Tug of War: Greed vs. Fear

In my journey of investing in the stock market, I realize now that the most difficult aspect of investing is not the technical evaluations (i.e. P/E, valuation models, CAPM or the ilk). The most difficult thing about investing is managing one's emotions!

Predominantly, it's about managing two conflicting emotions that are often two sides to the same coin. Namely this consists of both FEAR and GREED. I shall start with the emotion of FEAR first.

Fear

Fear is the state of mind where one is afraid. There is a mind-numbing feeling of paralysis. It is a situation where one thinks... "I know what I should be doing but... somehow, I'm not doing it". I freely admit that my personality falls into this category. The fearful investor is one that DISLIKES losing, meaning any losses, even on paper is a painful experience.

If you are the fearful type of investor, then it is important to remember the following:

(a) The Price of Inaction

We are no longer in the age of stability. This is the age of chaos where volatility and change is the only constant. Much like the chaos during the Three Kingdoms era at the end of the Han Dynasty, the price of inaction is defeat. One must seize the day when the time is right. To do nothing is safe but the price that one pays might be the death by a thousand cuts. If you've through research and analysis, then one must be persistent enough to commit to it. Nothing comes without risk. Inaction itself, is a form of risk. In financial terms, it is a slow death through inflation.

(b) Know Thyself, Know Thy Enemy

 In Sun Tzu's Art of War, it is said that:

 "Know Thyself, Know Thy Enemy, A Hundred Battles, A Hundred Victories"

Trying to apply this in stock market investment is not an easy task. However, NOT applying this principle in stock market investing may lead to disastrous consequences. Earlier in 2009 at the height of the Financial Crisis, I performed quite a number of financial analysis on the value of certain counters on the Bursa. Even though I found a number that was quite undervalued, I only invested in a small portion of my cash in them. Why? Fear.

Upon hindsight, I realize that although I knew the Enemy ... meaning I performed a reasonably detailed financial analysis, I failed to know Myself. Self-doubt, paralysis and pride (i.e. fear of losing) caused me to let the opportunity slip by. It's a costly mistake, but one that I'm determined to learn from.

(c) Remember the Simile of the Lute

Both Fear and Greed are servants to the Mind. The servants should not control the Master. The wise one is one who can master both these servants to his advantage. In investing, it is as difficult as walking on a tightrope whilst being pulled on either side by both Fear and Greed. In times like this, the best principle I can think of is to abide by the Buddha's advice., that is to follow the Middle Path of Moderation.

"The Buddha once had a disciple by the name of Sona who practised meditation so intensely that he could not progress in his meditation. He began to think of abandoning his life as a monk. The Buddha, who understood his problem, said to him, "Sona, before you became a monk you were a musician". Sona said that was true. So the Buddha said, "As a musician which string of the lute produces a pleasant and harmonious sound. The over-tight string?" "No," said Sona, "The over-tight string produces an unpleasant sound and is moreover likely to break at any moment." "The string that is too loose?" Again, "No, the string that is too loose does not produce a tuneful sound. The string that produces a tuneful sound is the string that is not too tight and not too loose." So here the life of luxury is too loose, without discipline."

Conclusion:

This post should serve as a reminder that one should neither be TOO prudent nor TOO greedy irregardless whether it is good times or bad. A clear mind is the greatest asset can possess in investing. Neither technical knowledge nor insider information can be equal to that.

Tis' The Silly Season Upon Us Again

All the turmoil in the current stock markets recently comes as little surprise to me. Nor should it surprise anybody else. Well, unless you're one of those avid followers of the mainstream media. It's really impossible that the US could recover so quickly from the 2008 financial crisis within a short period of one or two years. Real economic recovery requires time since manpower has to deployed, industries restructured and capital redirected amongst other things. After all, if it takes years to grow a tree, why should the 'real' economy be any different? The faster the US and the whole world faces up to the fact that we're all going to slip into a deep recession for at least 3 to 5 years, the better.

Capital Preservation?

The most painful observation that one must make right now is that Speculators/Gamblers are being given free reign over the Global Economy. What do I mean by that? Well, simply put - the people with capital/cash are no longer being compensated via interest. In other words, the Government wants you to either be in debt or to put your cash elsewhere. These negative returns on capital - after accounting for inflation is pushing everybody into speculating into all sorts of assets. This will merely fuel bubbles into assets such as property, stocks, gold and other assets. Preserving capital alone has become a difficult if not monumental task. 

Is all of these because the Government wants to help entrepreneurs? Not really. Most governments, including Malaysia are running on a deficit. Meaning expenditure is more than income. The Government has to borrow to make up for the shortfall. If you're the Government and have borrowed a lot of money, would you prefer interest to be high or low?

The Price of Inaction

Being an extremely risk averse person, I used to think - why bother? Preserving capital via Fixed Deposits would be sufficient to weather the risk. I no longer think so, since there is a real risk of Hyperinflation on the horizon. Meaning that if the Government keeps on printing money, inflation can go up to astronomical levels. Whilst it is inadvisable to panic over the financial turmoil, one must not be oblivious to it as well. We might well see extreme volatility over the next one year. It would be wise not to put all your eggs in one basket even if it be the almighty cash/ringgit. If there is a Depression, then there might be great opportunities ahead. Conversely, if there is Hyperinflation, there are great risks ahead.

Either way, take this as a friendly advice -  Do your Research, Be Prepared and Diversify. Rocky times are ahead of us.

Malaysian Mottos Makes Me Loco

Seperti ilmu padi hampa, makin lama makin mencongak

Loosely translated, this Malay proverb means ‘Like an ear of corn which grows tall in proportion to its emptiness’. The more one is puffed up with pride, the more likely that one’s achievements is just full of hot air. If we apply this to the length of letters in our slogans, it just shows how ‘tall’ we have grown. The more lavish our slogans, the more ludicrous records in our very own Malaysian Book of Records - the more ‘empty’ and ‘hollow’ our lives become.

Life in Malaysia is quite amusing at times. One inescapable fact of life is that when there is a change in the top leadership, a massive public relations campaign is mounted, spearheaded by catchy slogans promising ‘change’. Unfortunately, the nation seems to be headed in the OPPOSITE direction promised by these slogans. ‘Talking the talk’ is what we have come to expect from politicians. Not ‘walking the talk’ is also understandable. However, when one ‘talks one way, walks the opposite way’ or ‘Cakap Tak Serupa Bikin’, things becomes unbearable.

Bersih, Cekap dan Amanah

What does this motto mean? Loosely translated, it might mean Clean, Proficient and Trustworthy. Simply put, let’s just say it means ‘No Corruption’. Well, have we succeeded in reducing corruption in Malaysia? Let’s use the Corruption Perceptions Index by Transparency International as a measure.

Ooops… it appears that Corruption is actually on the uptrend rather than being reduced. See what I mean?

Cemerlang, Gemilang dan Terbilang

Excellence, Glory and Renown. A fantastic slogan that conjures up images a Golden Age filled with Emperors, Heroes and Glorious Armies of a long lost age. Perhaps one could use such words for the ancient Roman Empire or the Tang Dynasty. But for Malaysia? Is this realistic? A slide from PEMANDU should suffice.

So much for Excellence, Glory or Renown . Perhaps it is true that ‘Those whom the Gods would destroy, They first make Proud’?

One Malaysia. People First, Performance Now

Gee! This sounds quite swell. Finally a motto that actually makes sense. Now, if only the ruling Government could follow through on this one. Unfortunately, the walk has been in the opposite direction. Don’t believe me? Look at the picture below.

Conclusion:

Nobody minds good mottos, especially ones that we can believe in. However, let’s have honest mottos that we can rally behind and work towards. How about an eminently more sensible motto on what Malaysians needs? (with apologies to William Boyd "Bill" Watterson II)

Kick MY Butt!

Lies, Damned Lies and Statistics

On 27 May 2010, Idris Jala, CEO of Pemandu presented the Government’s justification for the proposed removal of subsidies. The presentation can be downloaded here. Today, we all the mainstream newspapers interviewing Idris Jala and allowing him to explain his views further here. It seems eminently reasonable to remove the subsidies, if you are one of those that lack a thinking cap. Once you think hard enough though, something appears to be wrong with this picture.

Interesting Headlines but …

The Government tells us that we, Malaysians must be swimming in the lake of milk and honey all this while. In Bolehland, prices are the lowest and life, the rosiest. We have enjoyed living in luxury via generous government subsidies and now the party’s over. No more Bolehland … time to return to the ‘Real World’. Well, this appears to be strange. The cost of living appears to have gone UP these past few years but … well, the picture above seems to imply otherwise. Is what is being said true?

An Independent Analysis

Let’s use the Internet to do a simple, independent analysis, shall we? The analysis below is a review of the cost of living between Malaysia and Singapore, using Numbeo, a free Internet database about the cost of living worldwide. Why Singapore? Well, that tiny little speck south of Johor was once part of Malaysia. We are both geographically and culturally similar. Since Bolehland has the lowest prices in the region, we would expect our cost of living to be significantly LOWER than Singapore, right?

Using Numbeo, we can compare the prices of food in Malaysia and Singapore in USD as well as our median monthly disposable income. Let’s look at the numbers below (click on the picture to enlarge it):

Hmmm.., food costs twice as much in Singapore (USD510) as compared to Malaysia (USD268). So, it is true that we are paying much less for food due to subsidies paid for by our Government. However, let’s not forget the MOST important fact. The average median monthly disposable salary of Singaporeans of USD2.2K is more than twice that of Malaysians, USD0.9K. Singaporeans only have to fork out 22% of their disposable salary on food. However in Malaysia, we have to fork out 27% of our disposable income for the same foodstuff. Although this analysis is imprecise, it is sufficient as an indicator that our cost of living is higher than Singapore. Further, this high cost will only go UP if we agree to the subsidy hike.

So, if the Government goes ahead and removes the subsidies on subsidized goods and fuel, inflation is projected by the Government to increase to approximately 5% per annum. This will be compounded by an additional 5% Goods and Services Tax by the Government. To maintain the same lifestyle, Malaysians will have to fork out an additional 3% (or more) of their hard earned (might I add, measly) salary for food alone.

The main question we should be asking is WHY there is such a HUGE disparity in the quality of life enjoyed by Singaporeans compared to Malaysians? Why is the Government portraying Malaysia as the land of milk and honey? Even BEFORE the subsidies are removed, our cost of living is already substantially higher than the Singaporeans. Let’s not forget that Singapore is a country with almost non-existent natural resources and lacks the economies of scale that Malaysia possesses.

Conclusion

Surprisingly, based on PEMANDU Open Day polls, over 90% of the attendees are ‘happy’ with the proposed subsidy removal. And that is being used as one of THE main justification to remove the subsidies. The very Government that put into place this subsidy mechanism, spent beyond its' limits and wasted billions in white elephants projects and bailing out GLCs is asking us for more money. They promise that it will be used wisely to increase our monthly income, eventually. I say, let’s wait for PIGS to fly and hope that we don’t starve to death in the meantime.

Propaganda: Malaysian Style

The maxim that ‘If you tell a lie big enough and keep repeating it, people will eventually come to believe it’ appears to be the driving principle behind the public relations effort by our Malaysian Government over the proposed removal of the subsidies. The official ‘story’ such as the one by Sin Chew entitled ‘The Malaysian Dilemma’ exemplifies this. Here is an extract:

‘If Malaysia's economy can expand robustly over the next couple of years, and our incomes grow significantly with the wealth gap narrowed concurrently, then the ensuing pains from subsidy cuts will be diluted.

Very simple. The subsidies North Korean government has provided to its citizens are perhaps the most generous in the world, but with appallingly low incomes, the people remain impoverished despite the generous government subsidies. In contrast, South Koreans can still enjoy very comfortable lives without the generous handouts from the government, because they have very high incomes.

As a matter of fact, our government needs not worry about subsidy cuts. More importantly, it must implement policies that will enhance economic growth, improve government efficiency, while cutting down unnecessary red tape and corruption so as to boost investor confidence.

Subsidies will no longer be that important once our per capita income becomes doubled.’

Since this is an issue that concerns our livelihood, we should ‘THINK’ and see how ridiculous the argument above is.

IF, If and if

Reading the first paragraph implies that our economy has been stagnating, our income has shrunk and the wealth gap between the poor and the rich had grown substantially during the past decade.

Albert Einstein once quoted that ‘Insanity: doing the same thing over and over again and expecting different results.’ So, let me ask you a simple question. How confident are you that the people that led our country on this financial precipice can find the courage, vision and wisdom to reverse our downturn and lead us onto a different path?

Subsidies Sucks

Is it true that subsidies are the bane of economic wealth? This article seems to imply that subsidies are the reason behind the decline of North Korea’s economy whereas the prosperity of the South Koreans is due to lack of subsidies. This is like comparing an apple with an orange. North Korea is under a dictatorship with substantial military spending. Further, with economic sanctions imposed on it by the United Nations, it is little wonder the country is suffering economically. To imply that subsidies are the reason for the poverty of the country is cheeky, to say the least.

Government Initiatives

The article goes further and states that the Government needs not worry about the cut in subsidies since ‘subsidies will no longer be that important once our per capita income becomes doubled’. Is this supposed to be a joke? Do you see the twisted logic here?

What the article is actually saying is that with the cut in subsidies, the Government will finally implement policies that will enhance economic growth and cut down on red tape and corruption. Of course, this implies that the Government has failed in implementing sound policies on economic growth for decades. Red tape and corruption have been allowed to flourish until we stand at the very edge of financial ruin.

The crux of the argument by the Government is that the subsidies are a waste of money. And that they are better used elsewhere to fuel economic growth of our country. We are now being asked to hand over more money to the people that created this mess in the first place. Now that’s really insane.

Conclusion

Whilst the Government is to be lauded with coming clean about the dire financial situation Malaysia is in, one should wonder whether it is too little, too late. Critical analysis and constructive suggestions such as ‘Economic tsunami heading our way’ by Dr Lim Teck Ghee is most instructive. What we don’t need is non-sensical propaganda saying ‘Yes’ to every government initiatives especially one as detrimental as removal of subsidies. Added with the proposed Goods and Services Tax (GST), these are really dire times ahead for Malaysians.