Budi Frensidy: Select Good Shares from Good Companies
Nino Eka Putra ~ Humas FEB UI
DEPOK – Professor of Finance and Capital Market of FEB UI, Budi Frensidy released the article published in Kontan newspaper, Bursa-Wake Up Call Column, Page 2, on Monday (2/3/2020) that when buying shares in the capital market, many investors fail to distinguish between good stocks and good companies.
Good stocks are not the same as good companies. Good stocks are good-value stocks or stocks that promise a large return in the future, while good companies are simply size companies that have good ratings, with a minimum triple B as a worthy investment rating limit.
Meanwhile, Fortune magazine defines a good company as a company that has the following characteristics, namely: quality management, products and services produced with high quality, high innovation, healthy finance, high social responsibility, good use of corporate assets (good governance), and human resources competent.
Based on the answers of 8000 senior executives to 311 companies in 32 industries in the 1990s, Fortune found that companies with the above characteristics were generally large companies with a ratio of book value to low market value (or high PBV). These results are then used by a behavioral finance expert, Hersh Shefrin, to classify companies that are good or not based on size and ratio of book value to market value.
Why do many investors consider good stocks as shares of good companies? Kahneman and Tversky called this incident a representative bias. This bias is related to human phenomena that often make decisions based on stereotypes. Many times we encounter examples of this bias in everyday life. Children of short parents are believed to be also short, prospective job applicants whose high achievement index (GPA) is high (low), are considered to be high achievers (low) also in their work.
“Associated with shares, good companies are analogous to graduates with high GPA and bad companies with low GPA. While stock returns are equated with work performance. With this stereotyping approach, good companies are expected to provide good returns or become good stocks,” said Budi Frensidy.
In investing, ideally, we hold good shares whose companies are also good and avoid bad stocks (bad stocks) whose companies are also bad (bad companies).
Warren Buffett once said that what investors need to do is to choose a good stock at a good price and keep holding it as long as the company stays good. Listen also to what George Reis said from Reis Investment Group. ‘A good company is not always a good stock, and conversely, a beaten-down stock can be a good purchase’.
“Someone immediately asked, ‘How can there be a good company whose shares are considered ugly?’ or ‘How come there are bad companies with good stocks?’ The answer is easy, good or bad stocks must be seen separately from the company, meaning that they must be seen from the cheap or high price of the shares in the market at certain times. ‘Due to excessive optimism and pessimism, good company shares are often expensive and poor company shares,” he explained.
In normal conditions especially when the market is bullish, it is difficult to get good shares from good companies. What was available at that time was usually bad stocks from good companies and good stocks from bad companies. However, at the end of last week when the JCI touched 5,288, the lowest in 37 months or to be precise after January 23, 2017, there were many good stock options from good companies ahead of us. Our stock market is really experiencing heavy pressure, greater than the shocks in other stock exchanges.
When the market returns to life later, there are rarely good companies with good stock prices. When that time comes, don’t regret if there are no more discounts for shares of good companies. What exists is precisely the premium price for these shares.
He continued, when last Friday you bought top ten big cap shares like BBNI at Rp6,675 (with PER 8 and PBV 1), ASII at Rp5,525 (PER 10.9 and PBV 1.5), and UNVR in Rp6,725, the downside risk you face is very limited. For your information, those are the lowest prices of ASII and UNVR in the last four years.
Could it be that the JCI will still drop to 5,000? Nothing is impossible but if you already get a big discount when buying it when the CSPI is in the range of 5,300, you should be grateful. Although it turns out there are investors who are more fortunate because they will get a bigger discount if the CSPI returns to the 5,000s.
When does the expected normal condition come? No one knows for sure. However, as long as our economic growth is positive at around 5% which more or less reflects the average real growth of corporations in Indonesia, the rebound and recovery process will not require annual time. “For example, when the United States experienced a subprime mortgage crisis in 2008, our stock exchange was also affected so that the JCI fell 50.6% in that year,” he said.
“However, because our economic growth is still positive 6.1% and 4.5% in 2008 and 2009, our stock exchange immediately shot up 87% and 46% in 2009 and 2010. No guts, no glory (no guts, no glory),” he concluded.
Source: Koran Kontan. Edition: Monday, March 2, 2020. The Exchange-Wake Up Call column. Page 2