A Story of Investment Roller Coaster
For some people, the thought of spending a day at a theme park is exhilarating, but not for me; Rollercoasters give me lots of anxiety. Afterall, you can choose not to come to theme parks, it’s an easy matter. However, you can’t escape the rollercoaster of life.
There’s a quote that says:
“Life is a roller coaster, and you don’t know what’s going to be thrown at you next, so all you can do is give it your best shot.”
So, here’s the story of Rollercoaster in my Investment journey…
The Beginning
My first entry in the stock market was in mid-2019, which I’m a final year student in Industrial Engineering major. In learning stocks, I solely relied on books and Google, that’s all. You know, the risk of being a Self-taught is no guidance.
Like any other rookie, I learned the Technical Analysis Technique (this is a method of predicting price through some indicators to find out patterns and forecast), simply because I was told it’s the way.
Long story short, I’ve made decent earnings at first 6 months (total return of 20+ %, not bad). However, I’m really exhausted and misfocus on my study. I had a pretty tight schedule around 9 am to 5 pm, Monday ‘till Friday. Coincidentally, the stock market is active at the same time (9 am to 4.30 pm). Imagine you must focus on listening to the lecturer and at the same time you must plan to draw Stop Losses or Take Profits.
I’m thinking, “is it that hard to find money in stocks?”
The Calamity
Lucky me, I found a book titled “One Up on Wall Street” by Peter Lynch that teaches technique called Growth Investing. I really like the book; it just simply makes sense (‘Til today, I’m still applying Growth Investing in my Portfolio). But I rarely read it due to my tight schedule, but this book plays apart in my journey later on which I will share in different story. That was at the end of 2019.
New year, new wishes, new hopes, Here comes 2020!
Everyone’s happy, designing and thinking of resolutions to fulfill, yet nobody ever predicted something big was coming…
A flu breakout in Wuhan, a city in Central China. At first, everyone thinks that’s a normal flu; Eat some soup and get some sleep. But things go down quickly, the flu spread out like wildfires and affected globally, including Indonesia (which officially entered in March 2020).
The market panics, Media’s disclosing extremely distressed situations, and Indonesian Composite Index (IHSG) drops by 1700 points in 19 days! At the same time, I’m just starting to learn the “true way” of Investing. But before that, my naive mind was thinking;
“How to beat the obligation rate of return by investing in stocks?”
So, I purchased 2 coal producers’ stocks (Bukit Asam and Indo Tambangraya Megah) because of the unusual dividend yield; it gave around 20% return solely on dividends!
What’s the next reason?
Nope, it’s just because of the dividends and no other reasons. When Covid-19 hits hard, My Portfolio was falling of cliff; a reduction of 40% in my total assets. Imagine someone investing $ 20,000 and leaving with $ 12,000 in the next 19 days. What a time to be alive…
The Comedy
And during that crazy period, I’d some classmates who invested as well. When the stock market crashes, all of us are shocked. We never thought that kind of event would happen in real life, which happened in real time. During those 19 days of crazy bearish period, I’d developed my own stock indicator which will tell me if stock doing good or bad.
Every day, around 10 minutes before the stock market opened, we anxiously waited for the openings. Then after the market opens on 9 am straight, I’m too anxious to check on market which I prefer to read on my college’s stock group chat. There’s a friend of mine that will immediately chat the group around 5 minutes after the market’s opening.
You can ask a Technical Trader to list a bunch or hundreds of Indicators, but I believe they won’t survive in that period as well. So, what indicator I’m using? Well, it has got no name but for the sake of easiness let’s call it:
“The Sanity Checker”
So, this indicator is based on the activities of the friend of mine, no calculations, no moving averages, and of course no Stop Losses! Just based on his chats. I remember a day after the crazy shock in stock market, he just simply chat the group after the market’s opening and wrote :
“I think we might consider adding and crunching stones in our soup for new diet”
After seeing those, I won’t open my stock apps the whole day because I know the market crashed. The next day, he wrote:
“Do you guys still on the right mind? (*insert emotes*)”
and of course, I’m not going to open the app for the whole day. Next day, he wrote
“I think red is the new green”
This kind of conversation keeps going until the market’s back to normal after 19 days and that’s the first time I’m clicking on my stock app after the crash.
The positive side is, everyone used to be stressed out but can take the issue with sanity. We just laugh at our absurd chats in the group, but it can be useful as a stress reliever. Until today, I’m grateful for that indicator to exist in short time.
The Pivot
Remember the 2 Coal Producers Companies that I bought? Turns out it’s a healthy company. The case is, I’m bit late when I realized it. When the market went sideways during May to July 2020, I’m invested heavily in learning Lynch’s books (because of public restrictions which I spend more time at home). I learned about how he found good stocks and his technique in categorizing companies into 6 Types (I’ll try to explain this technique in another post) and this book leads me to the world of Accounting.
Well, accounting is basically the language of a business. To find good business, I’ve to understand those numbers. For accounting, Subramanyam’s Financial Statement Analysis is a good reference for anyone that wants to learn.
Understanding some basics, I remembered that I left 2 stocks on my portfolio which I haven’t checked for a while. I remember one of my colleagues asked me after a year holding to those 2 stocks:
“Dude, how crazy are you? Holding to 2 stocks with 26x PER (Price to Earnings Ratio)? You’re not in your right mind”
If you wonder, you can check around Q1-Q2 of 2021. When I read the financial statements, I realized how damn lucky I am and at the same time how naive I am.
Here some thoughts that passing through my mind at that time:
- I realized that Coal business is cyclical due to its coal price. Coal sales are based by contracts; if its sell in good price you will get good revenue and otherwise applied. In 2018–2019, the contract price experienced a long bearish period which was a really bad time for coal. (that’s why the dividend yield is absurdly high, because of the stock price suffering from the bearish as well)
- Why is it Cyclical? Well coal is affected by high demand during the end of the year (winter) in southern hemisphere and rainy season in producers’ countries. Except for COVID-19 which literally stops all of production activities.
- Due to that logic I realized that PE ratio can be destructive in cyclicals especially if One doesn’t realized they’re buying a cyclical.
- Confused? So basically, PE is a metric to measure the breakeven point. Let’s say you purchased a money-producing machine for $ 2000 and it will print out $ 250 annually. Your breakeven will be in year 8, which PE = 8x. With that logic, smaller PE is favorable.
- Let’s go back to coal, there’s a good time & bad time due to its cyclical nature. In good times, companies will earn good money which PE will be at lowest number. Meanwhile in bad times, companies are struggling, and PE will soar.
- But the real question is, Will you buy coal stocks during the good times or bad times? If everyone happened to see that coal stocks have low PE and decided to all-ins, they are digging their own graves as the coal price will decline in the next phase.
- So, what to observe during bad times for coal companies? I checked their balance sheets and found out that both of companies have a DER ratio below 0.01, or it means that the debt they own is below 1% of their equity. Virtually they owned no debts.
- Remember, healthy companies in bad times won’t ever go bankrupt.
With those insights, I’m lucky to stumble upon those 2 stocks even though I’d no idea why I purchased them in the first place. But after that small enlightenment, I’m all in to those 2 stocks in March 2021.
The Temptation
Post all-ins, Market is getting better compared to previous year. Suddenly, the vaccines are all out; Everyone is obligated to take those shots. As the old Wall Street sayings “Buy the rumor, sell the news”, suddenly everyone hyped upon Pharmacy and Health-related Industries. One of biggest pharma company in Indonesia; Kimia Farma (KAEF), soars around 8,7 times the stock price just in 7 months. Another one is Indofarma (INAF) which soars around 9 times the stock price in 8 months.
At that period, I was interacting with one of my friends who recently was just trying to learn stocks at that time, let’s call him Jeff. So, Jeff is on high interest to learn the nature of stocks and eager to reach financial freedom. Somehow Jeff hopes that he can ride through the wave of big fund of the market (there’s a belief of following the big fish in stock market).
Then he purchased KAEF and told me. I know this company has an upper hand due to their right of service to distribute vaccines, but somehow reports haven’t showed up (never to be over optimistic) and I just keep on searching for hidden gems.
Long story short, he gained more than 600% from KAEF in less than 6 months while my coal stocks were stagnant. Now here’s the mental challenge:
“How come someone with lack of company knowledge can earn so much but I’m spending sweat and time specifically searching for hidden gems which gain me small rewards? “
This is why someone who has a master degree in finance won’t be guaranteed to survive in the stock market. To be honest, I’m almost tempted to sell all my coal stocks to switch to Pharmas. Luckily, I’m a stubborn individual and a bit of pride saves me from dumb decision that I’ve almost made.
The Numbers’ Trap: Pivot 2.0
Sometimes we hear from someone that just reading financial statements can provide enough insights. I used to be agreed on this statement, but I change my mind after some experiences which shows why quantitative and isolation can bring catastrophe to Investors.
In the end of 2019, I’m interested in one of public companies that sold vouchers of internet and phone quota which backed up by one of the biggest telecommunication companies in Indonesia. I noticed this stock has interesting key ratios; PE under 7, PBV under 0.5 and growing sales. Assets also grew at a fast rate which I thought was a sign of prosperity (the data is from websites and news). Until I met one of my dad’s relatives which also owned a small selling vouchers business.
I love hearing stories of entrepreneurship and businesses, so I decided to ask him all about Voucher’s distribution business model. What surprised me is he said that he’ll pivot and shift to other products. I’m confused; isn’t the business doing good? He said that if you can earn 5% GPM (Gross Profit Margin) you are one of the best in the industry. Imagine reducing that number with other costs such as operational costs, other costs, and taxes. Well, I said it’s fine if sales are doing well, right? He told me that the industry sales are declining due to the option of purchasing internet through mobile apps and competitors are trying to shift as well due to its tight competition. Turns out they are on big sale to remove excess inventories to reduce warehouse costs.
Now there’s an insight, how come the company I observed before is doing good? Then I opened an Annual Report to check (Annual Report usually give insights such as strategies, prospects, risk managements, etc. which you can’t find in usual financial statements) whether I can find other information. That’s when I realized that the company is struggling with their sales; even though Revenue/Sales increase at average 19–21% annually, the inventory increases more at average rate of more than 40%.
Now this is the red flag.
The company records massive inventory write-offs around 400 million dollars and the stock price is now grounded with no signs of recovery.
The second case is a shipping company, which has a similar fashion to the previous example I mentioned. Good valuation, mere balance sheet due to its nature of business; shipping business is a capital-intensive business. As usual I started from numbers crunching and finally decided to buy the stock. Not long after the purchase, I tried to search for some insights through some investor’s group chats. I found out someone said that this company has questionable corporate governance.
I’m worried, what do I miss?
After surfing the Internet, I found out that 2 directors of the current management somehow involved in past incidents which led to bankruptcy of a shipping company in 2011 (read: mismanaged) and now they’re leading the current company I’m invested in. Somehow, the leveraging technique they’re using is questionable because the amount of debt grows on average 30% (which is unusual compared to the peers). Knowing that, I’m really terrified and immediately sold all my stocks (only 1% loss). Not long after that, the stock price has declined 67% (2021 to current 2023).
What’s the conclusion?
Always focus on the qualitative aspects first before reaching the numbers. Find out the management, business model, products, strategies, prospects, etc before you decide on buying stocks. If you are having a hard time understanding the business model or company, consider talking to someone that might have an expertise in those topics. After all, do not forget that reports are written by Companies too which might lead to shenanigans if you met unethical companies.
For sure, these experiences humbled me.
The Domino Effect
“Luck is When Preparation Meets Opportunity”
Never have I ever thought that I’ll be experiencing what the quote says.
Around July 2021, a phenomenon emerged:
The Global Supply Chain Crisis!
Because of COVID 19, lots of countries closed down energy and goods production which led to a long-term effect. In 2021 when demand is surging, suppliers having a hard time fulfilling all the sudden incoming demands. And funny stuff happened on March 2021 where an incident happened at Suez Canal due to a container ship called the Ever Given had run aground in the canal! This canal obstruction lasted for 6 days which estimated roughly has led to a total trade loss around $54 Billion!
The Supply Chain Crisis forced suppliers to boost their production, which required resources such as fuels. Due to the increasing demand for fuels and previous case of Russia-Saudi Oil price war in 2020, it bid up prices of U.S., Australian, and Qatari ship-borne liquefied natural gas (LNG), diverting supply away from traditional LNG customers in Asia. Because gas frequently sets the price at which electricity is sold, power prices soared as well. Both LNG producers and importers rushed to build new infrastructure to increase LNG export/import capacity, but these costly projects take years to come online.
This led to a new case: The Global Energy Crisis!
European countries have tried to reduce coal consumption before COVID. Due to sudden surge of demand and tight supplies of oil and gas, they’re forced to purchase coal again. Imagine everyone using firewood to warm themselves during winter in Europe.
This led to increasing price in Coal Futures Contract (usually we use the Newcastle and Rotterdam Port Benchmark) which affected coal companies’ revenue, including those 2 in my portfolio. How strong was the impact? Now imagine if coal contract reach $100/tones, company’s earnings are heavily boosted. That’s why when coal contract reaches $100 dollars in 2018, all investors jump happily due to potential crazy earnings that will drive stock price.
Another funny story? Australian Government accused Chinese Government in a press conference session about who caused COVID. The Chinese Government conduct an embargo including coal imports, which they fully substituted to Indonesian producers.
Now you know why coal price does matter. Due to all circumstances and crisis happened, Newcastle Coal Price for the first time reached $200 in 2022…
That is shocking; Who predicted Coal went so far? This led my portfolio went up a bagger (100% return) exclude dividends.
After the events of crisis, everything chills for a while. Then comes 2022 with an unpassionate reaction from the market (except for coal holders); because COVID still sucks but slowly recovers.
I was preparing to move to Bandung, West Java to start my business. On 24 February 2022, as usual I’m working on my laptop and observing some news and reports. It’s 9.30 a.m. which the market reacts positively due to COVID easing and all my stocks in portfolio are green. I screenshot my portfolio and send it to my best friend, which I said that “this kind of image should exist everyday”. Then I left my phone to take a hot shower and quick bites.
Walking out of the bathroom, I noticed my phone ringing; a call from my friend who works in a brokerage firm. Turns out the market crashed (again) because Russia has officially declared war on Ukraine, exactly around 10 a.m. The war caused an energy shortage, because European countries rely on gas streams from Russia (The Nord Stream) and a cutoff done by Russian Government. Coal price surged and reached $400!! A new Historical event recorded.
And what happens next? The Commodity Boom.
It’s like the Yukon’s Gold Rush back in 19th century. Everybody just started talking about coal industries. I received phone calls and chats from colleagues and relatives to discuss more on coal prospects, which I answered. At the end of 2022, my portfolio return including dividends is 243%.
Moral of the story?
I’m lucky to have learned the fundamentals of investing and given the best timing to buy stocks. I don’t hope for another crisis or recession to happen. However if it does, then it’s really a very great opportunity to buy stocks! Market panics driven stock price to a very cheap valuation. Your homework is only to search for healthy companies during bad times and proceed to their prospects. The supply chain crisis, energy crisis, Russian-Ukraine war are really unpredictable; name an analyst that predicted it before and you’ll find none. So never ever timing the market! You just waste your precious time to guess which you can utilized it for searching good companies.
The Aftermath
“Well, that was one hell of a ride!”
But I noticed that lots of investors entered the market during the COVID era, in which everyone is a winner in a crisis. Personally I’m afraid that this phenomenon is a time-bomb; because new investors thought that stock market is really easy in making money. In 2022, a series of scams and Ponzi’s has shocked the Indonesian, with whooping billions of dollars loss.
I can’t imagine what if the market goes backs to normal, with all the Price rejection rules and market time back to normal. It will be a culture shock for new and future investors which can be devastating. The number of investors grows exponentially without the balance growth of financial literacy may spread misinformation about the nature of stock market.
Therefore I’m trying to create an ecosystem called Investoria to provide new users how to learn investment and company analysis, which they can be prepared if a certain crisis will come. I like to share a quote from Peter Lynch, which best describes what I’m trying to point out:
Always remember, bad times always create new millionaires. You need to not think like mainstreams; take risks; and be prepared. Applying all of that, all future crisis may be a blessing in disguise just like the case of supply chain crisis and sudden coal rise due to warfare.
And that’s my Roller Coaster journey.
