Stock picking is just like watching beauty contests

September 19, 2015 08:00
Picking the fairest among the contestants in a pageant is similar to choosing potential winners among stocks. Photo: CNSA

Watching Miss Hong Kong Pageant 2015 on the night of Aug. 30 reminded me of investment.

Although the audience have their own top three list, they have to get the judges’ top three in order to win access to the lucky draw.

Investment has a similar rule. Investors who don’t follow the rule will lose money.

In most cases, individual investors don't have voting rights (except those in the A-share market).

Retail investors make up about 80 percent of the A-share market. That's why the mainland stock market behaves very differently from institution-led markets overseas.

But even if an individual investor spots a stock with cheap valuation and attractive profitability, his effort will not pay off unless an influential fund pushes up the share price.

So unless individual investors can form a unified community, or a single fund holder becomes an institutional investor with voting rights, it will be of little help.

Let’s compare the pageant process with stock-picking.

The contestants were sent to Japan for some training in dancing or singing. Experts then ranked the contestants based on their professional skills — just like picking stocks based on different parameters. 

The experts and audience’s votes are both given a weight of 50 percent in the selection of the final four contestants. The choice of the top three candidates depends solely on the votes of the audience.

The pageant host or the listed companies must attract audience or investors to vote or invest by well-designed rules and branding efforts.

While different rules or investment strategies have their pros and cons, you should understand the decisions you make and know factors behind.

The A-share market is dominated by individual investors who chase market rumors and policy guidance, putting the State Council in a role much like that of the pageant judges.

After policy makers decide to restructure certain state-owned enterprises or conduct reform in certain industries, share prices of related listed firms will soar as both individual and institutional investors chase the wave.

The prices may not be connected at all to the companies' fundamentals.

Look at the shares of China Railway Rolling Stock Corp. (01766.HK) and China Railway Corp. (00390.HK). Their prices eventually fell to the ground after recording big increases.

Recently, the State Council has started to welcome private investment in state-owned firms that are not very close to public interest.

The cabinet will later quit engagement with those firms’ daily operations or human resources management to focus on return on investment.

If the model works successfully, it will contribute to the long-term value of the investment.

Otherwise, opportunism will continue to dominate the market.

The authur's daughter is Ada Pong, first runner-up of the Miss Hong Kong Pageant 2015.

This article appeared in the Hong Kong Economic Journal on Sept. 18.

Translation by Myssie You

[Chinese version中文版]

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Founder and Managing Director of Pegasus Fund Managers Ltd.