Book Reviews

Book Review on Successful Value Investing in Asia

Book: Successful Value Investing in Asia: 10 Timeless Principles by Tony Measor (2007)

Review: This is a bit like an autobiography, but it does contain some good points. Tony Measor was a stock broker (did not specify where), dealer (did not specify where), business editor (Hong Kong Standard), equity researcher (Hong Leong Securities which became Dao Heng Securities), fund manager (Dao Heng Securities, Dao Heng Hong Kong Fund), and founder and head of research (Quamnet).

Key Points:

  1. Inflation
    1. The high rate of growth in the Chinese economy will lead to inflation that will spill over into Hong Kong.
    2. A high rate of inflation is bad because it diverts money from constructive use into more highly speculative use. [My note: it also erodes savings for those not investing properly]
    3. A benign rate of inflation (2 to 4%) encourages reasonable investment.
    4. Inflation also increases worker’s wages (which makes workers more content), and companies will be willing to do so because prices will rise too so the additional cost will be passed on to the customers.
    5. Hong Kong experienced deflation from 2001 to early 2004. Deflation can led to negative home equity, businesses being curtailed, employers being unwilling to employ labour, jobless rate raising to unhealthy levels, confidence dropping perilously.
    6. [My note: Businesses with large capital expenditures will suffer more in high inflation situations than businesses with low capital requirements. This is because businesses earn less nominal money and yet have to pay higher capital outlays in future periods to replace or maintain PP&E. These businesses also typically find it hard to increase prices dynamically to maintain margins when inflation kicks in]
    7. During inflation, financial institutions will handle the same volume, but at increased nominal figures, and with margins still intact, their profits will rise together with inflation.
  2. U.S. dollar collapse
    1. A collapsing dollar is not in anybody’s best interests and everybody will rally round to protect the U.S. dollar. [My note: we already see that happening when the Bank of Japan sold Yen to prevent the Yen from appreciating any further vs. the U.S. dollar (82 Yen per USD was their threshold). China has also been resisting calls to appreciate the Yuan and has been buying tons of U.S. dollars to prevent the Yuan from rising. Singapore has also intervened to sell SGD to prevent the USD from depreciating ($1.32 was their threshold).]
    2. Hong Kong will become more and more dependent on China for its supplies and its exports
  3. Interest rates and stock prices
    1. Increasing interest rates will increase the cost of doing business. This can in turn lead to inflation if the cost is passed on to consumers. [My note: it depends on the type of business. Price competitive businesses churning out commodity products may not be able to pass the cost through to consumers, hence interest rate increases actually would hurt them and may cause the less competitive ones to shut down. However, businesses with non-price sensitive products and little capital expenditure requirements can pass the costs to the consumers, hence resulting in price level increases. The question then becomes, of the typical basket of goods and services required by consumers, what proportion of it are price-sensitive products and what proportion are non-price sensitive? That will determine how much ‘inflation’ is felt by consumers. I would think that a majority of the goods in the basket would be commodity goods, which are the ‘volume’ products that are required by the most number of people. Hence inflation would end up hurting the commodity businesses for a while before the businesses adjust and increase prices for consumers.]
    2. From experience in Hong Kong, increases in interest rates led to inflation, which pushed the equity markets higher. Deflation will cause stock prices to drop. Hence, you should not sell shares because inflation is rising or interest rates are running higher. [My note: if you look at the charts in Ken Fisher’s Wall Street Waltz book,  you do see periods where both interest rates and the equity market is high, and where both interest rates and the equity market is at a low. My first impression is that this is simply because things take time to work. When you start to raise interest rates, the less cost-effective companies that can’t pass the cost to their customers will get weeded off. As rates continue to increase, the bar keeps getting raised. More companies fall off, and companies that hang on do increase prices, leading to higher stock valuation. There then comes a time when the rates are so high that businesses can’t pass on costs anymore, new projects don’t get started, commodity-type businesses are severely affected, and that’s when the economy starts to drop. Of course this will be tied in with inventory and capacity cycles (e.g. at low capacities of utilization, businesses can stomach high interest rates better). Equity market drops tend to be more swift compared to gradual market rise. As the market drops, interest rates start to be lowered, which again the effects are not immediate as it takes time for companies to gradually come back in or ramp up again. Companies also need some confidence that the interest rates will be gradually dropping to put in investments. Hence we end up having situations where both stock market and interest rates are low at the same time.]
    3. In the U.S. and UK in the 1990s, when stocks were cheap, prices of goods and services restrained, profit margins were low, unemployment was high, spending was low, inflation came to the rescue. Inflation help to put the pressure on prices, coupled with interest rate increases that forced manufacturers to raise prices and take the pressure off profit margins. This helped to push the stock market up again culminating in the 1997 bull market.
    4. Increase in oil prices is inflationary.
    5. The potential fall of the U.S. dollar will cause savings to be diverted overseas to Asia where prospects are better. [My note: should check the BOP to see if there is capital flight from the U.S.]
  4. Commodities
    1. Storing commodities, including gold, costs money and does not pay interests or dividends. It is very difficult to consistently make money on commodities.
  5. Currencies
    1. U.S. dollar is holding its levels because countries with surpluses can find no where else big enough to deposit the surplus (i.e. their reserves).
  6. Principles
    1. For a large public company, return on capital employed should be from 5% to 15%.
    2. Look at dividend yield and earnings yield. Calculate (earnings yield / dividend yield) to know how many times the dividend is covered by earnings.
    3. Use asset values of value shares of property companies.
    4. Look for dividend income from stocks. Stocks with dividends have a ‘lower bound’ share price, unless there is expectation for the dividend to drop. If you buy stocks with no dividends just for capital gains, there are two problems:
      1. The market falls 40% of the time. During these times your money is not generating money even if your investment is right. If your investment is wrong, you suffer permanent capital loss.
      2. You will be unlikely to invest all of your money, hence you do not benefit on the whole of your capital.
    5. Buy on the way down. Graduate the buying so that you buy the same cash amount rather than the same share quantity.
    6. For positions in good companies, limit sells to an absolute minimum. Do not do short-term speculation in hopes of buying them back at a cheaper price.
    7. Don’t borrow. Bet only when the odds are in  your favour.
    8. Conduct your buying and selling in stages. Nobody can tell where the apex or bottom is.
    9. Buy property for living, not for investing. The cost to buy property is over 3% compared to under 0.5% for stocks. Costs include finding a tenant, collecting rent, maintenance, insurance, debt collection, no income for periods between tenants, etc.
  7. -END-


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