The financial markets generally are unpredictable. So that one has to have different scenarios... The idea that you can actually predict what’s going to happen contradicts my way of looking at the market.” — George Soros
This is a great quote from an expert investor. The idea that there is a Madame Auring with a crystal ball or that bully, Biff, from Back to the Future who have the answers for what will happen in the future, is a bunch of malarkey.
Some say that the performance of the stock market is one way of predicting the future. Here is another popular quote from Paul Anthony Samuelson, the firs- ever American economist to win the Nobel Prize goes: “The stock market has forecast nine of the last five recessions.”
Clearly the stock market does not have a very good track record of predicting the future. Another famous American economist and journalist, Silvia Porter, said: “One of the soundest rules I try to remember when making forecasts in the field of economics is that whatever is to happen is happening already.” Now I think this is a good rule to follow. The best things are happening right under our noses.
There are generally two ways to pick stocks. You can either go top down or bottom up. In a top-down approach, you start with themes you believe are relevant. The nice thing about a thematic approach is that there is a natural filtering process, because you narrow your search of companies to only those that fit your theme. For example, there is consensus among financial experts that Asia will be the growth leader of world economies in the near future. The fact is that this is already happening. Asian countries are growing faster than all other regions of the world. A good theme may be to invest in Asia.
The challenge is now to sift through the more than 3,000 stocks listed in Asia and try to find the gems. It may be best to narrow your search to themes within the Asian region, thus filtering your stock universe to a manageable size. Some interesting themes in Asia are consumer spending, lack of infrastructure, and the demand for natural resources. There are also themes within these themes. If the growth of the Asian consumer is a theme that is of interest to you, do you then buy stocks that sell household furniture, cars, clothing, or shoe companies? This type of approach is more successful when markets are in an early stage of the economic cycle. This approach was very useful in the last two years.
Generally, stock markets are not cheap nowadays. The Philippine Stock Exchange Index itself is trading at a 14-percent premium to its average price to earnings valuation since 2007. I think that a more bottom up approach is more relevant in the current market environment. The challenge is to identify a whole new set of filters to understand the gems you are hoping to find. Do you focus on value or growth in earnings? Are dividends important now? What debt levels are you comfortable with? Is cash flowing in the right or wrong direction?
A bottom-up approach means studying companies from the numbers they are delivering and expected to deliver in the future, irrespective of what region of the world or sector they are in. This is a difficult and time-consuming process. In the current stage of the Philippine stock market cycle, investors’ expectations are high and stocks that don’t deliver the goods will get punished. Understanding companies from the bottom up is critical to not losing any money.
We are now approaching the end of the first small corner of President Aquino’s journey in his fantasy golf round. A few months back, we thought it would be fun to track the President’s performance as if he was playing a round of golf. As his first year in office approaches, he is set to complete his first three holes (or in golfer parlance—the first small corner). He bogeyed #1, parred #2, and when we last left him, he was chipping for a birdie on his third hole.
One of the most important lessons in golf is to have conviction. You need to go for it to have a chance. Tempo is also important. You must keep your tempo consistent or else you will hit very unpredictable shots. Slowing down your swing also throws your tempo off. This is how I feel our president has played his first three holes. He has slowed down his swing and his tempo is all over the place.
There are some good shots; some bad ones—not a very consistent play. Some of this can be blamed on the early hole jitters as we all have this when starting an important round of golf. He needs to settle down and get his tempo back. It does not mean playing with more caution. It means focusing and going for it. Trust your swing. No fear.
His chip on # 3 is not very good. He has left himself a 15-foot putt to save a par. He steps up to it and hits the putt with little conviction. The putt rolls short for a tap in bogey. He is now 2 up after three holes. If this trend continues, he is on track to make a score of 86. Not a great start but the round can still be saved. I am still confident that he can make some birdies and get back on track.
Just remember: past performance is not an indicator of future returns.
Here is a final quote from the famous American film produce Samuel Goldwyn: “Never make forecasts, especially about the future.”
(The author is the investment director for equity portfolio management for ATR KimEng Asset Management and chairman of its investment committee. For comments, please e-mail him at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .)
