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Your knowledge is your competitive advantage over others

Tong Kooi Ong & Asia Analytica
Tong Kooi Ong & Asia Analytica • 7 min read
Your knowledge is your competitive advantage over others
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We have always maintained that investing in stocks is one of the best ways to build wealth over time, especially for the average person with limited capital to begin with. We doubt many would disagree with this — but the more pertinent question for most, we think, is which stocks to invest in?

One of Warren Buffett’s philosophies is never to invest in a business you cannot understand. Applying this more broadly, your knowledge is your competitive advantage over others that will enable you to maximise returns for the level of risks. Having more information and nuanced understanding, of a market and/or a company, is how you raise the odds of outperforming. And the proof, as they say, is in the pudding.

As followers of this column are well aware, we have two portfolios, one composed of only Malaysian stocks while the other is a global portfolio (in US dollars). Both portfolios are real — meaning, we put our money where our mouth is. We started the Malaysian Portfolio earlier, in 2014, but, for comparison purposes here, we will assume the same starting point, at the inception of the Global Portfolio in December 2017 (see Table).

Here are the key takeaways. First, both portfolios have done far better than simply keeping money in the bank — comparing fixed deposit rates for both ringgit (average 2.5%) and US dollar (0.34%) over the past five years. This validates our belief that investing in stocks is, without doubt, the better way to build wealth over time.

Notably, the Malaysian Portfolio has done better, in absolute returns terms, than the Global Portfolio over the five-year period — total portfolio value gaining 34.3% compared with 23.5% for the latter. It has performed even better when benchmarked against their respective bellwether indices. The Malaysian Portfolio has far, far outperformed the FBM KLCI, which fell 15% during the period. On the other hand, although the Global Portfolio made positive returns, it has underperformed the MSCI World Net Return Index.

See also: How does Bursa’s PN17 rule serve minority interests?

Having said that, we should also point out that the composition of the Global Portfolio has only one-fifth the risks compare to the stocks in the MSCI index. Remember, there is always a trade-off between risks and returns. For instance, right now, about one-third of the portfolio is invested in very low-risk treasuries and Singapore sovereign bonds — because we believe there is a high risk of recession next year. Historically, bonds outperform stocks during economic downturns.

Even though the Malaysian Portfolio had performed very well since its inception, we decided to expand our investing horizon. With the global portfolio, we have significantly more investment options, especially in sectors where there are limited investable alternatives on the local bourse. For instance, most technology stocks on Bursa Malaysia trade at steep premium valuations because of the scarcity factor. And, quite honestly, their businesses were not particularly appealing to us either. Investing globally also allows us to take advantage of broad macroeconomic trends, such as differentials in growth, interest rates and currency strength at any particular point in time. We could rotate between countries and sectors. Of course, as with all things in life, there is a trade-off.

We went in knowing full well that investing in a global environment would be far more challenging than investing in Malaysia or Singapore, where we have homeground advantage. And this is borne out in the performances of the two portfolios. We had the competitive advantage in the domestic market, through our intimate knowledge of trends, politics, consumer behaviours as well as idiosyncratic challenges faced by local companies. We could talk to management and employees, even their customers and suppliers. We simply do not have that same level of knowledge about, and access to, foreign companies.

See also: An article for the masses ... the small-time investors and savers

Nevertheless, on balance, a global portfolio makes sense — and still does. In addition to the expanded universe of investment options and instruments — stocks, bonds, exchange-traded funds and so on — the diversity allows us to manage exposure and risks to any single country and/or currency. Case in point: The US dollar has gained some 9.2% against the ringgit over the last five years. In other words, our returns in ringgit terms would be higher than headline 23.5% returns for the Global Portfolio. In Ringgit terms, the Global Portfolio outperformed the Malaysian Portfolio.

In summary, having at least some knowledge of what you are investing in will greatly increase the odds for profits and minimise the risks of losses. AbsolutelyStocks provides the financial data and ratios for all companies listed on Bursa and the Singapore Exchange that are critical for your decision-making. For those of you who are not confident enough in your knowledge to pick the stocks, we would advise you to follow the recommendations of analysts or fund managers that you trust or the portfolios of investors with a proven track record of success, such as Buffett. Asia Analytica also maintains two model portfolios that are available for subscribers on Total cumulative returns for the Quality and Income portfolios are 75.1% (compound annual growth rate of 8.8% since March 2016) and 97.8% (CAGR of 9.5% since May 2015) respectively (note that the Income Portfolio is always fully invested). Alternatively, as we wrote last week, you could also profit by doing the opposite of those who are wrong more often than right.

The Global Portfolio gained 2.9% for the week ended Dec 7, while the benchmark fell 2.4%. The top gainers were Alibaba Group Holding (+6.7%), iShares 20+ Year Treasury Bond ETF (+6.6%) and Global X China Electric Vehicle and Battery ETF (+6.2%). On the other hand, the losers were DBS Group Holdings (-3.8%), Telekom Malaysia (-2.5%) and Guangzhou Automobile Group Co (-1.2%). Total portfolio returns since inception were boosted to 27.1%, though we are still trailing the MSCI World Net Return Index’s 37.3% returns.

Our Chinese stocks have done well in recent weeks. The rally was fuelled by optimism on resumption of economic activities, as the Chinese government relaxed some of its Covid-19 restrictions. And Chinese stocks are oversold, in our view. The share price of Yihai International Holding gained 33% in the last month and it is now trading at 22.1% above our cost price. We decided to lock in some of the profits by disposing of 9,000 shares of Yihai International and used the proceeds and remaining cash to buy NEXT FUNDS Japan Bond NOMURA-BPI ETF. The ETF owns mainly long-dated Japanese government bonds and has an effective duration of 9.4 years.

We think the US dollar strength is close to a peak, with limited near-term rate hikes by the US Federal Reserve. Being one of the worst-performing currencies, the Japanese yen will rebound. We chose the Japanese government bond ETF for its low risk and stable yield of 0.55%.

Click here to view the latest updated portfolio table

Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/ or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.

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