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The Freedom of Investing, by Sophia Yan

Debut Issue: “In Search of the Answer to the Million-Dollar Question”

(Originally published on January 7, 2005)

About the Author: Ms. Sophia Yan is the deputy general manager of Legend Capital and has around twenty years of experience in investment analysis and advisory, investment management and fund raising in the capital markets. Ms. Yan is currently an investment advisor licensed with the Securities and Futures Commission of Hong Kong and a member of Hong Kong Securities Institute. She graduated with a MBA degree in the Chinese University of Hong Kong and a bachelor degree of social sciences in the University of Hong Kong. You can contact Ms. Yan directly at sophia@legendpartners.com.

Legend Capital is a licensed corporation with the Securities and Futures Commission of Hong Kong (“SFC”) since 1997. It is authorized to offer services in investment advisory, corporate finance and asset management. Legend Capitals has been focusing on providing financial advisory services to small and medium enterprises (SMEs) in Hong Kong and China.

Today is the debut of my bi-weekly column “The Freedom of Investing.” and therefore is a very special day to the author. It has been 15 years since I left the news media industry in search of better opportunities for the financial industry and today, I again find the opportunity to use this column as an outlet for the exchange of investment ideas and thoughts with my readers.

There are a couple of reasons why this column is titled “The Freedom of Investing.” Reason number one: If one has the vision and good money-managing skills, then one can obtain a reasonable amount of monetary rewards, a sense of satisfaction, as well as the ability to enjoy a just amount of economic and mental freedom. This should be the main goal of my readers. Second of all, if one is to reap just rewards from the markets, one must expand his investment arena to the greatest extent possible. That is, one must allow his capital to freely flow to investments that the reader believes will maximize potential profits – wherever and whenever opportunities exist. This is not unsimilar to the traveler going on a sight-seeing tour. If there were a dozen sight-seeing tours to choose from, wouldn’t one want to choose the tour that has the most scenic routes?  Of course, the typical traveler will excise his freedom and follow the most scenic route. This same analogy can be applied when one discusses the optimal methodology for investing.

Therefore, going forward, this column will not be restricted to certain investment tools or to financial markets in certain countries. This column will periodically discuss various investments such as precious metals, commodities, equities, bonds, and foreign currencies along with the economics and geopolitics that will affect these investments. The goal of this author is to write a biweekly column which will hopefully be able to act as a good and informed “tour guide” for my readers going forward – in order to help both you and I learn from our investments together and in our never-ending quest for investment profits.

Readers may ask why “The Freedom of Investing” is merely a biweekly and not a weekly publication. After all, doesn’t a weekly column have a better ability to keep track of all the movements of the financial markets? Readers may be correct about this, but the main focus of this column is to keep track and analyze the intermediate trends (a few months to a few years) of various markets. Let me be clear – our focus is not on day trading or gambling on short term trends. The many experiences of my friends and fellow colleagues reinforce this focus, since the majority of them have made the most money analyzing and subsequently trading the intermediate term trends. Almost none of them have made money day trading or focusing all their attentions on short-term trends. Moreover, both the risk and the competition among people who focus on intermediate term trading are relatively small. One will invariably miss out on the big picture if all one’s interest in is keeping track of the second-by-second tick of your favorite stocks.

There are many variables that determine the intermediate trends of the financial markets – both economic and non-economic. However, readers should keep in mind that when it comes to the stock market, there is really nothing new under the sun. Today, the “world’s factory” and manufacturing center is China. One hundred years ago, the United States, and two hundred years ago, Great Britain., As Mark Twain has been quoted many times: “History does not repeat itself, but it surely rhymes.” This is also why the financial markets are so appealing. Guided by history, our goal is to focus and analyze the many variables that will determine the intermediate trends of the financial markets – including the development of the Chinese and international economies, the effects of globalization, along with the many cultural and legal factors that come along with it. If we play our cards right, then sooner or later, we will find our own answers to the million-dollar question.

I have previously mentioned using history as a guide. Since the Tulipomania in Holland in the 1630s, investing in the modern economy has meant participating in one economic bubble after the other. Examples include railroad stocks in the mid 19th century, auto stocks in the 1920s, conglomerates in the 1960s, oil and gold in the 1970s and U.S. bonds in the 1980s. The destructive power of economic bubbles is widespread and well-documented, and thus there is no need for me to describe them further. However, readers should keep in mind that economic bubbles inherently can create a great amount of wealth and opportunities for the independent-minded entrepreneur and investor. Bubbles are a reflection of the emotions of the general society – from extreme optimism to extreme pessimism and back to extreme optimism. This is unavoidable – as bubbles (great and small unlike) tend to exploit human ingenuity and determination to the greatest extent. This is necessary if we are to maintain the amount of economic growth and technology developments that have developed over the last two hundred years. The key lies in whether the investor can profit from these opportunities and subsequently keep his post-bubble losses to a minimum.

The late 1990s saw the emergence (and subsequent deflation) of a technology/internet bubble. As the technology bubble ended, commodity and foreign currencies experienced a resurgence, mainly due to the great decline of the U.S. dollar. As we begin the year, 2005 our current million-dollar question involves asking the following: What kind of risks and opportunities do we face in 2005? Which will be the next trend to watch and where will the next economic bubble emerge? Before we seek to answer these questions, we should consider the following issues:

  • Since the election of President Reagan in 1980, the United States has experienced a two-decade period of high economic growth and wealth generation. As we move forward in the 21st century, is there a possibility of a significant slowdown in the next 10 to 15 years due to the high debt ratios of both the United States government and the American consumer?
  • The aging population of the developed countries around the world – how will this great secular trend affect economic growth and investment opportunities around the world?
  • The growing influence of Russia (with its great wealth of natural resources) and India (with its vast amounts of educated human labor) – how will this affect the economic balance and growth of the world?
  • Japan has undergone a 15-year period of economic stagnation and reforms. What is the likelihood of a Japanese economic recovery in 2005? Can the Japanese innovate and take advantage of such an innovation to help them in such a recovery?
  • China has experienced a 25-year period of economic reforms and high GDP growth. What challenges and “economic bottlenecks” (such as corruption, lack of a legal and financial infrastructure etc.) does she face in 2005?
  • The continued influx of foreign investment capital and foreign competition has created a significant amount of wealth for the Chinese economy. However, the disparity of wealth between the rich and the poor in the China is still very wide.  How can we directly translate economic growth to a higher standard of living for the general Chinese population going forward?
  • The general decline of commodity prices during the last 20 years has resulted in a tight supply/demand situation in many commodities. At the same time, the demand from China and India continues to explode. What kind of challenges and opportunities will arise from this unique situation in 2005? Will the resource-rich (but debt-ridden) Latin American countries be able to take advantage of this and experience sustained growth for the foreseeable future?
  • Since the abandonment of the Gold Standard in 1971, the U.S Dollar has acted as the world’s reserve currency. However, the U.S. Dollar has also consistently depreciated in value over the last thirty years. Will the U.S. Dollar follow the path of the British Pound and lose its world reserve currency stature in the foreseeable future? How will this affect the future path of the Chinese Renminbi?
  • The Chinese government will continue its macro-control policies (such as curbing blind investment and low-grade capacity expansion in certain overheated sectors) in 2005 to try to engineer a soft landing for the Chinese economy. What are the challenges and opportunities should the soft-landing fail to materialize?
  • Both the U.S. and Chinese Central Banks should continue to tighten their monetary policies in 2005. What are the implications and effects of these policies on the rest of the world?

In conclusion, the author would like to emphasize that the path to successful investing does not merely involve trading individual stocks. Investing is a way of life. Investing involves timing and measuring risks, preparing for the worst, as well as finding opportunities where others perceived only risks. Only when one has the necessary courage and independent-thinking to cold-bloodedly buy in extremely pessimistic and sell in extremely optimistic situations can one have a chance of survival in the investment arena. Investing is also a reflection of everyday life. After all, aren’t the necessary ups and downs in a person’s life similar to the volatility of the financial markets? Don’t emotions run to extremes as well? The search for a career, making friends, and finding a spouse all shape our emotions. The decision-making process is also very similar – as they both involve making logical decisions under imperfect information – and bearing the subsequent responsibilities that come with those decisions. This is where we stand, and hopefully, my readers and I will be able to examine (and perhaps even answer some of them “correctly”) more million dollar questions together as we move forward into 2005.

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