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Introduction

Investing in Indonesia


Blessed with a natural resource-abundant archipelago and strategically situated in the Southeast Asian Equator, Indonesia is an emerging market quickly making its mark amongst the world’s largest economies. As a member of the G20, it is Southeast Asia’s largest economy in terms of population and GDP, enjoying a capacity to both export valuable goods and services and tap into an enormous and rapidly growing domestic market.


Despite decades of corruption, political turbulences, and multiple economic recessions ever since its independence in 1945, Indonesia has enjoyed a stellar GDP compound annual growth rate (CAGR) of 5.3% over the past two decades. In fact, it was the only economy posting any real economic growth in 2011 in the aftermath of the global financial crisis and has continued to grow in the years since. Improved physical and digital infrastructures, financial inclusion, ease of doing business, and growing competencies outside of extracting natural resources have all contributed to the country’s economic growth. This surge in welfare has significantly reduced poverty and inequality, and significantly increased the middle income population, which currently contributes to the bulk of Indonesia’s consumer spending. This trend can be seen from private consumer spending on non-food items which comprised less than 50% in 2000 but drastically went up to over 60% in 2020, which indicates sufficiency of basic needs such as food, and more leeway to spend on tertiary goods.


Source: The World Bank


The agriculture sector, traditionally Indonesia’s economic engine, only contributed 12.7% of Indonesia’s GDP in 2019, mainly supported by rubber, rice, sugarcane, coffee, tea, tobacco, palm oil, coconuts and spices production. Industry contributed to 38.9% of GDP throughout the same period, supported by growing capacity to manufacture textiles, cement, chemical fertilisers, electronic products, rubber tyres, clothing and shoes. The services sector, dominated by tourism and financial services contributed 44.2%, being Indonesia’s largest and fastest growing economic sector.


Sources: Indexmundi, BPS


As depicted by the above results of two regression analyses, Indonesia’s economic growth is affected by commodity prices more pre-2010 than post-2010, signaling Indonesia’s gradual but rapid transition to a manufacturing and service-based economy.



Common Indonesian Investors


In recent times, the Gamestop stock readily comes to mind when one thinks of irregular equity price fluctuations, as hordes of retail investors pooled their collective gunpowder in order to bid its prices to absurd historical heights, a baffling phenomenon to many.


However, something similar happens almost everyday in the Indonesian stock exchange. Illiquid and obscure stocks’ prices multiply several times within hours without any fundamental catalyst or development whatsoever. Similarly, the same stocks can also tumble to a tiny fraction of its highest price overnight, without any catalyst. The extent of irregular price movements have been mitigated by the stock exchange’s policy to suspend stocks that fluctuate too drastically, but the frequency of such phenomena still remains quite high.

A survey conducted by Sucor Sekuritas in June 2020 found that a vast majority of retail investors’ investment horizons are less than three months. While irregular and extreme price swings from equities have the potential to significantly boost an investor’s returns, it can also in turn deliver crippling losses. We cannot count on both hands the number of retail investors we know personally who were day traders but became “involuntary investors” as they held onto their loss-making assets with fervent praying and fasting in the hope of seeing them one day rebound. Indonesian investors are stuck in a vicious cycle, playing a zero-sum game where the movement of stock prices in the short term are seemingly determined by the toss of a coin.


While one would be hard-pressed to find data regarding the cause of Indonesia’s irrational market, spending a short amount of time among Indonesian investors will make clear the most likely culprit: lack of investment methodology and principles. The Indonesian capital market is, in every sense of the word, in its infancy and as such, is treated by many as a casino; hence the lack of individuals employing disciplined and rigorous analysis in making investment decisions.


In making investment decisions, an investor needs to have a core set of principles to guide her/him to determine when to buy/sell. This rule certainly applies to Indonesian investors making investments in the Indonesian stock exchange as well. However, when asked for the rationale behind an investment decision: the average Indonesian investor will mostly recite one of the following three things:


  1. Exciting news

  2. Someone made money with the stock and recommended it to me

  3. Price looks like it will rebound / continue to go up (superficial technical analysis)


While news and developments must indeed be taken into account in order to formulate a sound investment thesis, it is not a robust and comprehensive framework to implement alone. Not all companies receive the same kind of coverage, as not all businesses operate within a “sexy” industry or conduct any headline-worthy corporate actions such as mergers and acquisitions. In the same vein, some indicators of weak financial or operational performance such as lagging revenue growth, weak capital structure, or weak working capital turnover will usually not be captured by journalists. By only focusing on news, an investor will also miss out on really great companies that operate defensively, focusing on their key competencies without engaging excessively with the press. Take PT Industri Jamu dan Farmasi Sidomuncul Tbk (SIDO) for example, which has generated stellar capital gain and dividend returns throughout the years but received minimal news coverage. A lack of investment education and principles also make Indonesian retail investors prone to being swayed by not only news, but also opinion as well. We are sorry to say, but buying PGAS because your dentist recommended it to you is not a good investment decision.


“The” Indonesian Investor


The investment approach that we propose on the other hand, while different and rather counter-intuitive, is not by any means revolutionary. We are, at heart, value investors. We believe that a stock, just like a property, is worth the economic value it brings.


Throughout the years of our experiences in advising private investors’ transactions in the ownership of private businesses, we have found the methodologies and principles in maximizing returns to be very highly applicable to making investments in the public capital market. As such, when looking at potential companies to invest in, we look at the drivers that tend to make a business successful, not ones that can potentially spike its price in the very near future. Instead of looking at the “clout” and “rumors” surrounding a company’s stock, we for the following in a company:


1. An economic moat


An economic moat is commonly defined as a competitive advantage that a company has that allows it to sustainably command market share and profitability above the levels of its competitors. This can be derived from various sources such as branding, business model innovation, switching costs, barriers to entry, etc.


2. A growing industry


While market share retention is important, a company cannot grow eventually without an expanding market size. In our view, it is extremely hard to find attractive companies in dinosaur industries such as airlines and coal production.


3. Capable and trustworthy management


When one invests in a company, one makes a bet on not just its business model and industry dynamics, but also its people. A company’s management can certainly make or break a company’s performance. Transparency, long-term orientation, lack of actions that prioritize one group of shareholders over others, and perseverance in executing strategic plans are some clear indicators of capable and trustworthy management.


4. Favorable valuations


As value investors, we do believe that companies have inherent economic worth, and that it is insensible to purchase a company for a price far higher than its most likely intrinsic value. This intrinsic value is primarily derived by discounting a company’s likely future cash flow to present value using a discount rate that reflects its riskiness as an asset. This line of thinking is much more intuitive than one might think, especially when considering how investors think about property investments. For some reason, Indonesian investors tend to be aware of the economic features of a property investment, but disconnect a stock’s price from its company’s financial performance.


5. Robust balance sheet and capital structure


This is something that most people do not pay a lot of attention to, but is a very critical element to a successful business. Leverage (debt) is good, as it can relatively cheaply help a business scale and expand its operations. But too much debt quickly creates disasters as all businesses, no matter how non-cyclical, will eventually face periods of depressed cash inflows. The F&B industry is traditionally known to be very defensive, but tell that to the myriads of restaurants having trouble due to the pandemic!


With such an investment strategy, we focus our investments toward companies that have the highest probability to display strong financial performance and exceed market expectations over a long time horizon. In our experience, holding great companies at great valuations over 3, 4, 5, or even 6 years and beyond yields quite the handsome returns as the market does indeed have no choice but to recognize their worth.


Throughout our subsequent posts, we will seek to outline to you, the readers, regarding why we have chosen this approach, how we go about implementing it, why it does work, and how retail investors like you and I can benefit from these principals. Our nation is a burgeoning center of commerce full of potential and promises, and it is a shame should we, as its residents, be unable to capture all this growth happening right amongst our midst. With this blog, we hope to be able to communicate our investing ideas to kickstart your creative investing juices, and that you can do the same for us and your fellow readers! If we can do that, we will have accomplished our goal of building a community of enterprising investors who take charge over their own finances and wrest the investing success available to only those disciplined and stalwart enough to put in the work and critical thinking. We are firm believers that luck is a function of two variables: preparation and opportunity - while we cannot control when and how our opportunities will come, we can ensure that we are amply and always prepared to capture them when the moment arises. Until then, our resolve remains indomitable.


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