Those who are acquainted with veteran journalist turned fund manager Teh Hooi Ling would hardly argue with me if I were to say that she is more substance than form. Very little form actually, unless you count on being soft spoken and peace loving as ‘form’. Yet beneath that peaceful and unassuming exterior lies substance – a hell lot of it.
Her latest book $how me the Money Book 2 – The Science of Stock-Picking is testament to that. The book is a compilation of 45 articles from her years working the newsroom.
They earliest articles trace back to 2008 and 2009; those years being tumultuous years in the global and local markets. Set against this backdrop, Hooi Ling’s latest book provide a good refresher to the psych and insights of investors then and there.
I share a couple of my favourites from within.
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Article #29 – Coming to grips with valuation – the price of stocks and their value are different things.
According to Hooi Ling, the spark for this article arose when New York University Professor Aswath Damodaran visited Singapore in 2013. Damodaran teaches corporate finance in NYU but he is best known for being the authority on equity valuation. His blog Musings on Markets discusses valuation methods in great depth.
What makes Damodaran so appealing is in his own admission that his craft is far from perfect. And this is despite him having written extensively on the subject. At his lecture in Singapore, he remarked that the value of a stock using the Discounted Cash Flow (DCF) method is imprecise. Yet he offers a brilliant solution no one can argue with.
One just has to be less wrong than the market to make money.
Another nugget of wisdom he offered during the lecture was about the pricing of IPOs. Investment banks and bankers determine the price of the issue based on the value of the company. If they get it right, the price should reflect the value and the counter should open and close at a very similar price. Yet this is hardly the case, the most recent local example being that of the Singapore O&G listing.
The Prof offers a simple answer to why this is so. Nothing to do with valuation per se. In fact,
the bankers are pricing the issue, they are not valuing the shares.
In other words, they are not driven by what the company is worth. They are driven by how much they can sell the shares for, taking into account market sentiment amongst other factors. This is something investors ought to bear in mind closely when we engage in IPO play.
Value Extremist vs Price Extremist
What really struck me most was how Hooi Ling goes on to discuss the value/pricing gap. She separated investors into two camps.
The ‘value extremists’ are investors who believe that price will eventually converge on value. They look out for undervalued stocks to buy and hold. The ‘pricing extremists’ on the other hand, think that prices never converge to value. So what they do is to look for mispriced securities and try to get ahead in shifts and momentum.
She also explains the issues with both. For the former, it is difficult to determine value. Consequently it is difficult to determine the price/value gap. Furthermore, it is almost impossible to predict when this gap will close. For the latter (she did not specify but I would imagine them to be the technical analysis practitioners who rely on charts), they do not have an anchor on the price and are therefore highly reactive.
I was guilty of trying to be both. I am sure many investors out there would agree with me. We want to determine the value of a company and use technical analysis to determine an entry and exit price. I now realise that doing so is futile.
These schools are fundamentally at odds with each other. To mix and match would be discounting the best features of both. That is a huge realisation for me.
Article #31 – Like beauty, the value of an asset lies in the eye of the beholder.
Here is another article which I found meaning in. In this article, the philosopher in Hooi Ling comes out. She explores the concept of duality and explains how different objects hold different values for people.
The owner says the house is worth $100k. A real estate appraiser says it is actually worth only 90k. A monk says it is worth nothing. A monopoly owner says it is worth $300k and he is willing to pay cash upfront for it. A bird flies by, excretes over it and doesn’t consider its value whatsoever. A kid, who is the son of the previous owner, thinks that there is no price that can match the value because he has lived there his whole life.
Who is right?
Without duality, the financial markets will not exist. There will not be buyers willing to pay for a stock because they value it at more than the ask price. There will also not be sellers willing to part with the stock because they value the exact same thing at less than the bid price.
And precisely because of this concept, there is no substitute for independence of thought in investing. What works for the bird and the monk will never work for the homeowner! (and vice versa). Without independent thought, we are merely indulging in others definition of beauty.
Concentrated Wisdom at its best
When I wrote a review of the first book in the series, I called it ‘concentrated wisdom at its best‘. I maintain that call.
$how me the Money Book 2 is not an easy book to digest but definitely one that will broaden your mind when it comes to investing. I spent an enjoyable afternoon with the book scooping up many bits of stock picking wisdom. I am sure you will too!
Hooi Ling will be at a book launch at SGX next Tuesday, 7th July, 7pm. She will sharing her thoughts, answering questions and signing copies of her book. All royalties from the book will be donated to charity. Rsvp your seat here now.