Why are some Stocks Short-Term Expensive, Long-Term Cheap – Ser Jing from The Good Investors

In episode #5 of Chills w TFC, we bring on someone that took the path less traveled. He found his way from being a stock-picking enthusiast to becoming a fund manager and running a very popular stock picking blog. 

Join me as I chill with Ser Jing from The Good Investors blog and discuss topics surrounding growth and value investing. When to sell stocks? Are there any industries that are in a long-term secular decline? How highly does valuation come into play in the buying process? Why are some stocks short term expensive, but long term cheap? What are some key concerns buying Chinese companies? How he search for good stock bargains? Tune in to find out!

Check out The Good Investors blog here.

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podcast Transcript

Reggie: Okay. So there’s this seemingly endless dichotomy between value investors and growth investors. Although they are all trying to pick stocks and use very fundamental ways to look at the stock market, they do have very different strategies, but can you do both? Are you able to kind of marry the essence of both ways of investing to come together to build your own portfolio?

I think there is some ways to go about it and that’s what we’re going to do today. 

Welcome to another Chills with TFC session. In this series, we hope to bring on interesting, relevant people to help us learn better from various perspectives. Life is not always about learning from people that you already agree with. Perspectives shape a rounder thinker. So in our pursuit of a life we love while managing our finances well. Our guest for today is someone that has took the path less traveled, meandered around and somehow found his way from stock-picking enthusiast to becoming a fund manager. Yes, he started his own fund and runs a very popular stock picking blog in Singapore.

He has a great mix of value and growth investing, and he’s here to share with us how he sees the market. So let’s welcome Ser Jing from The Good Investors! 

Do you want to, like, say your disclaimer first?

Expand Full Transcript

Ser Jing: Oh yeah, yeah, yeah. 

Reggie: Must disclaimer, this is for entertainment only. Anyway, Ser Jing will say it.    

Ser Jing: Nothing I say here in this podcast should be taken to be financial advice.

Nothing I say should be seen as a recommendation of any financial product or any investment vehicle, and nothing I say should be seen as a offer to invest in any financial product or investment vehicle. 

Reggie: [Laughs] I know you need to do it. I just find it very funny, you know, it’s a regulatory thing, right. It’s important, it’s important, I’m not discounting that, but I just find it funny. So it’s good. Yeah. So, you know, based on what I hear, you’re like net bias, you buy a lot of companies. You buy and buy and buy, and you compound over time, right? I mean, that’s the central name, Compounder Fund, duh. So you buy and buy. When do you guys sell your companies?

Ser Jing: Right. So I think for us, we actually try very hard not to sell anything. I think the only time we would really will sell is if we do not have any capital infusions and we find that we really would like to own a new company, but there’s no longer any additional capital to do so. And then that is when we would say, okay, perhaps it’s time to sell.

And when we sell, our focus would really be on the companies that are executing the poorest in terms of their business, yeah. So these will be our primary targets to sell, yeah. 

Reggie: So what you’re trying to tell me, it is a lot about capital flow rather than like market sentiments or like business performance. Capital is the main thing. 

Ser Jing: Not so much. So like there will, I think, also be cases where like, you know, if it’s just very clear that our investment thesis is wrong, then that we may also sell. Like, for example, if one of our investments turns out to be like a massive fraud, for example, let’s say, Luckin Coffee, right.

And then if like there’s a window for us to get some capital back because like the shares may initially be suspended, but like trading resume, you know, then I think it’s time to let go. So there will be cases where we would sell, but I think, I think a better way to put it would be that it will ultimately be driven by the performance of the business, but as much as possible, we will not like to be selling.

And the reason why we are kind of averse to selling is also because I think it’s very important to continuously hone the discipline of being patient and not wanting to like, be trigger-happy to sell. Because I think that the really good and really strong gains from the stock market can come from holding really good companies over the long run.

And if you don’t have the discipline to hold on, then that can also affect your returns. And so I think that’s important to not be willing to sell that easily because that will help to grow and build that muscle to enable you to hold on, even to your winners. 

Reggie: When you say performance of the business, do you mean like the performance of your fund or the performance of the companies that you’re holding?

Ser Jing: The companies.

Reggie: Because if you translate whatever you just said, you know, into a retail guy, right. As long as they have consistently pump money in, right. That means they got a consistent income and they keep pumping money in, then there’s no real reason to sell it. 

Ser Jing: Okay. That is very true. If the individual investor is able to add new inflows of capital to good investment opportunities.

I think one big mistake that I often see is that they often add to the companies that are not doing well. 

Reggie: They buy the losers. Then they rebalance. “Rebalance.” 

Ser Jing: Yeah, sometimes it works. I mean like sometimes mean reversion happens and adding to losers work. But… 

Reggie: Action word is “sometimes.” 

Ser Jing: Yeah, the word is sometimes. But how you define the losers is also important. Like you can, you can add to a company with a lower share price, but growing business. I think, I think that makes sense. But to add to a company with a lower share price, because the business is just getting, getting… 

Reggie: Swallowed up.

Ser Jing: Yeah. Right. Then I think that can be a very dangerous way to proceed. And then if anything happens, right. And then the investor, every time there’s an inflow of capital, adds to the losers and the losers happen to be the businesses they are in just secular long-term decline. Then, there’s just no… it’s just going to be a very bad use of capital. 

Reggie: Totally agree. Like what, what are some long-term secular decline that you think it’s happening?

Ser Jing: So I think like you can actually see these in the more old school industries especially the ones that are unable to like make a transition to digital. Like, for example, if you look at, say brick and mortar retail, like there are brick and mortar retail companies that have done really well over the past couple of years, even with the rise of the internet.

But then there are ones that just get smashed because like, they are just unable to adapt, right? And so I think it’s more important to think about, like, what are the businesses that are able to adapt? What are the ones that are unable to? Like I don’t really believe in, you know, just targeting, say, okay, you know, this industry is one that is in long-term secular decline.

I’ll give you an example, right? Like I think in the 30 years or 20 years, and let’s say 2003 or 2004, the best performing stock in the US market, right. Make a guess what industry it come from? 

Reggie: Supermarket. 

Ser Jing: Supermarket. Okay. I’ll give you another two tries. 

Reggie: Oil and gas? 

Ser Jing: Last try? 

Reggie: I don’t know, retail brands? 

Ser Jing: So the best performing stock came from the airlines industry. 

Reggie: Ha? Airlines? 

Ser Jing: Southwest airlines. Yeah. That was the best performing stock. You know, I think the 20 or 30 years ended 2003 or 2004. So my numbers may be a little bit off, but it was the best performing stock. And the reason is because it was just an airline company that was just doing so well as a business. And so what I think is more important is to look at the individual companies and not so much the individual and not, and not think so much about like industries and saying, oh, you know, if it’s these companies in this industry, it must be some lousy company that I wouldn’t want to touch.

Reggie: But you just need to be cognitively aware that there is a secular shift in the sector. 

Ser Jing: Yeah, yeah. Correct. Right. And even if there’s a secular shift, like, you know, you may end up with one or two companies like that, just for some reason able to navigate that secular shift really well. And, you know, then those could be very interesting as well.

Reggie: Like some of the retail brands they go omni-channel and you know — 

Ser Jing: Yeah, yeah. And it’s the omni-channel, it’s the ones who do really well with the omni-channels  that are, they are doing well as a business. 

Reggie: Amazing. It informs what to buy, what to develop and then informs their product line and then better their experience in-stores, like, wow, amazing how they use data.

Ser Jing: And actually, I think when it comes to retail, it’s not so much… I don’t think the future is one where, you know, it’s just purely online or purely offline. It’s a mixture.

Reggie: Of course. We’re all stuck at home, right. Nobody enjoys this thing, right? Everyone wants to go out. 

Ser Jing: So it’s going to be a mixture. And like the companies that are able to deliver that retail experience that combines a mixture of both online and offline in whatever format, I think those are the ones that would… 

Reggie: Yeah. And I mean, based on what you’ve talked to us so far, right? I’ve not heard a single word called valuation. All right, so how highly does, you know, valuation models actually come in your decision-making process of buying or selling? 

Ser Jing: So the valuation is important, but I think it’s, for me, it’s more important to think about the quality of the business.

If I can find a really high quality business, I’m really happy. And then, then I start thinking about, okay, what is the company’s valuation like? And when it comes to valuation, my process is also very simple. I tend to look at the appropriate valuation matrix for the particular company. It can be, say the price to sales ratio or the price to earnings or price to free cash flow price, or price to book ratio, right. 

And then I look at this ratio and I think about, okay, there’s this company with this amount of business today. What is its market opportunity like? And what can this business look like 5 to 10 years from now. And then I compare it with the current valuation. I think that this makes sense, but more often than not I think we only be able to know, I think like 5 to 10 years from now that I think there could be an interesting case of like, you know, so today we see a lot of these companies with like really high valuations, but I think that some of these companies today may end up being short term expensive, but long-term cheap.

Meaning that there are evaluations that look optically high today, but then they are able to produce like incredible growth for quite a number of years in the future. And then all of a sudden, when you arrive in the future, then you realize, you look back and like wow, well, actually back then they look cheap. Again, you know, we can’t really know for sure until it actually happens.

So you’ll only be able to tell in hindsight. But I have a suspicion that like, something like that could potentially happen. Not for all companies, but for some. Yeah. And, and so I think the point I’m trying to make here is that like, when it comes to valuation, I think quality of the business is more important than the valuation of the business.

The valuation numbers is just there to have like a ballpark of like, is this sensible or not. I mean, like, for example, if okay, so like in the fund, we own shares for Amazon as I mentioned earlier. Amazon, I think when we bought it, it was probably trading at maybe 50 or 60 times, trailing free cashflow.

Right, that seems high, and especially due to the fact that Amazon is already such a huge business, but we think that it makes it makes sense to be invested in Amazon because like we still see a lot of growth opportunities. And also like the fact that we think that Amazon has a higher probability of being able to take advantage of all the growth opportunities that you see.

And most importantly Amazon is a type of company that can have multiple paths to grow. It has this quality that I call optionality. It’s a term that I think that I first heard from the Motley fool co-founder David Gardner. It’s used to describe companies that have the ability to grow in multiple different ways.

And I think Amazon is just one of the classic examples of companies with optionality. So the idea is that with 50 or 60 times trailing free cash flow for Amazon. We think that it makes sense because like the top line growth still likely going to be strong for a long time. But if it’s like 5 or 600 times price of free cashflow at Amazon’s current size, then I don’t think that makes sense.

So for every company, I think like there will be valuations that that makes sense. And there will be valuations that don’t make sense. But I think the types of valuation figures that can fall into the realm of what is sensible is actually a lot wider than people think. 

Reggie: Yeah. I actually get what you’re saying in a sense that, I mean, if you see it from a growth perspective, compounding growth perspective, right? If the company’s top line grows at 30, 40% in 2-3 years’ time, they double up their business, right. So then it directly impacts their valuation in a very simple manner. It’s not even some complex valuation model.

As long as they grew at 30, 40%, 2-3 years down, they double-up. 

Ser Jing: Exactly. 

Reggie: So then the evaluation cuts by half based on today’s price, essentially. So there’s a simple math when you look at it. But I think, you talk about Amazon and my biggest concern with Amazon — since we are on the topic of Amazon, right?

It’s that it is a very complex business to understand for most people. Because you , you know, from a hobbyist to retail, to like now you run a fund, so you have, for lack of a better way to put it, you already moved into a professional, you know, it’s like a profession already, right. But for the starter guy that is still like, you know, eh, listen to  this podcastah , I’m considering how to invest, right. Like, is Amazon even the kind of business that they can comprehend in its complexity of evaluating a business. Then will you even, you know, kind of get them to buy these kinds of businesses? 

Ser Jing: I mean, I’m not in the business of getting anybody to buy anything, right. 

So, so I don’t think Amazon is that complex a business. Ultimately it’s about breaking down what are the key drivers or value for the company. So if Amazon is really just … a few things, right? So first is the e-commerce retail business. The second thing is the cloud computing business.

And then I think the third thing would be for now still a young, young, kind of young business. And that will be like the digital advertising business. And then the fourth thing would be anything new that pops up under the sun. 

Reggie: Anything that… the innovation business. 

Ser Jing: And I think that that is where the most interesting part of Amazon is at. Okay, so I’m bringing all this up because, right, like, so Amazon started off as a e-commerce retail business. And I think maybe in 2006 or 2007 or somewhere along those lines , Amazon web services was officially launched to the public. But what is really interesting is how Amazon web services got launched to the public.

So in Amazon’s earlier days, Jeff Bezos came up with this idea that Amazon as an organization needed to be architected in a way where it could innovate rapidly and not crumble under its own weight. And so what Jeff Bezos did, right, was to mandate Amazon’s employees to always communicate with different departments or different teams via application programming interfaces, via APIs.

And that is incredibly smart because why? When Amazon has a cost center that is used to support its core business, and if this cost center becomes large enough, it could potentially turn into a service. Amazon’s web services’ first customer was the Amazon’s retail business, right? So I think like if you look at it from this angle, right, Amazon actually becomes then a very simple business to understand, because it is just, it is a company with a very unique management structure that can allow rapid innovation and incredible innovation to occur.

And then, and that is why I think like, I don’t think it is that difficult to understand Amazon. You can think of it as like having, okay, just this e-commerce business that has still a small overall market share from a global and US perspective. You have a cloud computing business, which likely has a lot of legs to grow.

And then you have the digital advertising business, which is still very small. And then, yeah, the last thing, which is that any new thing under the sun, which will come because of the, just the way that Amazon is built as an organization where different teams forced to communicate with each other via API, but that by doing so, it just makes it so easy for any cost center or any support service provider to just, you know, at a click, okay… I mean, nearly at a flip of a switch, become something that people from outside Amazon can access and then that can become a new revenue generator for the company. 

Reggie: Yeah. Which is why some of these like huge as innovation companies like Google, you know, like Alibaba, they all have that kind of power, right. To just kind of spin off something, you know,  which they were using at first for their own cost centre, right. And then, yeah. And then it just got spin off. 

Ser Jing: I think Amazon is probably the most unique one in that sense where if you… like, a lot of the major businesses today is just, they popped up because Amazon happened to — Amazon’s core business happened to be like the first customer of their own internal support function.

And then they realized that wow, you know,  perhaps we can make this larger. Yeah.

Reggie: Okay. Okay. Interesting. And in that sense, right. Do you think that kind of similar innovation, you know, because you’re like very, I just keep hearing US companies, I also invest in the US, that’s why I kind of, I know what you’re saying. What about Chinese companies? I think a lot of people are very concerned about Chinese companies. 

Ser Jing: Yeah. So I mentioned there’s Meituan, right, which…

Reggie: Love Meituan. I lived in China before so I know, Meituan, is like every everytime I go Meituan, try and find coupon and everything. And that’s how they started.

Ser Jing: Yeah. And yeah, so Meituan is in our portfolio. Tencent is in our portfolio. And then… So we do look at Chinese companies and I think that there’s a lot of innovation also going on in China. In fact, I think in many ways, China is probably innovating at an even faster rate than the US, like, I think just recently the Chinese government unveiled its official government-backed digital currency.

So that is like a tokenized digital currency where the underlying technologies is kind of similar to like say Bitcoin or blockchain, right. And so this, I think is just an example of like how rapid the innovation is happening in China. But I think like for us at least, one of the key worries we have with China is that Chinese companies often serve two masters. And so that will be shareholders and also the authorities.

And if there’s any clash between those two, in any clash in terms of the interest of those two, then I think that is the authorities that will nearly always win. And because of this, you know it makes it just a bit harder, I think to kind of think about Chinese companies from a risk perspective.

And also there’s the VIE structure, the variable interest entity structure, where if you own Chinese companies, especially tech, Chinese technology or internet companies, you don’t actually own the company itself but you own, like, a shell company based in, I dunno, Cayman islands or something, that has a contract with the actual mainland company for the mainland company tokind of give all its economic benefits to that shell. 

But that structure has never actually been contested in Chinese courts before and the Chinese government, at least based on what I know so far has never actually come out and say that, you know, we like this or we don’t like this.

So you know, there’s always the risk that one day the government may come in and say that, you know,  I don’t like these VIE structure and then the whole thing collapses. So that is like existential risk. Though I think like, the chances of something like that happening is like very, very low, but it is a risk though.

So yeah. I think that the Chinese companies are really interesting and amazing. Like in fact, I think there’s a lot that Western companies can learn from, I think came across a podcast by, or article before by some prominent venture capital firm, I can’t remember the name now.

It might be a16z maybe, but the article was just mentioning that like, in China, you have all these technology companies have multiple sources of revenues. Like they are able to monetize in tremendously different ways. Like if you look at Meituan, there’s just so many things they’re doing, right? Food delivery. it helps facilitate the purchases of coupons, vouchers and so on, for,  like a massage parlor or a karaoke room or something like that. And then it has like car hailing, bike sharing, and so on and all that. So many different things that it’s doing. 

So it’s kind of like a super app, right. Where like your whole life can revolve around the app and the same goes for like WeChat, right. It’s sort of like a super app where like your whole life can just be revolved around that. But then when you look at, say, WhatsApp, run by Facebook, which, I mean, we also own shares of Facebook, but for now it’s really just like a small WhatsApp for business kind of thing, but it’s mostly just for people to send messages. Like Facebook today is still very much a digital advertising business. Like the sheer majority of its revenues comes from digital advertising. So that’s just one source of revenue. 

Reggie: Sheer, by that you mean like 98% or something?

Ser Jing: Yeah. Some, like nearly all. 

Reggie: That’s how predominant it is.

Ser Jing: Yeah. Correct. Yeah. So yeah, but like, if you look at like the technology companies in China, it’s very rare to find one where they derive like nearly all their revenues from just one source. So I think that’s also an interesting aspect of Chinese companies where it’s just like multiple avenues for growth and that plays into like the idea of optionality, which I talked about earlier, right.

Where you have companies with different ways to grow. So I think like Chinese companies are  just fascinating and interesting as well. Yeah. But just mindful of the regulatory risks. 

Reggie: Yeah. Yeah. But then a lot of them are getting pulled back to Hong Kong, right? There’s a lot of double listings going on and you know, Chinese companies are trying to woo them back essentially.

So do you guys do the VIE structure directly from the US, or do you guys like buy from the Hong Kong exchange, or is there a way to mitigate this vie risk? 

Ser Jing: So the VIE was set up to kind of circumvent Chinese laws that prevent foreign ownership of Chinese technology, internet companies, and other industries that the government deems to be essential to national interests.

And because of these, right, I don’t think it matters which exchange you buy the shares from, because if you are a foreign owner, you would still not be allowed to partake in the actual company’s economic interests. So you had to do it via the VIE structure. Yeah. 

Reggie: Okay. So it doesn’t matter where you buy from.

Ser Jing: Yeah, yeah. Yeah. I don’t think it matters.

Reggie: We are all under this Chinese rule. 

Ser Jing: Yeah. 

Reggie: Fair fair. And just based on  that thought, right, and going forward, it’s like your search for companies is pretty vast, right? It’s not just in the US, you know, you’re also very open to Chinese companies, although I’ve not really heard about Singapore companies yet, but how do you then go about searching for all these companies?

Because, you know, I’m an enthusiast and honestly, it’s quite tiring la. Keep searching, it’s like, oh my God. You know, I’m not full-time, you’re full-time, right. So then, how do you go about searching for these companies? 

Ser Jing: Yeah. So I think I’m a bit fortunate in the sense that I started becoming… I started investing for the fund after doing this for like nearly 10 years for my family.

So I, and also before I started the fund I was with the Motley Fool Singapore, so and as an investment  writer and as a co-leader of the investment team. So I already had like, kind of like library of mental knowledge about companies, good companies that, that are interested to invest in. So I think that helps. 

But in terms of the actual search process, even like during my days with the Motley Fool, I don’t think there’s any like hard structure to it. It’s not like say, okay, I wake up in the morning and like, okay, I flip open the papers and this is the section I should read, or like, I go up to say my data provider and run a screen and say, okay, this is the screen I’m going to run today.

It’s not really. It’s very, I would say, organic, very very unstructured. Like I spend a lot of my time reading. So I read a lot of different articles from interesting sources. And the interesting thing is that every now and then there will be just company names that pop up and I’ll be like, oh, okay.

Like, you know, there’s this article that talks about this particular company and like, okay, this is interesting. Let’s dig further. And then, and then that’s how that process starts. And I also read a lot on Twitter. I love … 

Reggie: My God, you’re on Twitter. 

Ser Jing: I’m not on Twitter. I use Twitter just as a reader. I use Twitter only to read, I don’t post anything. There’s this company in our fund called Medistim, which is a Norwegian company. It sells medical equipment that helps to image and measure the flow of blood, right. And after selling  the machine s , when surgeons use these machines during the surgeries that they conduct, they will have to pay for equipment that is considered like consumable in nature.

Like, so like they have probes and sensors that they use that would have to be replaced after a certain amount of usage. So that creates this very beautiful razor and blade business model. So the result would be the machines, the blades would then be like the probes that are used during the surgeries to measure and image blood flow.

Reggie: It’s like the dentist chair. That dental chair, that’s the razor, right? And then the blade is that rrrr thing. 

Ser Jing: Okay. Okay. Yeah. I mean, I’m not sure if the blades are attached to the… directly, but yeah, similar idea. Yeah, that’s right. Yeah. So it’s a company listed in Norway and based in Norway.

And I came across it first on Twitter. Like there was this a person that was posting a section of its annual report, like just a small section. And I was reading it. I was like, Oh, this is interesting. You know, I kind of remember what exactly the person posted, but that thing that was posted caught my eye and I started digging further and I was like, okay, this looks like a really interesting business because you know, you have like more than 60% of the world’s what they call CAPG, which is coronary, artery, bypass, grafting surgeries, which is the company’s main thing. 

Reggie: You lost me at coronary. [Laughs] it’s okay, I lost you. 

Ser Jing: Yeah. Think of it like heart bypass surgeries right. More than 60% of the surgeries that are conducted today do not actually have any form of quality control and quality check.

So what surgeons do traditionally is to use their fingers to measure, they use their fingers to touch like the veins or the arteries after the surgery is conducted to kind of feel for a pulse. If there’s a pulse, they think that there’s blood flow, but that is actually not a very … not a very good way to determine the success of the operation.

Reggie: Very feel-feel, huh? 

Ser Jing: Yeah. Yeah. Correct. So Medistim’s machine’s come into play here because they help to actually measure and image the blood flow within this arteries and veins, and so they give the medical professionals a much better idea of like how successful the surgery has been. Yeah.

So I thought like, you know, it is a much better solution than what is traditionally been done. And at the same time, penetration rate is still low. And more importantly, the company has like effective monopoly because I mentioned that more than 60% of surgeries today don’t have quality control. Of the say 30 plus or so percent that where quality control measures are in place, like 80 or  90% of it is done via Medistim’s machines. Yeah. 

So I thought, like, you know, that was like, just a very interesting , looked like a very interesting investment opportunity for us, yeah. So, so yeah, this an example of like how we kind of stumbled upon like an investment. 

Reggie: On Twitter. 

Ser Jing: Yeah. So I use Twitter a lot as well.

Reggie: Yeah. That’s cool. 

You know, like a lot of companies that you’re talking about, every time you talk about it, it’s very qualitative, right. It’s very story. It’s like, hey, this company, they’re doing this. I get the whole, like, there’s a market share, we’re trying to innovate on something, but it’s very qualitative, you know, in the discussion.

And a lot of people have this idea that, you know, it’s like, stock-picking is like you punch of few numbers in and then it’s like, okay, this price, you buy, you buy at this price and then you like guarantee make money. But that’s just, that’s not the reality from my personal experience, right? 

Ser Jing: So I think that there is, there are many different roads to Rome, I would say, when it comes to the stock market, there are just very different ways of making money. Like there are people who are able to do that, you know, punching all the numbers and make sense of just the numbers alone and they can do that well. But for me personally, that’s not an area where I’ve done well in. So like for me it is the qualitative understanding of businesses where I find the most comfort in, where I find…  where I think I’m able to perform better in.

Yeah. So, so that is what I have stuck with. So yeah, so I think that there are people who are just able to you know, just depend purely on the numbers and able to make good investment decisions, just purely on the numbers. And yeah, I think ultimately people have to find what works for them. Yeah. 

Reggie: Fair. All roads lead to Rome. And in your recent article, right, there’s this one — ’cause I have you on, mah, so I must read your blog mah, right. So in your recent article, you talk about this thing called , there’s a divergence between the stock market and economy, right. And you know, just to let the cat out, you don’t agree with that, right. Essentially, right. So then can you just kinda give us a better idea, because all these number punching, you know, and just kind of….

I mean, there’s a whole channel, a network out there talking about like, you know, this dichotomy, you know, the separation between the economy and the stock market, right? So what is your thought on this? 

Ser Jing: So I went back more than a hundred years ago to look at this thing called the panic of 1907.

So it was a panic — it was a period of a very severe economic distress for the United States. It was in fact, like, the situation was so bad that it was one of the key motivations behind the US government’s decision to set up the federal reserve in 1913. So the panic of 1907 happened in late 1907, then few years later, the federal reserve was set up. 

And during that period, there was just severe economic contraction in the US that lasted nearly throughout 1908. But what’s interesting is that if you look at the way the US stock market performed, the stock market, basically went one way, which was up, in 1908. And then it spent the next eight or nine years, you know, just steadily climbing up. 

Reggie: Just going up.

Ser Jing: Yeah. So I think like there have always been cases where, you know, the stock market does not seem to reflect what’s going on in the economy, but what I was trying to say in the article is that I think it’s normal. And if we look deeper behind today’s context, Like the disconnect, we realize that like the stock prices of the industries and the businesses that are indeed getting hurt badly by COVID have actually fallen by a lot.

Reggie: Yes. 

Ser Jing: But the important thing here is that they tend to be small companies. And so they do not actually get reflected in the prominent market indexes. 

Reggie: Yeah. Yeah, so there’s an index weightage on those ones. 

Ser Jing: Yeah, correct. So the S&P 500 because of the way it’s constructed and just by sheer chance, the technology companies tend to be the ones that have a larger weighting, right. Within the index. But these tech companies, because of the current context today, they are the ones. With the businesses that are actually doing okay. Or in fact, could be even doing very well. 

Reggie: Thriving. The numbers up. 

Ser Jing: Yeah, yeah, yeah. 

Reggie: It’s fundamentally very strong. 

Ser Jing: Because of the way these businesses these perform, then you kind of like have… it’s natural, I guess then that the market  index as well will be  doing pretty okay, right. Because if the index’s heavier component are like the companies that are doing well. Then why shouldn’t the index be doing okay at a very least? So that was like, I think, the gist of the article. 

And I think if we also look back at empirical studies about the performance of stock markets and economies, you realize that there’s very little correlation between the performance of the economy and the stock market, like, for the sake of listeners who may not have read my article, there’s this example I used about China. And so like in the 20 years ended 2013, China’s economy, I think grew by, I don’t know, 12 or 15%, something like that, per year.

Which was like phenomenally strong growth, but the stock market actually declined by, I think, 2% per year over the exact same period. And I think the reason why that could potentially happen, I don’t know the reason why it happened. I don’t know the exact reason why it happened, but one potential and likely reason that I think that occurred is because if you look back at again, what is the stock market? The stock market, essentially it’s made up of a collection of companies, right?

Stock prices will effectively be covered by the underlying business performances of these companies. So a company may be able to grow his revenue, right? And that’s how economic growth is measured, because economic growth is essentially the output of a country’s companies. And that is the revenue of the companies that are generated.

But the profit that is generated by the company may not be growing, because you can have very good revenue growth, but if your cost controls are poor or your taxes are high, you know, then the profits will not accrue to shareholders. And then there’s another factor as well, which is like the per share growth in earnings or profits, because ultimately the share prices will reflect the per share changes in the business performances of companies, right? 

And so you may have seen very strong revenue growth, but if you keep diluting shareholders, then there is no per share growth. And so the economy may grow in terms of like the growth in the revenue, but that may not be reflected in the underlying business performance, right. And then it’s also important to realize that the economy is a measurement of the output of all companies, whereas stocks and the stock market reflects the business performance of a group of companies. And so what it means is that the overall performance of the economy may be very different from like the performance of the individual companies. 

As an example, right, like if you have a country that keeps having new companies appear over time, the GDP of the country all things equal will increase, because if every new company comes out and is able to produce new revenue and existing companies’ revenues remains unchanged, then GDP will increase. But if the revenues of the existing companies don’t increase, then the stock prices of these companies will not increase as well right? And then that will get reflected by a stagnant stock price. Yeah. So, so I think like there is a big difference between the economy and the stock market for many countries.

Reggie: Yeah. And I also think like, the world is a fairly flat world these days like today, right? It’s like a lot of businesses are everywhere. They are international. And if you look across all the other indexes, a lot of them are still down, right? So it’s predominantly the US that’s powering this thing and once again, back to the idea of what is the composite of the index, right?

A lot of big tech companies are there and their business are global, it’s not unique to just the US economy. Right? 

Ser Jing: Well, I think like if you bring it back to Singapore, right, it’s also very interesting. If you look at Singapore’s index, the Straits Times Index, right. There are 30 companies and the biggest ones in there are the banks and property companies and the telcos, none of them are doing well.

Reggie: They’re all struggling. 

Ser Jing: And therefore the STI is down significantly, but then you have like companies like, Singapore-listed companies like Riverstone, like Top Glove, which are both rubber glove makers, which have seen their businesses just soar because of this huge increase in demand for rubber gloves, right.

And their stock prices reflect that. Then you have like iFAST, which is this investment products, online investment products distributor. Again, the share price has soared because, because the business has done well. I think in the most recent quarter , third quarter of 2020, if I remember correctly, iFAST profit was up by about, I think 150% or something.

Yeah. So, you know, when you have things like these happening, I think it’s, again very clear that like, you know, the stock market and the economy are not the same thing and more importantly, right. Individual companies are also not the same thing as the stock market. Yeah. 

Reggie: Okay. Yeah. Thanks for sharing, man. Like, wanted to… there’s just so much going on.

It’s like I get it right. I think fundamentally you keep going back to the same idea, which is like the stock market is just a place to transact different companies. And the index is a composite of all these company. The economy is a separate thing, all right. So I think for our listeners, that’s the baseline you need to understand. 

Over time you will understand the intricacies, how they interact, but that is the chim chim stuff, correct. It takes some time to learn. You’re not going to compound everything in one podcast, and sort of just kind of end of the discussion, right. You’ve shared a lot. You’ve done a lot.

You’ve come all the way from enthusiast to where you are… 

Ser Jing: Sure. 

Reggie: Why do you still do this? 

Ser Jing: Okay by this, do you mean like me, you know, still being involved in the financial markets? 

Reggie: Yeah. Still do the financial thing. Because a lot of people, they just want to make money and you know, they have their own like retirement. And then they don’t have anything else to do, right. So  why do you still do it? 

Ser Jing: There are, there are a few things to unpack here, right. So the first is that I really enjoy the process of investing. To me, I see investing as like a intellectual challenge. You know, you look at a company and it’s like a puzzle. You’ve got to figure it out. Like, is this, is this going to be a company that can do well in the long run? Or is it going to be a company that will not be able to do well in the long run. And, and the most, most important puzzle is — the question you have to ask yourself is that, am I being honest with myself in terms of my ability to analyze this company? And if I don’t have the ability to analyze this company, then that’s, you know, like a sign that says, oh, there’s something new for me to learn.

So I really  enjoy the whole intellectual process. The money part is I think it’s important that it’s important to make money. You know, you do need a roof over your head and you do need to eat, but it’s not, it’s really not the most important thing in my life. So for me, investing is a passion.

It’s not so much a, it’s not so much a vehicle to make money. It’s really something that I just very passionate about. And then the second thing is that I think I entered the investment industry with the idea that I wanted to be in a role where I could help , where I could positively impact the lives of people.

And I think that that’s important. And I think it’s just very important for me to continue doing that, like to, to be able to continue helping people. And so, because of these, like, I don’t think I will ever stop, like, because the intellectual pleasure from just, you know , investing, I think will always be there.

And then I think there will always be the need to go out there to continue helping people. That’s one of the reasons why me and my business partner, Jeremy Chia, who is also a long time friend of mine. Why we set up an investment blog as well called The Good Investors, because the blog is like, for us, it’s really, it’s a passion project.

Like we write it only so that we can help to educate investors. It’s also why, when we, for Compounder Fund, why we’re running it transparently is because we want to be able to, to have the fund be also a source for like investor education, right. So for us, it’s just this whole investing things is more than… It’s just way more than just money involved. And so this just gives us like the fire within, you know, to just to just continue. Yeah. 

Reggie: Okay, thanks for sharing. Thanks for coming on the show. 

Ser Jing: No problem. Thanks for having me. 

Reggie: Happy to have you, and I’m sure everyone learned a lot from you today. Thank you. 

Ser Jing: I hope so, thanks.

Reggie: I hope you learned something useful today and truly appreciate that you took time off to better your life with the Financial Coconut. Knowledge is that much more powerful and interesting when shared, debated, and discussed. Join our community Telegram group. Follow us on our socials, sign up for weekly newsletter. Everything is in the description below. 

And if you love us and want to help us grow, definitely share the podcast with your friends and on your socials. Also, if you have some interesting thoughts to share or know someone that you want to hear more from, reach out to us through hello @thefinancialcoconut.com. With that, have a great day ahead, stay tuned next week, and always remember: personal finance can be chill, clear, and sustainable for all.

Okay. So I hope you learned some interesting stuff from Ser Jing. He’s a very cool guy. Check out his blog and yeah, if you, you know, sophisticated investor, you want him to help you manage your money, Compounder Fund. There you go. Either way, we are not here to recommend you or, you know, everything’s for education and entertainment purposes only. Yes. Very important, must repeating this, yeah. 

And next week. So we, in this theme this month of like investing and whatnot there’s so many things to talk about and we have enough of like stocks and stocks and stocks and stuff. So next week, we’re going to talk about bonds. We’re going to have Chuin Ting, CEO of Money Owl, to come on and talk about how does she see bonds. Like give us a lesson about bonds, right? How do you look at bonds? And can you actually make money from bonds in such a negative territory at this moment in time, right? Everybody here like, aw, negative interest rates, negative interest rates, then still can make money meh from bonds?

So is there a position for bonds in your portfolio? How do you plan to go about managing your own portfolio with a tool that is not usually talked about, but you know, like people talk about it, but very briefly, right? So that’s what we’re going to tackle next week and I will see you next week. Bye bye.

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