The August chain of thoughts
Thought 1: The not-so-overvalued stock market
Amidst the negative headlines around stock-market overvaluation it is productive to question “is it really?” History has shown that a significant amount of bond-yield-outstripping-earning-yield is needed for a major market correction to wreak havoc on investors’ portfolio. For instance in the 3 years leading up to the great crash of the 1973 and 1974, earning yield equalled an underwhelming 0.7 bond yield. Right now earning yield is about 1.52 that of bond yield. Whether or not this level is dangerous and therefore crash-provocative depends on how much stock’s excess return one is asking. If the investor thinks a 52% extra return from stock over bond is adequate, which is what the current sentiment seems to indicate, then a major crash or a cash-overweight portfolio might be unnecessary. However a smaller amount of cash at today time may justify, for that reasonable-to-cheap stocks can still be found, though this is subjected to an investor’s requirement for quality attributes of such stocks. It is not hard to search for stocks trading well below 6x even in the developed market, but one would need to compromise significantly on quality if subsequent purchases of these stocks are made.
Thought 2 – Timeless advice
I read Ben’s famous investment book – The Intelligent Investor 3 years ago when I was still in uni. I only finished 4 chapters back then and already felt overwhelmed. Couple weeks back I decided to read all of it. Ben’s attention to purchase price is such a timeless advice. The idea of future return being dependent on the price paid makes more sense the more I think about it. Quality investors could of course always compromise on price to obtain premium-justified quality. But more often they risk paying too much for it. Rather than that it always pays to sit calmly and be patient until Mr Market offers an attractively cheap price.
Thought 4 – Market folly
Stock-market folly is happening right now with Sabeco (SAB) – the Vietnamese beer giant. The company is now trading at 35x current earnings. The quality – the best of Vietnam isn’t justified for the price being exchanged between investors/speculators. First, such level is way above bond yield. The investors are now willing to pay for 2.8% earning yield when they can get 5.25% investing in Vietnamese government bond and 7% in a bank saving account, a level much higher and also safer than buying into SAB. This folly has led me to trim a significant portion of my holdings in SAB, for that the amount can be sensibly used to purchase the same level of quality at a much cheaper price. Vinacafe seems to offer just that.
Thought 5 – Warren’s move
Warren was willing to pay for Oncor- the 6th biggest electricity transmission and distribution company in the States an equivalent of 25x earnings. First it is interesting to know the man of value is now willing to commit for as low as 4% earning yield for a “moaty” business. His offer for Unilever, though failed, was priced around the same level. Second it is productive for me to ask, for the quality of assets owned by Oncor and the price market participant (Warren) is willing to pay for it (25x) wouldn’t one expect that similarly (even better) quality assets (Enterprise Product Partners – the pipeline king of the States or National Grid – the monopolistic electricity transmitter of the UK) would have a re-rating? Currently the 2 are trading at 19x and 15x respectively. Both have significantly high moaty businesses. Such question stems from my observation of the rapid valuation re-rating experienced in the consumer-defensive space when Unilever was being offered for ~$140bn.