I have been thinking quite sometimes now. I just finished Maggie Mahar’s “Bull: A History of the Boom and Bust”. I recommend my reader to read it as it really helps my thinking a lot. With the current condition of Indonesian economy, I want to inform my reader that I am officially bearish now. There are some points that summarize my thought:

Cute polar bear iPad wallpapers 1024x1024 (17)1. I belong to a generation that has not seen a true bear market yet. Looking back at the beginning of my investment journey, I started my Indonesia portfolio around 2010. I could say, if I refer to history, people who started from 2008 and up, have not seen a true bear market before. Whatever they buy, it is very likely that the portfolio can only go up. That being said, I am not exempted from this analysis. It is possible that my outperformance from 2010 was produced by taking more risk than the market. In other words, I am a very lucky guy. My investment strategy has not been tested in the market yet, and so far in 2015, I have to say that I am underperforming the market. I am currently down around 10% from the beginning of the year.

2. What is the lesson that I learn with this underperformance? I learn that patience and ability to sit on my ass are two of the most important lessons that I missed. People who talk to me will know that I am in bearish position since 2012. However, I didn’t act enough to adjust my portfolio accordingly. Why is that? Because it is hard for me to do nothing. Frankly, I feel that I have to be in the market because I am an investor. Indonesia is tricky. There is a fear of missing out, since the cost of fund is so high. Looking back, yes, currently I am still making more money if I am invested, but at this time, the score is not out yet, because there are a number of position that I cannot go out, simply because the liquidity is not there. Sometimes, liquidity is scarce when it is most needed, and it is plenty when it is most unneeded. If I am right and we are in the beginning of the bear cycle, then I would wish I have just hold on foreign currency (more on that later) and sit on my ass.

3. The leverage that Indonesia has accumulated since 2004 has probably produced on of the best time for bull. However, as with many good things of the world, they have to end somewhere. 10 years streak of economic growth is a great feat. However, nothing can last forever without rest. Especially when we have been so imprudent with our investment. A lot of bulls told me that Indonesia is a great country is driven by natural resources and consumer. Well, the natural resources price is not very encouraging, and it is unlikely that it will recover (be it coal, or palm oil). On the other hands, Indonesia’s consumer can’t help the economy. To move the economy, you have to produce something, not just consume it (even worse, consuming imported goods). What really increase the GDP is not the consumption, it is the capital investment that you use to generate more production. Look at South Korea, Singapore, and other economic miracle. They do not grow out of consumption; they grow out of trade, innovation and capacity building. South Korea, for example, has a inferior capability to produce goods such as ships, cars, and electronic 20 years ago. However, today’s South Korea is among the greatest economic powers in this world. Indonesia, however, will probably say that it has more ferraris, LVs, and malls in the nation. We will really pay a steep price for our imprudence.

4. It is no secret in the Indonesian value investing community that ideas have dried up for quite some times. Looking at the market today, it is hard to find a good idea. I can only find a handful of companies that is worth buying right now, and those are not even a bull-eye type of opportunity. What shall we do in time like this then? The worse thing we can do is to lower our standard of what is investable. I have many friends who keep arguing that the price we are paying for consumer goods companies are fair, and I respectfully disagree. I don’t think at this price, $UNVR is fair. I think it is grossly overvalued. There are more downside risk than upside opportunity. Buffett did an interesting thing when he couldnt find bargain in 1970s. He had the ball to exit the market and hold treasuries and munis. Looking back, I should have more balls to than stocks in my portfolio. One thing that I learn from the book “Bull”, is that a person can be wrong, really wrong for 2-5 years, and he can still outperform the broad market by standing on the sideline. People like Buffett, Eveilard, and Vinik were terribly early in their assessment of the market, but they have the balls to go through it and still have wonderful career.

5. How long will the bear last? I don’t know. I think the market has still some energy left for another rally. However, there are already signs of slowdown in the economies (try talk to people in the real sector). If the government and the economy realize that we need to deleverage and allow it to take its natural path, then we should expect the economies to start recovering in 4-5 years. After all, all the investment in infrastructure will not take effect until they are completed. Meanwhile, it will be good for companies to slow down, clean up, and prepare for the next wave. There will be many overleveraged companies that go out of business, but that is part of the process. Without the down cycle, people who are reckless and extreme risk takers will be rewarded. We know that it is not a good long-term system. How about trying to fight the market? The reason bear goes out to find food in the summer is because if it works in the winter, it will get killed by the cold. So, if a bear doesnt work in summer, then in the winter, it will die either of hunger or of cold. I prefer to die in my cave hungry, rather than die outside trying to look for food and end up dying with my food (if I ever find it). Some people might have different preference, but that is not up to me to judge.

6. What are our alternatives then? There are a small number of companies that can provide good cash flow. If it is cheap enough, then consider holding them, assuming that the cash flow is not impaired greatly by the somber economic mood. Holding a combination of foreign currency such as USD, RMB, or SGD, might be another good idea. If because of this people find me unpatriotic, then you can still be patriotic and hold on IDR product such as Ori, Sukuk, or even deposito (with short tenor). Yes, it is very likely that we would get eaten by inflation, but at this time, capital preservation is of higher priority. Those who run business, should just reduce leverage, clean up, and gather strength. I think business should be your greatest focus, if you run a business. If you only invest, then the choice is limited.

I think I am early. I will be lucky to be proven right in less than 2 years time. But hey, that is still a long way to prepare. I hope I am wrong.