Dash of daring may pay off in the long run
For a lesson in the evolution of stock markets look no further than the Hang Seng Index. Of the blue-chip companies on the benchmark index 20 to 30 years ago, only five to eight survive today.
Most companies were either bought out, went bankrupt or fizzled into obscurity through bad management and declining morale. The survivors had a rare set of genes enabling them to adapt to changes in society and even prosper in the face of adversity, stock columnist and head of Pegasus Fund Managers Paul Pong said.
'This is due to a number of factors,' said Mr Pong, 48, adding he believes in Jim Collins' theory in his book, Good To Great, that about 10 in every 1,000 companies rise to their full potential. 'Firstly, many companies become lazy, think they have achieved their target, so don't bother trying any more.'
Picking the winners is a combination of luck against long odds. If most stocks fail over time, how can investors beat the game?
Mr Pong, a fan of the Benjamin Graham school of stock picking, said there was no magic formula and analytical tools could help weed out the sick from the healthy.
'I look for value,' he said. 'I have a good understanding of the macroeconomic environment, so analyse companies and their stock and assess them accordingly. For example, with the opening up and industrialisation of China there are some excellent companies to invest, however, timing is crucial and this requires investors to conduct regular research and analysis.'
Charts can help identify turning points when a stock is about to hit a peak or a low, useful tools that can signal when to buy and sell. But the technique has its limits. It tends to work best when markets are trading in clear ranges. It can also fall short on how to interpret the data, leaving investors who rely too heavily on technical indicators with a false sense of security.
A better idea for long-term success was using a strategy that bets against popular psychology, said Mr Pong. 'A lot of investors do not understand investment,' he said. 'When a lot of people want a certain stock, then this is definitely not the time to buy, however, when people walk away or lose interest in these stocks, then is the time to take a deep breath and invest your money. In the end all investment is basically common sense.'
Another good tool is to buy during 'big events'. As Sars gripped Hong Kong in early 2003, Mr Pong said he steeled himself and bought a flat in Yuen Long for $2.2 million. It is worth about $3.8 million now. 'When a lot of people panic - that is the time to buy. It's like shopping. You are not going to buy multiple items at the normal regular retail price if you also know that a sale is imminent. You will wait for the sale and then buy multiples of a particular item, as you will get them at a decent discount.'
Mr Pong credits his hard-luck upbringing with providing insight into human behaviour. As a boy, and the eldest son, he helped support his mother and four siblings after his father moved to the US. Tall for his age, he talked his way into a restaurant job. The experience forced him to mature quickly and taught him the value of hard work, but left him short on childhood memories. 'Nowadays, my attitude has changed and I realise that I would probably not have been as successful had I had a normal childhood,' he said.
For the 12-month period ending January 28, Mr Pong's stock picking column in the Sunday Morning Post produced a 3.98 per cent gain, versus a 2.56 per cent increase for the Hang Seng Index. The H-share index lost 1.13 per cent for the period.
'My record's been good, but there's room for improvement,' he said. His twin philosophies of market timing and contrarian investing came into play after the 9/11 terrorist attacks in New York and Washington. As punters headed for the exit, he advised readers to take advantage of the sell off. Switching completely out of cash and 100 per cent into shares he was able to capture the rebound and limit the downside of a bad year. For the 12-month period ending February 8, 2002, his portfolio lost 3.19 per cent, versus a 33.88 per cent decline in the Hang Seng Index.
For the second half of this year he expects continuing strong markets but with a few twists. In Chinese lore, the year of the rooster is associated with the phoenix. Markets in the first half have taken their cue from the symbol of rebirth in the form of a rally. But they may begin to cave under the weight of rising interest rates, high oil prices and declining competitiveness in the United States. In short, he plans to take profits later this year while the mood is buoyant.
The decline of the Shanghai and Shenzhen share markets to eight-year lows recently bear all the hallmarks of excessive pessimism. He believes new fund flows attracted by the yuan revaluation could be the catalyst for super cycle in Chinese equity. He advises investors to use this opportunity to purchase selected red chips and H shares.
