Fundamental Stock picking in emerging market

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Neus
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Fundamental Stock picking in emerging market

Post by Neus »

I'm curious how's the market efficiency in Emerging Market

There's an Investor called Lo Keng Hong in my country (Indonesia), whose net worth is growing from nothing to currently about 100 Million USD, purely with his own compounding money (not managing other people's money), in 30 years, by invest like Warren Buffet

There are not many English articles about him, but it seems like he only does valuation without talking to the management like a typical equity analyst

So it seems the market is not efficient here, and stock picking is profitable in this country?

Looking for Boglehead's thoughts & opinion
tibbitts
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Re: Fundamental Stock picking in emerging market

Post by tibbitts »

My recollection is that Bogle addressed active management in EM in his first book, and dismissed it as not being any more advantageous than in other markets, but someone else will know.

Now if you're talking about factor investing that would be something different but probably somebody will have studied that as well and will know whether it's been more or less effective in EM vs. the U.S. or developed markets.
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Re: Fundamental Stock picking in emerging market

Post by alex_686 »

I am a modest proponent of active management. EM is not a absolute thing but a matter of degree. It is like a 12 year old declaring that they will get rich by playing football. It is unlikely but not impossible. In some countries it is easier to do than others. In some countries it pays more than others.

I have also worked in performance attribution. It is really hard to tell the difference between skill and luck.

So I am kind of answering your question with a qualified yes.
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Re: Fundamental Stock picking in emerging market

Post by nisiprius »

I can't speak to Indonesia specifically. I had been about to post the SPIVA statistics, showing that about 74% of actively managed emerging markets funds had underperformed their benchmarks over the last ten years, and 94% (!) over the last twenty, so there's no evidence that it is easy for competent managers to beat the market in emerging markets in general. But, as I say, I don't know about Indonesia. I see headlines that Indonesian stocks are hot right now.
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Re: Fundamental Stock picking in emerging market

Post by vineviz »

Neus wrote: Tue Nov 29, 2022 8:13 pm I'm curious how's the market efficiency in Emerging Market

There's an Investor called Lo Keng Hong in my country (Indonesia), whose net worth is growing from nothing to currently about 100 Million USD, purely with his own compounding money (not managing other people's money), in 30 years, by invest like Warren Buffet

There are not many English articles about him, but it seems like he only does valuation without talking to the management like a typical equity analyst

So it seems the market is not efficient here, and stock picking is profitable in this country?

Looking for Boglehead's thoughts & opinion
Emerging markets are less efficient than developed markets. In fact, this is pretty much a tautology, since whether a market is classified as "emerging" or "developed" is largely a function of HOW efficient they are.

But it would be a serious mistake to infer from that that the Indonesian market is NOT EFFICIENT at all, or even inefficient enough to justify "fundamental stock picking".

At the risk of over-generalizing, an inefficient market is typically MORE dangerous for individual investor not LESS dangerous. As an uninformed individual investor you should always presume that every trade you make is with someone who has more information than you have. The less efficient the market, the bigger the gap between what you know and what your trading partner likely knows.

The world is full of stories of people who purport to have "grown their own money from nothing to large sums", but not only are such claims usually impossible to verify they almost always turn out to be the result of fraud and/or luck. Not genuine, repeatable skill.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Neus
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Re: Fundamental Stock picking in emerging market

Post by Neus »

vineviz wrote: Wed Nov 30, 2022 10:12 am
Neus wrote: Tue Nov 29, 2022 8:13 pm I'm curious how's the market efficiency in Emerging Market

There's an Investor called Lo Keng Hong in my country (Indonesia), whose net worth is growing from nothing to currently about 100 Million USD, purely with his own compounding money (not managing other people's money), in 30 years, by invest like Warren Buffet

There are not many English articles about him, but it seems like he only does valuation without talking to the management like a typical equity analyst

So it seems the market is not efficient here, and stock picking is profitable in this country?

Looking for Boglehead's thoughts & opinion
Emerging markets are less efficient than developed markets. In fact, this is pretty much a tautology, since whether a market is classified as "emerging" or "developed" is largely a function of HOW efficient they are.

But it would be a serious mistake to infer from that that the Indonesian market is NOT EFFICIENT at all, or even inefficient enough to justify "fundamental stock picking".

At the risk of over-generalizing, an inefficient market is typically MORE dangerous for individual investor not LESS dangerous. As an uninformed individual investor you should always presume that every trade you make is with someone who has more information than you have. The less efficient the market, the bigger the gap between what you know and what your trading partner likely knows.

The world is full of stories of people who purport to have "grown their own money from nothing to large sums", but not only are such claims usually impossible to verify they almost always turn out to be the result of fraud and/or luck. Not genuine, repeatable skill.
Very interesting view, thank you
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Re: Fundamental Stock picking in emerging market

Post by Neus »

nisiprius wrote: Wed Nov 30, 2022 10:03 am I can't speak to Indonesia specifically. I had been about to post the SPIVA statistics, showing that about 74% of actively managed emerging markets funds had underperformed their benchmarks over the last ten years, and 94% (!) over the last twenty, so there's no evidence that it is easy for competent managers to beat the market in emerging markets in general. But, as I say, I don't know about Indonesia. I see headlines that Indonesian stocks are hot right now.
Thank for the input

I see

How about difference of individual investor like this Lo Keng Hong fellow who’re not under pressure from institutional money vs PM

He said he lost 85% of his equity portfolio on 98 crisis, but keep buying and make a fortune when it bounces back

In PM case, client would withdraw at the way down

So there’s seems to be an edge for managing our own money actively?
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Re: Fundamental Stock picking in emerging market

Post by Independent George »

Markets only become efficient when there are enough active traders for price discovery to happen. Some of those traders will be very, very good and beat the market; this is a universal phenomenon.
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Re: Fundamental Stock picking in emerging market

Post by jeffyscott »

vineviz wrote: Wed Nov 30, 2022 10:12 am Emerging markets are less efficient than developed markets. In fact, this is pretty much a tautology, since whether a market is classified as "emerging" or "developed" is largely a function of HOW efficient they are.

But it would be a serious mistake to infer from that that the Indonesian market is NOT EFFICIENT at all, or even inefficient enough to justify "fundamental stock picking".

At the risk of over-generalizing, an inefficient market is typically MORE dangerous for individual investor not LESS dangerous. As an uninformed individual investor you should always presume that every trade you make is with someone who has more information than you have.
So I think that would mean that an uniformed individual investor might consider hiring a fund manager to invest in those markets? But my own preference, to the extent that I would do that with some of our money, would be to not handicap a fund manager by being overly prescriptive and limiting them to only emerging markets or in this case to only the Indonesian market.
The world is full of stories of people who purport to have "grown their own money from nothing to large sums", but not only are such claims usually impossible to verify they almost always turn out to be the result of fraud and/or luck. Not genuine, repeatable skill.
And we don't hear about the unlucky ones. There might be 100 anti-Lo Keng Hong's who lost their life savings playing the Indonesian market, but no one's publicizing that much more common outcome.
The less efficient the market, the bigger the gap between what you know and what your trading partner likely knows.
I know what you mean, but isn't it more that the information gap loses it's value in an efficient market? I can know nothing in the highly efficient US market and do fine, even though I may be trading with financial geniuses.
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Re: Fundamental Stock picking in emerging market

Post by asset_chaos »

Neus wrote: Thu Dec 01, 2022 8:38 am So there’s seems to be an edge for managing our own money actively?
That's not an argument for stock picking with your own money. But it is a generic advantage of individual investors over professional investors. As individuals we can chose to stay the course and follow our investing plan without fear of having other people (clients) force us to sell securities at a bad moment. But that applies whether you're an active management individual or, like most Bogleheads, an indexed, passive investment individual.
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Re: Fundamental Stock picking in emerging market

Post by nisiprius »

Neus wrote: Thu Dec 01, 2022 8:38 am
nisiprius wrote: Wed Nov 30, 2022 10:03 am I can't speak to Indonesia specifically. I had been about to post the SPIVA statistics, showing that about 74% of actively managed emerging markets funds had underperformed their benchmarks over the last ten years, and 94% (!) over the last twenty, so there's no evidence that it is easy for competent managers to beat the market in emerging markets in general. But, as I say, I don't know about Indonesia. I see headlines that Indonesian stocks are hot right now.
Thank for the input

I see

How about difference of individual investor like this Lo Keng Hong fellow who’re not under pressure from institutional money vs PM

He said he lost 85% of his equity portfolio on 98 crisis, but keep buying and make a fortune when it bounces back

In PM case, client would withdraw at the way down

So there’s seems to be an edge for managing our own money actively?
1) You don't know if his results were the result of skill or luck.

2) You don't know if he's using only publicly available information, or if he has access to information that you couldn't get yourself.

3) You don't know if he's telling the truth. "Is it more probable that nature should go out of her course, or that a man should tell a lie?"--Thomas Paine
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Neus
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Re: Fundamental Stock picking in emerging market

Post by Neus »

nisiprius wrote: Fri Dec 02, 2022 5:32 pm
Neus wrote: Thu Dec 01, 2022 8:38 am
nisiprius wrote: Wed Nov 30, 2022 10:03 am I can't speak to Indonesia specifically. I had been about to post the SPIVA statistics, showing that about 74% of actively managed emerging markets funds had underperformed their benchmarks over the last ten years, and 94% (!) over the last twenty, so there's no evidence that it is easy for competent managers to beat the market in emerging markets in general. But, as I say, I don't know about Indonesia. I see headlines that Indonesian stocks are hot right now.
Thank for the input

I see

How about difference of individual investor like this Lo Keng Hong fellow who’re not under pressure from institutional money vs PM

He said he lost 85% of his equity portfolio on 98 crisis, but keep buying and make a fortune when it bounces back

In PM case, client would withdraw at the way down

So there’s seems to be an edge for managing our own money actively?
1) You don't know if his results were the result of skill or luck.

2) You don't know if he's using only publicly available information, or if he has access to information that you couldn't get yourself.

3) You don't know if he's telling the truth. "Is it more probable that nature should go out of her course, or that a man should tell a lie?"--Thomas Paine
Noted

Especially number 2
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Re: Fundamental Stock picking in emerging market

Post by Logan Roy »

The thing is, the Buffett-style of investing has worked quite well in lots of smaller markets in recent decades. In the UK, our AIM market (very small companies) has some of the UK's best performing funds since 1997 or so (e.g. Marlborough Special Situations). Yet the AIM index has hardly gone anywhere. One of these cases where active and passive results are radically different.

EM is half the planet. So you're going to get a range of very different examples. One reason I prefer passive for EM is that it's far too large a space for any particular group to have a persistent information edge. (and when it comes to 'factors' and quant-style investing, I don't think the middle of the road's a good place to be.)

The Buffett approach can work in quite efficient markets. I think if you can identify a handful of the 5% of businesses that are likely to contribute a large share of the market's long-term returns, it's almost more about all the businesses you don't invest in. For it to be arbitraged, you'd need more businesses on these very high valuations, like PE >600. And even if that does happen, those kind of valuations tend to sell off very hard. I think the Buffett approach can still work in the US, let alone Indonesia. Most mutual funds couldn't survive how long it may appear to underperform. So: plausible.
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Re: Fundamental Stock picking in emerging market

Post by arcticpineapplecorp. »

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Re: Fundamental Stock picking in emerging market

Post by Logan Roy »

I think the problem for active funds is, much like stocks, it will always be a minority outperforming. And that minority will attract the most inflows.

So I think 'How many funds are outperforming' will always be a rigged game. Even if the majority of funds were running the right strategy, they'd attract the inflows, and there'd be nowhere for that outperformance to come from. I think the success of active management is that Emerging Markets are quite efficient and are able to allocate capital quite well. We could have a very high standard of tennis in the world, but we're never going to get the majority of players winning most of their matches.

It also used to be the case that active EM funds had 2-5% fees. I think as that effect diminishes, the difference is going to become fairly arbitrary. What's probably much more significant is what I decide to allocate to EM. If someone was bold enough to go 50% EM, valuations and growth certainly give them scope to massively outperform someone more market-weight.
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Re: Fundamental Stock picking in emerging market

Post by imak »

vineviz wrote: Wed Nov 30, 2022 10:12 am
At the risk of over-generalizing, an inefficient market is typically MORE dangerous for individual investor not LESS dangerous. As an uninformed individual investor you should always presume that every trade you make is with someone who has more information than you have. The less efficient the market, the bigger the gap between what you know and what your trading partner likely knows.
This is a great insight, thank you for sharing!
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