At equities.com, we’ve always been focused on building an active community among the leading voices within the world of finance. As with many other fields, in finance, we’ve noticed a significant shift away from traditional sources of financial news, tips and predictions, and toward a growing number of financial bloggers.
In this series, we profile some of the most distinct and noteworthy voices in the world of financial blogging. Here, you’ll find our recent interview with Andrew Stotz, founder of the site Andrew Stotz Blog. Read below for valuable advice on investing in Asia, and why tried and true techniques like “buy-and-hold investing” might not be the best defense against volatility for investors in the region.
EQ: Thank you for meeting with me today, Andrew. To start out, what originally inspired you to start blogging?
Stotz: Well, I have a lot to say, and I’ve been saying it in classrooms and to clients, in particular institutional clients, for many years. Now, my desire is to get more of it out to the masses. So, that’s what got me into it. In fact, just today I sent the final manuscript of a book I’ve written, which is about investing in the stock market for individuals. That’s my step towards the individual market, rather than just institutions.
EQ: Great. I read several posts on your blog, and it seems like you cover a lot of ground in terms of financial markets in Asia. How would you characterize the focus of your work?
Stotz: The funny thing about my life is that since I went to Asia 23 years ago, so many interesting opportunities came up, and I ended up doing a wide variety of things. Basically, I spent my career as an analyst at different brokers or investment banks, and as a head of research. All of my work has been focused on that, but in the meantime, I started a coffee factory on the side (CoffeeWORKS Co.), I started an online learning platform (jcademy.com) that’s just getting ready to launch. Then, when I left the business and went out on my own, I started A. Stotz Investment Research.
The core function of that business is picking stocks in Asia, and I monetize that in three ways. First, I sell my research. All of my research can be broken down as a portfolio of stocks to own right now. I sell that to institutional clients for fund managers who are looking across Asia for investment ideas. The second way that I monetize it is by managing high net-worth accounts for individuals. The third way is that I basically cooperate with fund management companies. They launch funds, and I’m a sub-advisor to the fund.
EQ: What inspired you to start getting involved in Asia, in particular?
Stotz: Well, I had taken a trip to Asia in 1989 when I was graduating from university at Cal State, Long Beach.
EQ: Wow, you’ve been interested in Asia for some time, then.
Stotz: Yes. It was a while ago. I went to Thailand and Japan. I was supposed to go to Hong Kong, but they had the Tiananmen Square protest going on. In 1989, Thailand had one of the most booming economies in all of Asia. When I go to China now, people will say, “Why didn’t you come to China?” As my executive MBA student said to me, “You’d be rich!” I was talking to another friend of mine though, and he quipped, “Or you’d be in jail.”
EQ: (Laughs) Sure, it was a highly volatile environment.
Stotz: The point is, China was nothing back then, and Thailand was really booming. In fact, when you look at the size of the Thai market relative to the overall Asia except Japan, Thailand was 15% of the market cap of Asia excluding Japan. Today, it’s one percent. That’s the rise of China.
EQ: It certainly makes sense then to have focused on Thailand over China. Just recently, China’s economy has been struggling a bit, yet again. Do you have any thoughts on that?
Stotz: Yes. In fact, I’m about to put up something on my website in the next couple days from a speech I’m going to give at this Harvard event at which I’ll be talking about Asia (you can read it here). I have a couple of points to make on it. Point number one is that if you look at the GDP of China over the last 20 years, you can see that they had exceptional growth in GDP in the early 2000s – from roughly mid-2004 to 2005. About three or four years from then, it was all about net exports. Then, it switched to investment by companies, but also government. Then, exports started slowing and it really became government investment.
Now, in all that time, the consumer was always at the same level of GDP. Really, it was just this boom that happened originally in exports, then in investment, and then in government investment, and now, you’re back down to normal. China’s no longer a net exporter. Obviously, they’re importing a lot of raw materials, but they’re no longer a net exporter. GDP growth is coming back down to seven or eight percent. The first thing to note is that we had a boom in the economy, and in the stock market in China, but then we had a massive busy. It takes years to recover from that boom/bust cycle.
In fact, Thailand is a parallel, it was at the final stages of a boom when the SET Index hit 1,789 in January of 1994, and today, more than 20 years later, Thailand is still has not yet hit 1,789. We saw that in the US after the Great Depression. It took until 1955 or so before the markets really started to get back to their prior peak.
The point is that we have to accept that the Chinese stock market did go through a bubble, and it collapsed. Now, things are leveling out. The other thing that I noticed in Thailand that I now see in China is that when a market goes into this bubble, the last 25 to 35% of the rise in the market just sucks in amateurs. Everybody is seeing everybody get rich. They’re all in. What happens then, though, is that none of these amateurs know what’s going on, and they don’t know when to sell. Therefore, they all get crushed. The 60, 70, 80% fall in the markets whenever we get a boom-bust, well it’s these amateurs that just get crushed. What ends up happening is that they don’t know what to do. They don’t sell. They’re sitting on their money. They’ve lost 50, 60, 70%. Then, they invariably say, “I’ll never invest again.”
Stotz: I think part of the reason why it takes so long for a market to recover to its prior peak is that you have to actually go through a generation to begin to see the appetite for getting back in the market.
EQ: If there’s someone who is looking to invest in China today or in the near future, what advice would you give them?
Stotz: Well, first thing is that I stay away from financials. That’s the first piece of advice, and financials are a big part of the market cap compared to the US. For example. Mainly banks, I’m okay with insurance companies and maybe brokers, but really, I would stay away from most of these. The reason is, just like in America for a lot of different reasons, banks have really become an instrument for implementing government policy. In America, it’s mainly through policy, but of course, in China, it’s through directed lending and preferential treatment, those types of things. I’m a stock picker, so I’m looking for entrepreneurs. I’m looking for new businesses, businesses that are doing interesting things, that type of thing. My first piece of advice would be to stay away from financials.
EQ: That should be helpful to a lot of our readers. Are there any stocks or companies in particular right now that you find interesting?
Stotz: What’s interesting right now, and this is really a little bit of a sign of what’s going on, is that even though I have an Asia portfolio and I’ve got fifteen stocks in it, I run a pretty concentrated portfolio. I’ve only got China Tel, which is listed in Hong Kong, and I’ve got a Chinese shipbuilder that’s listed in Singapore. Those are my only Chinese exposures right now. The shipbuilder is Yangzijiang, or YZJ, and it’s in Singapore dollars listed in Singapore. Its valuation has gotten really super, super cheap. I look at four factors: Fundamentals, evaluation, momentum, and risk. Basically, risk is very, very low, mainly because this company’s got a lot of cash on the balance sheet. Their net cash times interest earned is very high, so they don’t have much debt at all. Also, their beta is very low. I like low beta stocks. In fact, I did a study (the link is here) looking at beta across the whole world, and what I found is that you can really make serious money if you buy low beta stocks, because the beta of a stock does not stay the say, low betas tend to rise and high betas tend to fall.
EQ: Great, that’s very helpful. Getting back to blogging, I’ve noticed you update your blog fairly regularly, at least once a week or so. How much are you focused on blogging as opposed to other financial activities?
Stotz: I’d say it’s growing. Basically, I have two sides to my business. One is A. Stotz Investment Research (astotz.com). I’m doing more over there related to businesses, related to fund management. Also, I just finished a book on a guy named Dr. Deming, and trying to teach some of Dr. Deming’s methods. That’s marketed over at astotz.com, which is directed towards CEOs and institutional investors. But for my site AndrewStotz.com, it’s really going to start to increase a lot in the blogging, because I have a book coming out in the next couple of days, and you’re the first person to hear the title. The title is You Won’t Get Rich in the Stock Market. The second part of it is, “…Until You Change the Way You Think About it.
I’ll be blogging more on AndrewStotz.com to try to go through, and show all the resources, and all of the research that I’ve done to support what I’m saying in that book. That’s a big one that I’ve got coming up, and then I also have an online course on public speaking. I’m trying to do more on that one too, because I really enjoy teaching people how to communicate or argue a point effectively. It’s really what half of the business of investing is about – maybe what half the world’s business is about.
EQ: Terrific. Your work is definitely very helpful for those who are new to the stock market, who might be afraid of the potential risks. Do you have any specific philosophy or financial philosophy that you stick to when investing?
Stotz: I would say that I have two constituents that I look at. I wrote the book, You Won’t Get Rich in the Stock Market, for my five nieces. All five are in their early twenties and just getting out of university. They basically know nothing about investing, and they are just not interested in it. The book is really an attempt to say, “How could I serve this audience of young people who know nothing about investing, and how could I teach them to become financially independent through the stock market?” To keep it simple, it is really about diversifying through stock and bond-ETFs.
For my own stock selection and my work related to stock picking, I would basically say the most important thing I’ve learned over the years, whether it’s looking at fund managers, or looking at my own experiences, is a piece of advice from Warren Buffet. “Rule #1: Never lose money. Rule #2: Don’t forget Rule #1.” It might sound trite, but it’s true.
What really damages a portfolio is riding a stock down. I did that for many years as a professional analyst, and I have realized that sometimes the market’s just not going to go your way. I have analyzed basically every market in Asia, and I’ve calculated what an optimum exit point for an individual stock was when it had fallen in my portfolios over the past 10 years. I try not to call it a stop-loss, because I’m not that kind of a trader, but basically, I call it a give-up point, and that is a point that I’m going to give up on my thesis for that stock – though I may revisit it somewhere down the line. That’s between 15 and 25% across all of Asia, depending on the volatility of the market.
Whenever I get into a stock, I think the first and most important point is that I always set my exit price when I get in. When I look at my returns over time, probably 30% of my success has really been that discipline. I did recently have one stock that had a fire in its factory, and it immediately traded down 30%. I wasn’t able to execute, so sometimes you can’t always perfectly execute this strategy. But, I would say that’s my one piece of advice when it comes to selecting stocks and building a portfolio.
EQ: Excellent. Is there anything we didn’t touch on at all that you think is certainly worth noting?
Stotz: Yes. One last thing I would say is that if you want to be successful in picking stocks in Asia, it doesn’t work as well to be wedded to a particular methodology. In a developed market, you may say, “I’m a value investor, and I’m this and that, or I’m a momentum trader.” But sometimes, these markets in Asia can go completely against you for a long time on a particular methodology, so I try to advise people to have a combination of a few different methodologies, or be willing to change your thinking a little bit in a market that’s very, very volatile compared to what we’re used to in the US, for instance.
EQ: That’s an important point. How would you suggest new investors in Asia can best deal with that volatility?
Stotz: I think the best way to do it is to pick the core stocks in your portfolio, and be more willing to trade around your positions in these stocks. If you’re in the west, you might say “Okay. I’m going to buy these five stocks, because I really like them. They’re high quality, good brands.” But then, what I would say is that in Asia when those stocks collapse, you have to be willing to put more money in sometimes, and when they rise, be willing to take some of the profit. That’s where I think people get stuck, and they end up saying, “Well, I’m a buy-and-hold investor. I’ve got a long-term horizon.” That doesn’t always work that well in Asia.
For more news and advice involving Asia from Andrew Stotz, check out his blog at http://andrewstotz.com/blog
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