Friday, August 20, 2021

Random thoughts: Right valuation usually appear only during the wrong time

In investing, if we want to manage risk, there are a few ways.

Last week, I talk about diversification. I was referring to diversification into more counters as compared to concentrated bets. 

That is just one side to diversification. The other side is diversification across asset classes, so u are not heavily vested in just equity. Textbook theory talks about Bonds and Equity. I guess for me, my only meaningful asset class diversification is CASH. 

Today post is more about valuation.

It is a key part of FA, a great business with good fudementals must go hand in hand with a great valuation.

The ironic is, given market is effecient most of the time, u can only get great valuation at the wrong time.

2 ways IMHO, and both happens in the wrong time.

1) You get the good valuation in the future.
The company valuation seem high by today standards, but u projected the earnings for the next few years (I could only do it with confidence maximum of 1 year projection, beyond that is usually just a good guess) and see a compressed valuation.

So u dun get a good valuation NOW/ YET, u let the company grow into a good deal.

2) When bad news that do not really affect a company structurally in the medium to long term break, and sentiments are weak, u get a good valuation NOW, but u have to wait out the poor results that u expected (yet overly punished in terms of shares price) and for sentiments to normalised to get your good valuation.

Conclusion:

The company (mainly, although I could find a lot more examples) I have in mind when I write this article is Alibaba.

It is more of 2) Than 1)

Of course, regulatory risks is scary. Would they suddenly declare all platform companies should be for "non-profit", like what they did for the education and tutoring sector? 

If the tutoring sector "dies" parents still get tuition, they just can't go to the centers. If a significant number of pupils do not have tuition, it is aligned with making education more equitable.

As for platforms, they are a "livehood" for many workers. The cost for big internet companies should increase, as the central pushes for more benefits and safety net to these gig economy workers. 

While without doubts, as this trend unfolds, margin will get squeeze and some merchants might quit the platforms ( with data restriction and privacy issues, it might not be as easy to find customers ), but net net, improving the lives of gig workers is a worthy cause if u ask me. Merchants, platform owners and consumers should be able to find a compromise to share the "social cost"

Tencent, Alibaba and other big internet companies are also pushing into various strategic areas that the CCP hold dear, AI, cloud etc. Will the CCP deliberately make them weaker? I seriously doubt so. 

Of course, there are other political reasons beyond the balancing "invisible hand" and "centrally planned hand" of the economy, but to say is all about toeing the line, it is properly untrue, since Tencent is the quiet poster boy and had it equally hard. 

I did accumulate more of Alibaba when it hits the trigger rule of 25 percent drop. I am not sure how it will turn out. Guess if I fail, there are lessons to be learnt again.

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