Why I'm not a big fan of top-down analysis

Investopedia: Top-down analysis is a method of analysis that involves looking at the “big picture” first, and then analyzing the details of smaller components. By first analyzing the overall picture, such as a macroeconomic trend, an investor can start narrowing potential companies/investment to analyze.

Although it sounds beautiful and rational, I see many defects in top-down analysis. 

Let’s just start with the example of its application in investment world.

One of the best examples of the top-down analysis flaw is the US election period and the beginning of the Trump presidential administration.

During the US 2016 presidential election campaign, two candidates competed for the presidency: Hillary Clinton and Donald Trump.

Before election day, they were showing a sustained but narrowing lead for Clinton.

The Telegraph’s poll tracker, showed Clinton leading with three percentage points over Trump.

American statistics and polling analysis site FiveThirtyEight gave Trump only a 30% chance of victory going into the final few days (by the way, I believe the polling method uses a similar method to the calculation of economic data such as inflation, namely through sampling and statistical calculations). And many more survey institutions provide similar conclusions.

Not all survey agencies were wrong, but the consensus of that time stated that Clinton was the winner of the 2016 presidential election.

In fact, many financial and business news at that time posed that Clinton's victory was good, while Trump's victory was a disaster for the stock market (this is related to Trump’s controversial statements during campaigning that are likely to be nationalist and protectionist).

Is this macro-politic analysis correct?

WRONG.

It turns out that Donald Trump won.

There are so many parties who mistakenly predict the results of the 2016 US election.

The lesson is: although it feels good to be in the consensus (due to confirmation bias and herding mentality), it turns out that consensus is not always true. Being in a consensus does not make you right. And countless data and sophisticated statistical calculations do not help (how many of us often naively ingest data just like that? Are we sure the data presented, is accurate enough?).

And after they mistakenly predicted the results of the 2016 US election, were they right in guessing the Trump winning effect?

WRONG AGAIN.

Instead of free fall into abyss, the US stock market is rising as fast as it can, leaving the market forecasters in the dust.

Even more strange, when Trump embodies the spirit of nationalism and protectionism (ex: US withdrawal from TPP), the market is also still rising.

The lesson is: say you’re correctly predicting something (in this case the election results), the market reaction can be different than you think.

And after Trump wins, the market again guesses, what economic policy will Donald Trump take.

One of them is related to monetary economic policy. During his campaign, Trump often denounced the Fed governor at that time, Janet Yellen, for her policy of letting interest rates fall too low and too long.

So the market assumes that Trump is a "hawkish" guy and will try to influence the Fed to raise interest rates.

Is this macro-economic view proven true?

WRONG AGAIN.

Later Trump stated that he was a low-interest rate guy. And not only that, Trump was also very close/familiar with Yellen and comfortable with the Fed's policy at the time.

Not deterrent in making a mistake in predicting, the market predicts that the USD will strengthen significantly against other currencies as US monetary policy tends to tighten.

Is this fundamental top-down currency analysis proven true?

WRONG AGAIN.

USD weakened significantly since the beginning of Trump’s administration.

I can show dozens of other examples of flaw of top-down analysis, but I am tired of writing the word "WRONG". I myself am also astonished why top-down analysis can be so wrong in that short period of time.

Through the above examples, I just want to point out, how big is the room-of-error in top-down analysis.

Say you are correct in predicting macro variables, you can still be wrong in guessing the market reaction (which in fact has more influence on the value of your investment). The market does not know you. It has no obligation to obey you.

The trouble is, many people like to talk about confusing macro matters just to look smart, hence macro chats will always re-tempt investors to make predictions.

For me, I understand that the macro things that used in top-down analysis are actually things that are out of my control anyway. There’s nothing I can do to influence the market, Trump or the Fed. So, I leave it alone.

Therefore, I’m not a big fan of top-down analysis. 

I don’t want to look smart, I just want to be right often. However, it seems by often doing top-down analysis makes my chances of being right smaller.
I’m not saying that top-down analysis is a wrong practice, but it is less accountable.

Relying on your investment decisions based on top-down analysis is a dangerous thing.

As the name implies, it can bring your investment value from "top" to "down".

Disclaimer: This article is not a recommendation to conduct transactions on the intended securities. Any consequences arising from this writing are beyond the responsibility of the author.

Mayweather vs Lo Keng Hong: Who Wins?

Can an investor confront a boxer in a fight?
Can.
In a "fight", not a literally fight.
Yes, because in fact I do see a resemblance between boxing and investing.

For example: if a boxer’s main goal is to win the game, then the main goal of an investor is to make a profit.

Now, let’s start with an analysis of a boxer.

As I mentioned above, the boxer’s main goal, is to win the game.
And although victory with a KO (knock out) is a beautiful victory, but no one says that a boxer must win the fight with a KO.

That’s why I think Floyd Mayweather deserves to be the best boxer.

Mayweather is a boxer who places victory as his primary target. Though it should mean presenting a boring and unattractive match. Look at Mayweather’s game: running, hugging, dodging and occasionally hitting. He rarely hit hard. But he often blows lightly. And the jury counts the number of clean punches that go into the opponent, regardless it’s hard or not. That’s the most important point. And Mayweather really understands this.

Equally important, Mayweather always tries to take the opponent's punches as little as possible. This is where Mayweather’s main advantage is: he is very fast. His opponent had a hard time hitting a clean blow to Mayweather's body. Mayweather always ran, dodged and embraced to prevent an opponent's blows from entering his body.

So it's clear, in every game, Mayweather always hits more than taking a hit, so he consistently wins  (regardless of the amount of scorn he received after the games).
He doesn’t care about the scorns people make. Victory is his ultimate goal. For the record, he has played 50 times, has never lost and win the game with a knockout as much as 27 times. Note that the accumulation of light punches that he launched, able to give a fairly good percentage of KO victory, ie 54%.

Now, imagine that a successful blow you wielded as an investment gain, and the blow you receive is an investment loss.

The key to your success in investing is to make profits while avoiding losses as often as possible.

The gain on investment will add to your wealth. Even small gains (as well as light punches in boxing), which are consistently accumulated, can be very big thanks to the compounding effect.

But on the other side, investment losses reduce your wealth. To make matters worse, investment losses undermine the ability of your money to multiply. 
As an illustration: if in year 1, your investment value increases 10%, and in year 2, your investment value down 10%, then at the end of year 2, your investment value is only 99% of its original value. That is a 1% loss. Even though you experience the same level of profit (10%) in years 1 and 2.
Therefore, as in boxing, losses should be avoided.

On the other hand, there is a prominent Indonesian investor named Lo Keng Hong. He is often referred to as Warren Buffett of Indonesia.

Incidentally last week I got a chance to meet him.

There’s not much to dig out of him, to be honest.

The words that came out of him were simple words like:

“Invest in bad times, and sell at good times”.

“Saham (stock) is the best choice”

Hearing him speak making getting-rich-through-stock-investing sounds easy.

His criteria in choosing shares, among them:

1. Choose a company whose owners and operators have good character.
2. Choose a cheap stock.
3. Choose a company whose profit is large.
4. Etc.

Uninspiring, isn’t it?

Do not get me wrong, I respect and admire him. Not only rich, he is also funny and humble.

And his track record tells everything.

I just feel that there are many things that he does not reveal in his investment process.

However, never mind, I also do not intend to discuss the process and criteria of his investment.

What I want to underline is his investment style.

What makes Lo Keng Hong famous is the incredible profits that he made in stock investing.

UNTR, MBAI, TINS are a few of the stocks that provides tremendous gains for him.

Obviously, the huge profits it achieves are not the result of widespread investment diversification, but from focused and successful investment. Not infrequently, his big stakes against a company's stock make him the majority shareholder of the company.

If likened to boxer, Lo Keng Hong is Mike Tyson in the investment world.

But I must explain from the beginning, that Lo Keng Hong is an exception. He is a different boxer.

As a fighter, Lo Keng Hong rarely throws a punch (maybe even he rarely fights). But if he sees a good chance, he will let go as hard as possible, to create a spectacular victory. This is what I mean by a stylish boxer like Mike Tyson.
However, unlike Mike Tyson, Lo Keng Hong often won and rarely lost (if not, of course he is not as rich as it is today). For the record, in 58 matches that have been passed, Mike Tyson won 50 times, lost 6 times and draw 2 times. His KO victory percentage was 88%.

All investors want to win big. KO victory. Spectacular gains. Get rich quick. And become a legend.

Unfortunately, not everyone can do such a thing.

Unless you have analytical skills, patience and endurance such as Lo Keng Hong, I do not recommend you follow his investment style.
Why?

In every major “big blow” you execute, there is always the possibility that the blow is not on target. And as Angelo Dundee puts it: “The punches you miss are the ones that wear you out”.

As an illustration: you have done a sharp analysis of a stock, and decided to invest most of your money in the stock. However, instead of rising, the stock does not move. Or, even down, for example. With the huge money you have invested, you are competing against time (opportunity cost). 

The point is: there is always a potential error even if you have done all the necessary actions correctly.

Again, do not get me wrong.
I am not in a position to advise you to follow Mayweather style (by the way, following Mayweather's style is clearly not a recommendation for short-term trading but investing vigilantly, consistently delivering respected profit in the medium to long term), or Lo Keng Hong style.
Comparing the two is not an apple to apple comparison either, from the beginning.

Answering the question on the big headline above, there is no winner between Mayweather and Lo Keng Hong.
There is no right or wrong here.

Many roads lead to Rome, and many roads lead to riches. Choose your own investment style.

At the end, investing is the process of recognizing yourself.

Disclaimer: This article is not a recommendation to conduct transactions on the intended securities. Any consequences arising from this writing are beyond the responsibility of the author.

Quick Thoughts on Go-Ahead (GOG LN)

The Go-Ahead Group PLC (GOG LN) is a UK-based public passenger transport company for bus and rail services. 

The group operates through three segments: regional bus, London bus and rail. 

The regional bus segment comprises commercial bus businesses outside of London. 

The London bus segment comprises tendered bus operations under control of Transport for London (TfL). 

Train operation are run through rail franchises through contracts tendered by the Department for Transport (DfT).

Outside of the UK, the Group mobilizing three rail contracts in Germany and also run bus services in Singapore.

I found the stock price of GOG LN lying helpless when I first found it in early September 2017.

Shadowed by the fear of Brexit effects and the number of downgrades made by analysts make GOG LN stocks slumped.

After "technical washout" (see circle), I tried to dig deeper about this company.

After reading the financial statements in passing, it seems the condition of this company is fine.

Here are the financial data based on book year 1H17:

		2017	2016	2015	2014	2013
Mcap	702.94
Cash	590.00
Total debt	359.00
EV	471.94
Equity	202.00
Revenue		3,481.00	3,361.00	3,215.00	2,702.00	2,572.00
Operating income		151.00	163.00	97.00	110.00	80.00
Depreciation		(69.00)	(58.00)	(80.00)	(67.00)	(65.00)
EBITDA		220.00	221.00	177.00	177.00	145.00
Net income		89.00	94.00	52.00	70.00	46.00
Operating cash flow		144.00	212.00	411.00	172.00	115.00
Capex		(147.00)	(115.00)	(48.00)	(71.00)	(60.00)
FCF		(3.00)	97.00	363.00	101.00	55.00
Net debt/EBITDA		(1.05)
PBV		3.47
P/E		7.90
EV/EBITDA		2.15

Although not growing fast, but the company's income grew very-stable (genius?) in the last five years.

It is true company’s incomes appear to be fluctuating, but its cash profit is still growing steadily. Free Cash Flow (FCF) also looks healthy.

All looks good. Sign me up!

But, wait, then why the stock prices fall?

According to media, the company has been hit repeatedly by strikes on its Southern rail franchise. This is one of the many railway lines owned by GOG LN, that is Govia Thameslink Railway (GTR) – a joint venture between GOG LN and France’s Keolis. This franchise started in Sep14 and is the largest contributor to company’s revenue (35% total revenue). This is the only business segment that has decreased revenue in 2017, ie about -4% y-y. On July 13, 2017, agreement was reached with the DfT regarding GTR contractual variations relating to the impact of industrial action on train performance over a period of around 18 months. In that agreement, GTR will fund a package of performance and passenger improvements worth GBP 13.4 mio. This agreement resolves financial uncertainty relating to past industrial action and allows GTR to focus on improving services.

In addition, it seems the market is also concerned about the impact of Brexit, which will manifest in the form of weakening economy and rising labor costs.

The slightly shrinking revenues, coupled with the potential increase in operating costs, send GOG LN stock prices falling into the abyss.

But, hey, regardless of any problems that will be faced, the price of shares of GOG LN has dropped 27.33% in a year. Whereas in the same period, the FTSE All Share Index rose 12.02%.

In addition, the decline in the price of shares of GOG LN also caused stock valuations to be very attractive:

	GOG LN 2017	5Y historical	Peers
P/E	7.90	13.74	15.04
PBV	3.47	16.51	5.77
EV/EBITDA	2.15	4.88	4.40
ROE	44.00%	133.47%	34.10%

*Source: Bloomberg

From the table above can be seen, that the valuation of shares of GOG LN relatively very cheap when compared with its historical valuation and even with its competitors.

In my view, there are 3 things that make GOG LN interesting:

1. The problem facing GOG LN is a problem that can be solved. Even in today's tough times, the company's revenue keeps growing.
2. The company's balance sheet looks pretty strong against the storm.
3. GOG LN share price is relatively cheap compared to its historical valuation and even compared to its competitors.

At current prices (GBp 1,630), GOG LN not only offers attractive valuations, but also provides attractive dividend yield. In my calculations, GOG LN can give dividend yield of 5% p.a.

I think it is not excessive to expect GOG LN valuations to reach 4x EV/EBITDA, a level that is both a historical achievement and a competitor's valuation level. Fingers crossed.

Disclaimer: This article is not a recommendation to conduct transactions on the intended securities. Any consequences arising from this writing are beyond the responsibility of the author.

PNIN IJ and EMH

Once, there are 2 people walking together.

One is a value investor (we call it VI). While the other is a professor of finance (Prof).

As they both walked through the park, suddenly VI's eyes saw a $ 100 bill lying on the sidewalk.

VI: Professor, look! There’s $ 100 cash there!

Prof: That is impossible. You must be mistaken.

VI: Why is that? It really looked like $ 100 in my eyes.

Prof: If there were really $ 100 there, it must have long been taken by others.

VI walked over to the money, picked it up and put it in his pocket.

VI: It's really $ 100, professor. Let me treat you a cup of coffee?

Prof: No, thank you. I still have to catch the time to teach on campus.

VI: Oh ok. Sorry professor, remind me again, what subject do you teach on campus?

Prof: It is an “Efficient Market Hypothesis” (EMH) theory.

About a year ago, I recommended the shares of PT Paninvest Tbk. (PNIN IJ) to my team. 

One of my main reasons for recommending PNIN IJ is because its valuation is so cheap.

At that time, PNIN IJ was only traded in the range of 0.2x BV and 5x E. A very cheap price level.

As well as the $ 100 money lying in the park, shares PNIN IJ long enough to sit at the level of IDR 600.

My feelings for the shares of PNIN IJ, identical to the feeling of value investor in the fictional story above.

But many of my friends do not care about my recommendations.

Some of the classic reasons are:

1. The stock is not liquid.
2. Panin's group shares are value traps (concern on GCG).
3. No catalyst.

People rarely aware that there is no a truly perfect investment.

If PNIN IJ is liquid, GCG is good and has a catalyst, do you still think PNIN IJ will be trading at 0.2x BV?

Have you ever thought, that all the bad things, actually been reflected in the stock price valuation?

With a 0.2x BV valuation, PNIN IJ's shares traded well below its liquidity value. And most of PNIN IJ's assets are liquid assets, which do not require big discount to know its real market value.

Indeed, most of its assets are paper assets (stocks), whose value can fluctuate and can very quickly generate profits, but also losses.

But in fact, historically, PNIN IJ is able to generate a stable yet substantial profit.

And when it comes to the stability of assets and profits, isn’t the instability, also experienced by commodities companies? But the fact is that commodity stocks can become liquid and fly when the time comes. Clearly there has been massive discrimination against PNIN IJ shares.

Suddenly in the past few days, PNIN IJ's shares have risen remarkably to IDR 1,415/share, with very high trading volume (liquid).

A 135% profit in a year.
At IDR 1,415/share, I am more than happy to take money off the table.

That's why I'm not too worried about the growing trend of passive investment (index fund) and or artificial intelligence (AI/robotic investing).

Ultimately, all judgments and final decisions, leads to humans.

And man is subjective.

Therefore I am pretty sure, in the future that will come, the market will still create opportunities like the $ 100 money lying on the ground.

In fact, with the increasingly widespread passive investment (index funds), the more inefficient a stock market.

In the long run, the stock market is always right, but that does not mean it is always fully efficient in its journey.

Disclaimer: This article is not a recommendation to conduct transactions on the intended securities. Any consequences arising from this writing are beyond the responsibility of the author.

An open letter for ASII' BoD

Dear ASII IJ Board of Directors,

On this occasion let me convey a proposal.

As we know, the good capital market conditions, has made the price of shares in Indonesia in general rise significantly. In addition, the popularity of index funds makes big caps such as ASII IJ increasingly popular and strong, so ASII IJ is currently trading at 15.4x E18, 2.72x BV17, or equivalent to a USD 24.8 billion market cap.

In my opinion, you should take advantage of this moment by issuing new shares in large quantities, which you can use to acquire good assets at low prices. Your shopping list is as follows:

	Mcap (USD bio)	P/E18	PBV17
7203 JT	161.00	10.84	1.03
7201 JT	37.72	7.18	0.86
FCAU US	16.75	5.68	1.02
BMW GY	61.51	7.81	1.07
VOW3 GY	72.30	6.07	0.78

Thanks to electric vehicle noises, currently traditional-car manufacturer’s stocks are trading far below ASII valuations.

Although acquiring 7203 JT seems excessive because of its huge market cap, but the acquisition plan against other seems reasonable, in my view. 

My favorite is FCAU US which only has USD 16.75 bio market cap. Acquired 51% of its shares only need USD 8.54 bio.

At the end of 9M17, you only have total debt of USD 5.56 bio, while your cash is USD 2.19 bio and your equity is USD 11.05 bio. There is still plenty of funding space you can explore, either through additional debt and or new stock issuance to fund the acquisition, but I personally recommend funding through massive new shares issuance. The reasons are:

1. ASII stock valuation is high, very unfortunate if you do not take advantage of this moment by issuing new expensive shares.
2. By issuing new shares in large quantities, current shareholders will be cornered and forced to participate if they do not want their ownership diluted.
3. On the other hand, a large increase in new stocks will significantly increase ASII’ market cap and this will only cause index funds to be more eager to acquire your stock.

In the short term, the market may be upset with you, but be calm, because eventually the market will forget it. They can not ignore your presence when your market cap is getting bigger. Let alone if the market starts to realize that the expensive stock that you issue is used to buy a relatively cheap world-class assets.

Through this transaction, I believe you will create added value for shareholders through:

1. New brand and technologies acquisitions.
2. Your business is becoming more diversified, yet it is still related with the existing business.
3. Your market cap will increase significantly.

That’s more or less the suggestion I can give. You are welcome. Hope you can consider.

Disclaimer: This article is not a recommendation to conduct transactions on the intended securities. Any consequences arising from this writing are beyond the responsibility of the author.