Equity Thursday : The Business of Stock Picking Now & Not the Past

My good friend Zico has been in the equity portfolio management business for over 30 years but his zest is certainly not lost. I would define him as a forward thinker and a little ahead of time which would make him a freak amongst some of his peers who prefer to stick to traditional methods of stock picking.

Thus I can understand his frustrations when he launches a tirade every now and then when his views are not accepted by his mates in his age group.

With his kind permission I am publishing a little rant he mailed to me yesterday which hopefully gets the load off his chest.

Here goes.

The holy grail in the business of equity investing centres on how you pick stocks and, in my opinion,  sectors as well.
All the methods that look at the valuation measures be they PERs or Price-to-Book etc. tend to be backward looking – very much like using rear view mirrors.
Yes there is that argument about prospective or forward looking multiples. However these really centre on what we estimate the companies to be doing in the future; i.e. it’s has to be forward looking, and taking a view about how the business is going to do.
Therefore it’s buying into companies whose growth prospects are great and the profits growing, preferably better than the analysts and investors expectations. And this relativity to expectations is critical to whether the stock price will go up. Naturally this also means “cheapness” is more than an absolute measure; i.e. a multiple of 10 times forecast earnings may not be cheap and 60 times forecast earnings may not be expensive.
The other “elephant in the room” is liquidity or simply put, the demand and supply of the stock in question. An attractive stock is always scarce and there is too much of the unworthy stuff.
Another dimension of liquidity is the liquidity that created by the extraordinary low level of interest rates in the global financial markets.  If liquidity is ample, the “bar” set for prospective returns that investors use comes down. And despite the conversations about tapering and the eventual contraction the central balance sheets, it seems the environment we are facing in the next 12 to 18 months is still for a relatively benign interest rate environment as far as equity investing is concerned.
Therefore the funding for companies – especially in the new growth areas will also be affected. Liquidity will seek out these opportunities in ways never seen before. With new concepts like crowd funding (and others to come) taking off, private equity and venture capital investing will never be the same.  If the company is worth pursuing, is it really necessary to seek out private equity funds ? Not when you have direct access via crowd funding, for instance.
Yes there is that refrain that such things are only happening in the US and it’s mainly in the e-commerce sphere and, more specifically, those that operate in the “virtual” space. Whether the new companies operate in the virtual environment (like those in the social media) and “make money online”, the profits are still real and it’s all about commerce. Commerce has morphed. For example – look at how the so-called brick & mortar consumer companies in the US are decimated. Even the global luxury companies which were considered “stealth” were not spared.
[quite true considering that Macy’s just lowered their sales outlook last night http://www.usatoday.com/story/money/business/2014/08/13/macys-q2-earnings/13993139/]
If the China bull is looking for the “Wal-Mart of China” to emerge, it will be like waiting for Godot or like the song “looking for love in all the wrong places”. Yes it’s cheesy. It’s not that consumption is not growing or happening as the Chinese economy grows. It’s just happening in companies that the investors didn’t notice. It’s happening in the e-commerce companies, which in China means Alibaba and Tencent. Is it any wonder that these are as large as they are now ?
 [Tencent’s 60 times P/E has been significantly reduced with their Q2 earnings up 58% as announced today http://www.chinadaily.com.cn/business/2014-08/14/content_18308928.htm]
This transition is not unusual and an example from the past would be the transition from fixed line telephony to mobile. And look at how remote access took over and the smartphone “replaced” the personal computer. These themes will continue and success in picking the right stock is about making an calculated bet or estimation of the future.
I think that Zico has made some good points.
1. Venture capitalism will never be the same with crowd funding coming into the picture.
That has spread to Singapore property with the recent conclusion of

Asia’s FIRST Expo for Property Investing & Crowdfunding. http://www.youtube.com/watch?v=Y82jvMV2Rxk

2. We may miss the trees for the forest if we stick to basic textbook analysis of equities. Eg. Tencent’s P/E ratios.

3. Trends are developing right now and I can think of many opportunities in retail e-commerce, environmental science, energy and commodities.

4. Investing with long term objectives to capitalise on the macro trends may yield just as good a reward as a private equity venture.

5. Lastly, individual stock picking is still important despite the surge in broad sector ETFs and the new and popular mass allocation portfolio methods.