Speculative Signals in the Stock Market
"The Thai Stock Market" is a highly speculative market due to various factors, such as a conducive system, etc. Therefore, what factors or signals can we observe that indicate intense speculation in the stock market, causing certain groups or individual stocks to be overpriced and how should we avoid them?
I have long observed that the Thai stock market is highly speculative compared to the stock markets of other countries I know. The speculation by individual investors in Thailand has hardly ever disappeared, except during the aftermath of the 1997 financial crisis when the Thai economy nearly collapsed, and those who suffered the most were entrepreneurs and businesspeople who had enough money to play stocks or invest at that time.
This led to speculation in the stock market disappearing entirely for several years before the economy recovered, giving rise to a "new generation of investors" who are more diverse, including middle-class individuals who earn a salary and start accumulating money or wealth for retirement.
These new investors have significantly increased in number compared to older investors. Besides having money, they also possess much more "knowledge" about investing. They understand that when selecting stocks to invest in, one must analyze and assess the true value and compare it with the stock price. If a stock is priced significantly below its true value, known as having a high Margin Of Safety, they will buy it. If the stock price is higher, they will sell. This principle is known as “Value Investing”, which has become the mainstream investment strategy in the Thai stock market to this day.
However, speculation in the stock market has not only not disappeared, but it has also flourished and may even exceed past levels of speculation. There are several reasons for this. The first reason is that speculation is embedded in the "genes" of humans since the early days of humanity known as “Homo Sapiens”, where those who are not daring or dislike risk tend to struggle to survive and propagate their species less than those who enjoy taking risks.
The next reason is the system that facilitates speculation. This includes very low trading fees and the absence of taxes on capital gains from securities trading. Therefore, buying and selling stocks and making profits quickly is something people want to do. Finally, the alternatives for speculation in other areas in Thailand do not seem to yield returns as good as "playing stocks" in the current economic and social conditions, especially for those who have increasing savings for retirement.
High speculation causes stocks that are being speculated to have prices that adjust higher than normal. The more people buy and sell, the higher the prices go, leading to stocks often being priced significantly above their fundamental value. If we buy those stocks and hold them for a long time, the chances of the stock price adjusting down to the fundamental level are high, and we may incur significant losses.
Therefore, Value Investors who are committed and cautious should know which stocks or groups of stocks are experiencing high levels of speculation. What are the “signals” indicating that there is intense speculation in the stock market, which causes certain groups or individual stocks to be overpriced and should be avoided?
The first signal of speculation is the daily trading volume of stocks in the stock market. For no less than 10 years, the trading volume in the Thai stock market has been extraordinarily high compared to neighboring countries with similar development levels. Recently, in the past few months, despite the COVID-19 issues, the daily trading volume has still reached 60 to 70 billion baht, the highest in ASEAN and ten times higher than the Vietnamese stock market. Therefore, based on this data, it indicates that the overall Thai stock market has very high speculation, which often leads to the second signal.
The overall P/E ratio of the market is at a historic high of nearly 20 times, higher than that of ASEAN countries, which is around 15-16 times, despite the economic growth and profits of listed companies being almost the lowest at about 3% per year over the past several years compared to the growth of neighboring countries at around 5-7% per year.
Speculation often occurs with small or mid-sized stocks that have low Free Float or circulating shares in the market. This often allows stocks to rise quickly and significantly in a short period. The price changes of these stocks can be high, sometimes 10% in a single day without any special good news. Daily changes of 4-5% have become common. Therefore, when we see small and mid-sized stocks with low circulating shares experiencing significant price increases, it is a signal that speculation by retail investors is very high, and many small stocks are likely overpriced.
The fourth signal that clearly indicates speculation in small or mid-sized stocks with low Free Float is that the top 10 stocks by trading volume each day often include several of these stocks. Consider how many people are speculating on those stocks if they have a market capitalization of only 2-3 billion baht but have trading volumes of 2-3 billion baht in a single day. This means that every stock is being bought and may be sold immediately within the same day, and the trading volume is equivalent to that of large companies with market capitalizations of hundreds of billions of baht. These are stocks that are being speculated on intensely. If we are not speculators, we should avoid these stocks.
During periods of high speculation in the stock market, sometimes the overall market index does not rise significantly. This is because the overall fundamentals of the economy and large listed companies may not be good at all. In such situations, the numerous speculators in the Thai stock market often look for certain groups or individual stocks to speculate on. The stocks they often use as tools are those that still look good in terms of performance and have characteristics suitable for speculation, which are small or mid-sized stocks with low Free Float that can be manipulated or "cornered" to push prices significantly higher. Therefore, when we find that in a poor stock market environment, certain groups or individual stocks are still rising, one reason could be that there is a large group of speculators looking for stocks to play with and "crowding into" that stock or group.
The sixth signal that often indicates speculation is reaching its peak is when we find stocks that have prices skyrocketing to a level referred to as "Impossible" stocks because the prices rise to a level that is "impossible" to sustain in the long term over the next 2-3 years. For example, these are stocks that sell commodities such as agricultural and industrial products or services related to commodities like shipping or even aviation. These stocks, in good market conditions with high commodity prices, will yield high profits, but in downturns, prices can plummet significantly, leading to losses. The point is that in good times, people tend to "speculate" and buy stocks heavily, causing prices to rise sharply, which attracts more buyers without considering the price's reasonableness and without thinking that future profits will likely decrease significantly. However, soon commodity prices must decline due to increased production. My definition of "Impossible" is that stock prices may exceed their fundamental value by 4-5 times or more in normal conditions.
Finally, the last signal of speculation in the stock market is the volume and number of IPOs or newly listed stocks. If there are many and the stock prices on the first trading day rise significantly, increasing by dozens or even hundreds of percent from the IPO price, it indicates that speculation in that market or group of stocks is high, and the stock prices are often higher than their fundamental values.
Investors should carefully observe and monitor the level of speculation in the stock market or specific stocks. Watching the volume and especially the price fluctuations is a preliminary signal that often indicates how high or low speculation is in those stocks or groups. After that, we need to look at qualitative data: how the business is performing, whether it is a commodity or a product that people choose to buy based on factors other than price, and whether the company is a leader and how outstanding it is.
Finally, we come to the story or narrative of future growth that is being "sold" to investors. We need to assess how reasonable and feasible it is. Do not easily believe anything, especially from those who have vested interests in wanting the stock to rise significantly. In many cases, I often avoid investing in stocks that show signs of unusually high speculation that cause stock prices to rise abnormally.
I may be an old-fashioned Value Investor who refuses to buy overpriced stocks, regardless of how good the company looks, which sometimes causes me to miss out on investing in stocks that can yield quick and easy profits. But this is a choice I have made.
SOURCE: www.bangkokbiznews.com
