Apollo Investment Management 

Nuggets from my book, Asia’s Investment Prophets
  - few will wish to read the whole book now, more than four years on, but some of the fund managers' advice remains invaluable

I recently re-read my book, Asia’s Investment Prophets, to see how it had withstood the passage of time, and whether it might still hold useful insights for a present market participant. The book was written in the second half of 1994, in the aftermath of the tidal wave of new money which descended on Asia in 1993. This torrent magnified and helped to finance tremendous excesses and follies.

The book was written for two principal audiences:

In the writing I was shocked to discover that most Americans are unfamiliar with heffalump traps, which perhaps makes it difficult to spot them. Heffalump traps, for those deprived in childhood of Winnie the Pooh, are large holes concealed with sticks and brush into which fall unwary heffalumps. (Should this still be unclear, please read A.A.Milne.)

One such heffalump trap was the one-way nature of the markets. Unprecedented amounts of money were being put in:  no problem, company owners and governments were happy to offer shares for sale, at the right price. But the buyers were frequently open-ended funds:  should their investors become disillusioned and wish to redeem, who would buy?

Another evident aberration was the earnings growth being assumed, way in excess of historical norms and arithmetical sustainability. Earnings growth in the very long run must bear some relationship to growth in nominal GDP (for growth in the profit share of GDP comes only at the expense of the share of labour or government, to which there are natural limits). GDP growth in the region was impressive enough, at the time, but ludicrous over-optimism led investors to pay far too much.

They were encouraged in this by the historical performance of shares, another logical non-sequitur, in so far as the gains were due largely to re-rating. I calculated for example that Templeton’s 30% annual returns in the seven years from inception might have reflected earnings growth of the order of 12% and an almost threefold re-rating. It would have been dangerous to assume any further re-rating, let alone of the same magnitude, but enthusiastic investors implicitly did so – leading to the other problem, of size; the track record was based largely on the early years, when the fund was a fraction of the eventual behemoth.

Four years on, the flaws in the logic of the Great Emerging Market Mania are painfully apparent to many, but it is interesting how the Great American Bubble continues to expand with little heed paid to these lessons or to those of history.

So, back to the book, and to some of the quotes that are as relevant as ever:

“At market peaks the warnings of the bears are ridiculed because their forecasts have almost inevitably been wrong for some time. Warnings are ignored because at the peak of every market the majority of well-known and seemingly knowledgeable experts will find arguments supporting a further advance. A mania is a mania, and the experts are caught in it just as the public is.”  Marc Faber

“Buying something when it is unfashionable is the key.  How can you make money (from a market) when everyone already owns it?” Kerr Neilson

“For a normal commodity, such as fish, if prices go up, consumers buy less. In a financial market, if prices go up, investors buy more.” Marc Faber

Quotes with historical charm, pith, or prescience:

“Many investors think the tiger is a tame animal.”  Mark Mobius

“China was such a strong drug;  it was like honey to bees.”  Anthony Cragg

“The one basic test is management, especially in places like Indonesia and Thailand where private and public companies are so intermingled.” Gavin Graham

“My sense is that the pricing of companies will go well ahead of realities within the next four to six months, and then the penny will drop about the depth of the problems. Much of manufacturing industry will be eliminated, jobs will be lost, and despondency will set in… Lots of unfulfilled promise.”  Kerr Neilson on Russia, 1994

“Most controlling shareholders treat institutional investors as roast pig. As for fund managers who want to participate in the China boom… do they want to participate as a diner at the banquet, or as the dish in the centre of the table?”   Liz Tran

Practical advice from the battle-hardened:

“We don’t buy on the basis of greater fool theory, or on specific categories of investor coming in; we buy the stocks we think are most attractive, and hope they come to the same conclusion. If they don’t, we underperform in the short term, but eventually we are right, we catch up.”  Edward Kong

“More money is made by thinking than is ever made by buying and selling.” Adrian Cantwell

“I was a non-believer in efficient market theory, so I worked backwards. If the market is not efficient, what is wrong with the assumptions? First assumption: information is free and equally available – so I focussed on research, on obtaining better information. Second assumption: given the same information, you come to the same conclusions – so I focussed on better interpretation. People thought I was crazy.” Edward Kong

“If you have the luxury of time in making investment decisions – if you have time to look, to research, to let the short-term froth get blown out, and then buy when nobody else is looking – you will make better investments.”  Adrian Cantwell

“I never try to buy at the bottom; I never try to sell at the top.  I buy on the way down, near the bottom of the cycle, even if I think I will probably lose money. If the market goes down, I can buy more. But I cannot be sure of the market, so if I think the stock is cheap I want to lock in some. Most people buy after the bottom, on the way up… If you buy on the way down, the pain threshold is high, and the amount of time you are wrong is longer, but your average cost is actually lower. If you buy on the way up, you look much better, and you’re under much less pressure, but you get worse execution.”  Edward Kong

“You’ve got to overcome the fear of selling a stock and watching it go up.  If you bought at the right time, there is nothing wrong with selling in the knowledge that it may go higher, because when things come down they can come down a long way…”  Adrian Cantwell

“I took some profit, but I tried to wait for the market to turn to maximize my profit, and then I couldn’t sell;  I underestimated how much the trading volume would shrink. Had I just sold and forgotten about it, I would have made a lot more. Now I always tell people not to be too greedy; leave the last 20% or even 40% to other people.”  Edward Kong

Finally, this cautionary definition comes not from the book, but from South Africa:

“An emerging market is a market from which one cannot emerge in an emergency.”  James Cross, 1997

Thanks to all those quoted, and to the many other friends who have helped in the forging of my own investment style.  They, of course, bear none of the responsibility for my ongoing investment errors!

Claire Barnes, 27 December 1998

  *  Of that enormous tidal wave of funds which hit Asia in 1993 and caused such a memorable backwash, US$17bn was committed by US investors.   By coincidence, this is equivalent to the Christmas 1998 valuation of Amazon.com – I can recommend buying their books, but not their stock. To anyone with long positions in Internet shares, I could recommend The Great Taiwan Bubble by Steve Champion (publ. Pacific View Press, US 1998), but I am sure they won’t see the parallel.  Asia’s Investment Prophets (publ. Random House, UK 1995) is of limited interest now, expect perhaps for the historical record, but can be found at www.amazon.co.uk.

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