cut, what can he say?

SGX must perform its regulatory role, in protecting shareholders. And yet, if listing requirements are too strict, firms will find it increasingly harder to list, thereby reducing their own profits.

Who is going to complain?

The shareholders of the SGX board which are there for a profit sharing motive.

In a way, I pity the whoever takes the role of the CEO of the SGX. As Prof Mak Yuen Teen wrote in his article

A couple of years ago, I met the retired CEO of a listed stock exchange which, like SGX, has dual roles of a regulator and operator. I asked him whether he thought there was a conflict between the two roles.

He replied: “Of course there is, but I couldn’t say it when I was the CEO.”

I think the problem with the current situation is pretty clear.

What puzzles me more is why haven’t the authorities moved to rectify the situation by simply seperating the regulatory role of the SGX into an independent body.

After all, that’s the standard operating practise of most countries.

A lot of people are commenting on how the Emerging Markets are collapsing. Its not hard to see why with the crazy stock market and impending slowdown in China, instability in Thailand, the corruption scandals in Malaysia and the poor economic outlook of the other countries.

Sell first and think later is the watchword of the day.

And yet, by my measure, emerging market valuations are exceedingly cheap. And if we don’t buy when its cheap, when do we buy?

In the last post, I talked about how looking at the price levels are not an accurate gauge of how “expensive” or “cheap” a market is. It doesn’t take into account the economic activity over the years, reflected either through dividend payouts or increases in book value.

I am pretty bias towards the P/B ratio, just because it takes out a lot of the fluctuations in earnings. There maybe problems with it too, but I find it the best tool we have so far.

I remember back when I attended the London Value Investor Conference in May 2014, investors were already remarking that Emerging Markets were cheap relative to the rest of the world.

Where do we stand now?

screenshotCredit: JP Morgan

The data is from JPM. The data is accurate from the end of June 2015. It doesn’t take into account the subsequent decline in prices from July – August. The average P/B of the MSCI Emerging Markets stands at about 1.3x, a level not seen since 2009.


Credit: JP Morgan

What’s really interesting from the chart above is that the cheaper the P/B ratio, the better the subsequent returns in the next 12 months.

The data goes back all the way to 1995, and it takes into account the Asian Financial Crisis in 1997.

The returns are overwhelmingly positive, which makes sense to me, as values “mean-revert”. The probability of positive returns increase significantly as stocks get cheaper. The key word here is “probability”.

Of course stocks can get cheaper, but if they go down significantly in the next couple of months, we will be already approaching 1997 Levels.

How Cheap Will It Go?

The million dollar question. Unfortunately I have no idea. All I can say is stocks are getting much cheaper. More specifically, in the markets I operate in (Singapore, Hong Kong, South Korea and Japan), I am seeing plenty of value.

Some stock valuations are as cheap as when I was starting out in 2010 – 2011.

Its probably a good time to remember that market timing is not a pre-requisite of doing well in the market. Just look at the date of Warren Buffett’s famous “Buy America I Am” piece in October 2008.

He was a couple of months early too the bottom. But that wasn’t the point, it was that valuations were already becoming very attractive. Without the help of a crystal ball, I don’t think anyone really knows when the bottom is.

I know a couple of people who are waiting for the “all clear” to buy… but lets just take a look at some of the magazine covers during one of the greatest stock market rallies in history from. These are just a couple from 2009 – 2010:



I think it just goes to show how hard it is to predict the future. I will probably do a future post. Reading these articles written in the past are tremendous fun, as are the comments made then.

Final Thoughts:

So I think stocks are pretty cheap across the board, and its time to go bargain hunting. Still, the news in the coming months will probably be pretty bad, and anyone looking to commit should steel themselves mentally and be prepared to look foolish in the face of a wall of negative press.


Stocks valuations are as cheap as they have ever been in the last decade.


Notice how I don’t say prices, because on a price basis, they certainly aren’t as cheap as they were in 2008. The reason why I don’t look at price alone is that it fails to take into account the years of economic productivity.

Businesses have made money in the last few years, which were either paid or to shareholders in dividends, or are represented in earnings which are retained in the company.

There’s a certain danger in anchoring to the last “crisis”, simply because the price then and now reflects a different situation.


I can imagine someone in 2009 thinking that prices hadn’t hit the all time lows of 1997 (Asian Financial Crisis), or 2001 (Terrorist Bombings of 2001), or even 2003 (SARS Crisis in South Easy Asia), and always waiting for a “better deal”.

The problem is that you would have missed out the subsequent rally. Again, bearing in mind that in 2009, any objective valuation metric would have told you that stocks were a screaming buy. In all this market volatility, I think its easy to get caught up in the noise.



Despite conventional wisdom, very little successful investing behaviour is built on market timing. All investors can do is value a business, and decide what a reasonable price is to pay based on the current market conditions.

Buying a cheap stock is no guarantee that it will go up (it normally tends to go down), and shorting an expensive stock just because it is expensive does not mean it will go down (it normally goes up with momentum).

Investors have a huge advantage when it come to the stock market. Their holding period.


And yet investors time and time again forsake their advantage by trading in and out of the market. Like now. The worst part is investors time and time again sell at low prices, and only proceed to buy the same stocks again at much higher prices repeatedly.

Investing may be simple, but its never easy, and its the nature of the stock market that it is intrinsically volatile. Lets remember that volatility works both ways, both on the way up and on the way down. The fact that investors like to see stock prices go up does not make it “right”.

Are Stocks Cheap?

That depends on which market you’re looking at. Stock market prices in the United States are by my measure, overvalued or richly valued – which is one reason why we exited most of our US holdings back in 2014. Stocks were overwhelmingly cheap in the US back when we started in 2011 compared to the Emerging Markets.

On the other hand, stock market valuations in the Emerging Markets are overwhelmingly cheap today. Just take a look at some of the headlines:

How farmers from rural China bet on the stock market and lost – The Washington Post

Foreign investors flee South Korea stocks, bonds – CNBC

Investors are fleeing once-popular emerging markets – CNBC



Why do I look at stock market valuations? Simply because they are an overwhelmingly reliable predictor of long-term price appreciation! Here’s a warning though: they do very little in way of predicting short term price movements.

I don’t think this is academic theory at this point: just take a look what has actually happened in the stock market in the last couple of decades – What Has Worked In Investing

To end off this post, let me just end with two quotes from Sir John Templeton, one of the most celebrated investors of our time.

The four most dangerous words in investing are “This time it’s different.”

and my all time favourite:

“Bull markets are born on pessimism, grown on scepticism, mature on optimism and die on euphoria.”




It’s been an interesting week, with emerging markets swinging to its classical “risk off” mode again. China has given up most of its gains since the start of the year. I don’t feel so stressed out now as I did a couple of months back when the market was riding high on optimism and hope.

Emerging markets have caught the flu, and have been hit across the board. It looks like a perfect storm, with problems in almost every major economy: Thailand, Malaysia, South Korea, China etc. It’s one of those moments where investors have forgotten that emerging markets aren’t actually a homogeneous bunch of countries to be lumped together.

Still, I think we as investors should ask ourselves what has really changed in the real economy (as opposed to the stock market). Many of the concerns today are not actually new ones. Just that people have awaken to the fact that the world isn’t as rosy as it once was. But I suspect investors today are shooting on the other-side in pessimism.

To be fair, much of the speculation in recent months has actually gone on in the US markets, and China. Valuations in the rest of the world such as Hong Kong, South Korea and even Singapore have been reasonable by historical measures. Will we get a repeat of 1997? Its anyone’s guess, but the majority of countries have learned from their mistakes.

Stock markets can always go lower (just like it did in 2008 and 1997), but we have to weigh against the probability of it actually doing so which valuations already being on the low side.

I guess its easy to think that the current market volatility and the price drops are “new”… but lets just take a look at what the STI has done over the last decade.




Well… I think its pretty clear that investing in stocks is VOLATILE. That’s the nature of the beast. Leaving aside 2008, you still saw a significant drop in 2011 (despite the low valuations). What’s interesting is that in the last 2 years (and this year by the look of it), the market has pretty much gone nowhere.  This is a gross generalization, but markets tend to do better after a serious period of under-performance, and terribly after a period of over-performance.

This is pretty much why value investing works – mean reversion. I don’t want to get into the unreliable world of forecasting stock prices, but if I had to bet, I would say that the next couple of years should provide investors with a very satisfactory return.