Chapter Fifteen
Turning Fear into an Advantage Instead of a Disadvantage
A Case Study of Thailand
Let’s take the Thai people. I’d lived in Thailand for a few years, back in the 1960s, and I’d been back quite a few times in the years since. I thought I knew the Thai people pretty well, and I had great respect and admiration for them. In particular, I respected them for their capacity to persevere in times of adversity and smile when things got difficult.
When everyone else is getting all pessimistic, that’s usually when it is time to turn optimistic.
Something that people tend to forget is that during times of panic, adversity often brings out the best in people. And, by the same token, prosperity often brings out the worst in people.
Within a matter of months, not years, after the Asian financial crisis, I could see the progress that the Thai people and the formerly stagnant Thai government had made to set things right. It takes a major blowout for tectonic plates to shift.
The boiling point had come when the embattled prime minister seriously suggested that the economy could be saved by opening up more Thai restaurants and popularizing Thai kickboxing.
It took just a few serious protests in Bangkok—mounted not by disgruntled leftists and radicals, but by sober, dark-suited businesspeople, middle-class people feeling the pinch and getting hopping mad about it—to suddenly result in a new government and a new, more respected prime minister. The king had stepped in and started to exert moral pressure to lessen corruption and self-dealing on the part of the local elites. Would all these bad people all of a sudden turn into angels? Of course not, but for a while at least, it would behoove them to keep their noses clean. That, in time, would help revive morale and bring the market around.
The people get it together. They start pulling together. They clean up their acts, and start demanding that people in charge do the same. They start working harder. They start saving more. They stop spending money. This was what Oliver Wendell Holmes meant when he spoke of “the moral equivalent of war.”
As a partner in the Bangkok office of a consulting firm said during the depths of the crisis: “Even turkeys can fly in a hurricane. But when the wind dies down, it’s much more difficult to sustain performance. It’s a question of muscle.”
He soberly added, “During a downturn, you need to not just cut fat. It’s even more important to start building muscle.” This means that sooner rather than later, the situation begins slowly but surely to turn around.
The first thing to do in times of crisis is go for liquidity. You could call it a flight to quality. It only stands to reason that if I now have a choice between a small illiquid stock and a large liquid stock, I’ll pick a liquid one every time. In fact, the only time that I buy illiquid or less liquid stocks is if I have to—during booms, when liquid stocks get too expensive.
The first thing to do in times of crisis is go for liquidity.
Liquid stocks tend to be the market leaders, large-cap stocks, index stocks, and blue chips—the stocks you can never buy during a boom, but are your first choice at the first sign of a bust. As sentiment sours, these stocks will begin to come down to more reasonable levels.
In Thailand, I was aching to take a closer look at Siam Cement, one of the country’s blue-chip companies, partly owned by the royal household. This was more than just a cement company, but a diversified group with holdings in building materials, petrochemicals, plastics, and a number of other basic building-block raw chemical materials.
It was getting a bad rap in the press: exports down, plants being closed. In other words, now was the perfect time to pay a visit. Was Siam Cement, you might ask, one of those companies that irresponsibly took out loans in dollars with the expectation that they could be paid back in Baht? Well, yes. And, I ask you, so what?
The point is, they all did it. The point is, such a strategy seemed sound at the time. In fact, the fact that Siam Cement was widely known to have suffered that exposure made it worth buying. Why? Because these ideas about exposure to risk tend to weaken sentiment, which makes them attractive targets.
With the currency devaluation, the beleaguered Baht would soon be looking competitive again. Under pressure to increase business through exports, Siam Cement was going to start exporting like crazy, because it could make and sell cement and all of its other products more cheaply than its competitors in neighboring countries could.
And Thailand, which had slapped an export tax on cement, had—lo and behold—canceled that tax for the duration. This made Siam Cement even cheaper to the Malaysian market—even cheaper, in some cases, than Malaysian cement. So, like a kid in a candy store, I was rarin’ to start buying up all those juicy blue chips I couldn’t afford before the crash.
Playing Pin the Tail on the Bottom
As the Asian virus raged ominously throughout the continent, the new verbal game being played out grimly in global financial circles became “pin the tail on the bottom.”
One global trader announced that this wasn’t a panic, but “a systematic meltdown of testing a new bottom.” Say what? Other self-styled experts pronounced this a terrific time for “bottom fishing.” Still others spoke loftily about “breaching the quadruple bottom.”
Meanwhile, into the breach plunged the intrepid International Monetary Fund, the global institution best equipped to deal with such crises of confidence. It promptly stepped up to the Baht with a generous offer: a US$17 billion bailout and rescue package, which was dangled like a carrot in order to force the ruling elite to swallow the harsh medicine of financial discipline.
But, in the short term, sentiment was so sour that even the prospect of powerful external forces leveraging the Thai economy back into line did little to raise morale.
Hoping to steal a leaf out of my own book, I hopped onto the next flight to Bangkok. Now how on earth, you might ask, could we be the slightest bit optimistic about Thailand when all the smart money was deserting the place, as if the country had contracted the plague?
The main reason that we felt positive was because all of the trends were so negative. This was not just to be stubbornly or rigidly contrarian—because being a true contrarian means not to go slavishly against the grain, but to be always independent in your thinking. It was simply that we and the short-term smart money were operating according to different time frames.
In the short term, the smart money was right on the money. For the near future, Thailand was a mess. But over time—I reckoned three to four years, maybe five at the outside—precisely because things were going to get so tough, the Thai people would change their behavior dramatically. Here’s how (and why):
- They would not borrow as much.
- They would not buy as much.
- They would save more.
- They would work harder.
- They would break their necks to export because they would need dollars.
- Their industrial output would increase.
And last but not least, not by a long shot:
- They would demand more from their government by way of reform.
And they did. The case study of Thailand is just one example of how the only thing to fear is fear itself. And, in actuality, fear can be used to the investor’s advantage time and time again.