China again? where else?

The market is kindda stuck at the moment. Main attention is still at China. Even the almighty Superman Lee has voiced his concern on the China's market (Superman Lee is another investor that I respect beside Warren Buffett). The China market is currently trading at a PE (Price/Earnings, the ratio that compares the market price relative to earnings) that is close to 40 times, and is considered one of the highest in past histories, including those of other countries. For comparison, our own Malaysian market is currently trading below 20 times PE. This implies, the market as a whole, you have to pay over 30 dollars to earn 1 dollar annually, if everything else stays constant. Alternatively, it can be stated as an earning yield of 1/40 or around 2.5% per year. Well, lower than the FD rate in Malaysia today. So, why are there still so many people rushing to jump onto the bandwagon? (why no people rushing to the bank to earn the same yield?) Ahhh.. the key difference is the potential of "growth" of the China's market.

In fundamental analysis, it refers to the growth in market size, revenue, earnings and etc. Let's say this company Huat Chai Sdn Bhd is earning RM1 million per year for year 2005. And if the company is selling at a PE of 40 times, its market cap (total price x total number of shares) shall be worth RM40 mil. As a owner, your investment need 40 years to break even. That's an annual yield of 2.5% per year (let's forget about the compounding effect for simpler calculation). And let's say this Huat Chai is doing good business and it earns RM1.5million in year 2006. With an earnings growth of 50%, if the PE still stays, the market cap shall worth RM45mil by the end of 2006. Assuming all else remain constant, the price of the company shall already worth 50% more. Now does it sounds attractive? of course it is. Warren Buffett has become so rich by only achieving returns of 20+% per year on average. You will be twice richer than Buffett at his age if you are able to maintain that kind of returns, with his kind of initial investment. And, most probably, you will already be the richest man on earth by then.

So, again, my point is, everyone is seeing the growth potential in Chinese companies, due to its booming economy and its big population (although there are some who only buy because they believe in "the greater fool theory", a theory that believe whatever you buy today, another greater fool will come to buy from you at a higher price some time later). So are there bubble? I personally think so. I think, a correction is on its way, by then, most investors, traders, speculators or any other market players will be burnt, some very badly. And some will have to sell off most of their holdings to cover their loses, some due to panic, whatever the reason, it's going to be a bloodbath.

Some might argue that there are certainly value buys out there. Of course there are. Values are everywhere. But I believe, if we have enough patience, we will be able to buy them cheaper and at a deeper discounts later. Borrowing from Warren Buffett's wisdom, "we shall be fearful when others are greedy, and be greedy when others are fearful".. Why shouldn't we?

Another quote I like very much, by Leonidas in the movie 300: "enjoy your breakfast, for tonight we dine in hell"... Like the feelings of "be prepared for the worst to come, and embrace it".

Opportunities lie ahead..