On Target Newsletter

In this issue:

  • Living in Chiang Mai
  • Value investing disappoints
  • Outlook for 2021
  • Seven things investors ought to know
  • Threats to Big Tech

Living Well in a Safe Place

Last week I was introduced to a remarkable residential development in Chiang Mai, the charming city in northern Thailand where we live.

Plover Cove is an estate of 59 luxury villas designed to appeal to an international audience, particularly retirees. The unusual investment packages, which start at 13.5 million Thai baht (that’s about $450,000/£334,000/ZAR6.6 million), include 20-year visas for a couple.

Why Chiang Mai? Because it’s periodically rated in international surveys as one of the best places in the world to live. Safe. Friendly. Sophisticated. Inexpensive. Never too cold, but hardly ever too hot.

The Plover Cove villas overlook rice paddies in quiet countryside but within easy reach of all the facilities of a modern city. They are of clean modern Canadian designs ranging in size from 255 to 315 square metres. No two homes are the same. Rooms are spacious with large windows. Each bedroom is en-suite. Curtains/drapes open/close at touch of a switch. Light fittings are of stunning designs. Kitchen and environmental equipment embraces top brands such as Gorenje, Hafele, Mazuma, Daikin, Enagic.

Each unit has an infinity pool (choose your size, up to 18 metres). A full range of domestic services, including pool and garden maintenance, is on offer. Supermarkets, restaurants (Western and Thai cuisine), beauty salons, spas and golf courses are only a few minutes away; excellent internationally-accredited hospitals are within half-an-hour’s drive.

For the moment, Thailand has closed borders – a policy that’s been spectacularly successful to keep Covid-19 deaths down to just 60. But within a year you should be welcome to come visit and see for yourself why Chiang Mai is such a good place to live.

I have described it to friends in these terms: “Wonderful caring people, virtually no crime, a warm and sunny climate, a beautiful location (mountains, forests, rice paddies), excellent but really low-cost medical care, great inexpensive household help, and a wonderful lifestyle.” All elderly people are treated with reverence; leisure facilities are abundant; the long-established expats club is an excellent source of information, social opportunities and entertainment.

Why Value-Focused Portfolios Disappoint

Value stocks “have had a decade from hell” says The Economist. Over that period their returns have lagged behind the average for the American stockmarket as a whole by more than 90 percentage points.

For almost a century the dominant ideology in investment analysis has been Value – a conservative view of firms placing more weight on their record and current realities, less on their future prospects and the momentum of their shares. But for years companies selected according to such “fundamentals” have underperformed their “growth” rivals.

Value investing seems to produce backward-looking portfolios dominated by old giants in stodgy, unfashionable industries. It has consistently understated or even ignored the message that the place to be invested is an elite of technology or tech-enabled shares: Apple, Alphabet, Facebook, Microsoft, Amazon; in China Alibaba, Tencent.

As the industrial age gives way to the digital age the intrinsic worth of businesses is no longer well captured by old-style valuation methods. There has been a shift in importance from an economy where factories, office buildings and machinery were key to one where software, ideas, brands and general knowhow matter most.

Intangible assets such as data, ideas, reputation, now account for more than one third of American business investment. Their costs appear in published accounts as expenses but not as investments. The value they add to worth is ignored or at least seriously underplayed.

Some sophisticated institutional investors try to adjust for this, but it is easy to miscalculate how much firms are reinvesting. That is a key factor — firms’ ability to reinvest heavily at high rates of return is crucial for their long-run performance.

The backbone of economies used to be tangible – that is physical – capital. But now what makes companies distinctive and therefore valuable is no longer primarily their ownership of physical assets.

The spread of manufacturing technology beyond the rich world has taken care of that. Any new design for a gadget or garment can be assembled to order by contract manufacturers from components made by any number of third-party factories. The value in a smartphone or a pair of fancy athletic shoes is mostly in the design, not the production.

In service-led economies the value of a business is increasingly in intangibles – assets you cannot touch, see or count easily. It might be software; think of Google’s search algorithm or Microsoft’s Windows operating system. Other examples are a consumer brand such as Coco-Cola, a drug patent, or a publishing copyright.

A lot of intangible wealth is even more nebulous.

Complex supply chains or a set of distribution channels, neither of which is easily replicable, are intangible assets. So are the skills of a company’s workforce. In some cases the most valuable asset of all is a company’s culture: a set of routines, priorities and commitments that have been internationalized by the workforce. It can’t always be written down. You cannot easily enter a number for it on a spreadsheet. But it can be of huge value all the same.

Accounting for intangibles is chaotic because of uncertainties. The more leeway a company has to turn running costs into capital assets, the more scope there is to manipulate reported earnings. And not every dollar of R&D or advertising spending can be ascribed to a patent or a brand. That is why, with few exceptions, such spending is commonly treated in company accounts as a running cost like rent or electricity, not an investment.

Intangibles have important implications for investors. Earnings and book value have become less useful in gauging the value of a company. Profits are revenues minus costs, but if a chunk of those costs are not running expenses but actually capital investments in intangible assets that will generate future cashflows, then earnings are understated. And so is book value. The more a firm spends on advertising, R&D, workforce training, software development, the more distorted is the picture.

For a young company able to grow at an exponential rate, future opportunity will account for the bulk of valuation. For such a firm with a high return on investment it makes sense to plough back profits rather than distribute them, and to borrow to finance further investment .

As an investor, how can you address the problem of intangibles, assuming you want to stick with principles of a system that made men like Warren Buffett rich, rather than switching to the higher-risk strategy of growth investing?

A simple measure for intangibles

Investment Bank Morgan Stanley says, in a recent excellent and detailed report about intangibles, that investment in them is largely going to be found in the income statement “within ‘selling, general and administrative (SG&A), which capture costs not directly related to making good or providing a service.”

Unfortunately there is no easy way to differentiate spending needed to maintain  current operations from spending to pursue value-creating growth. However Baruch Lev, a New York professor of accounting, has developed a comparatively simple index for intangibles – R&D plus SG&A spending as a percentage of assets. It enables you to compare one company with its peers. Research has shown that you are likely to do better buying firms with high intangible asset value.

My own final comment about value investing is that you should not depend completely on standard metrics such as price-to-earnings, price-to-book and free cash flow.  Take into account factors that cannot be rated mathematically such as competence of management, service efficiency, corporate reputation, abundance of new products, excellent design, marketing vigour — intangibles that increasingly determine investment value.

The Outlook for This Year

UBS, the Swiss bank, predicts economic growth of 6.1 per cent, the strongest since the 1970s. China is expected to grow 8.2 per cent. This buoyant growth, plus governments’ focus on boosting the environment, will particularly benefit mining companies. The bank forecasts much higher prices for iron ore, copper and nickel.

The Gavekal research house predicts that the US economy will transmute from a deflationary boom to an inflationary one. Charles Gave says: “In past inflationary booms non-US markets, especially in Asia, tended to outperform the US, while the dollar usually fell.

“Hence, investors needed to own gold and longdated bonds in currencies which were due to revalue strongly [Deutschemark and Swiss franc in the 1970s]… Large cash positions also had to be held in those currencies.

“My advice today is to replace Bunds [German federal bonds] with Chinese government bonds and hold cash in Asian currencies, which are tracking the [Chinese] renminbi… Brazilian bonds and cash tend to offer exceptional returns and could be put in the aggressive part of the portfolio as a replacement for equities.”

Seven Things You Need to Know About Investing

By Peggy and Chad Creveling

Investing is a full-time profession for many people. Countless books have been written on the hows and whys of making smart investment decisions. If you’re an expatriate, you must also consider the role that different currencies and tax jurisdictions play in your portfolio.

These issues are complex, and our goal today is to simply introduce you to some of the concepts behind successful investing. We will also provide you with additional resources and book recommendations to help you design an investment strategy that will work for you.

  1. The Difference Between Speculating and Investing

In popular media, speculating is often confused with investing, but there is an important difference between the two. Speculating involves betting on the direction of short-term price movements, while investing is purchasing assets that generate an economic return over time.

Betting on the short run (also called market timing) is generally a losing proposition — you may occasionally get lucky, but luck is not an investment strategy, and you’ll probably lose over the long run. This is because short-term returns driven by market greed and fear are inherently unpredictable.

On the other hand, long-term investment returns are ultimately driven by the cash flows generated by the underlying businesses. Having a calculated, well-thought-out, long-term investment strategy is much more likely to work for you than trying to time the market and hoping to get lucky.

  1. Risk, Return, and the Relationship Between Them

Return is generally defined as how much you’ve made on an investment, and it is measured in percentage terms versus the original cost of the investment.

At a basic level, we often think of risk as the possibility that a given investment will lose money. In the investment world, risk is often defined as deviation from the return that was expected. Risk is often measured in terms of annual volatility or standard deviation from the mean, but both risk and return can be measured in either the short or long term.

The important points to remember when it comes to investing are:

► It is really the long-term return and risk taken that should concern you.

► There is a link between the amount of risk taken and the expected return.

Generally, you have to take on more risk (in this case, greater annual volatility in the price of your investments) in order to get a chance (not a guarantee) of a higher long-term return.

  1. Diversification — Not Putting All Your Eggs in One Basket

Diversifying means spreading investment risk among many investments.

Holding a couple of concentrated positions in individual stocks, even market favorites like Google or Apple, rarely makes sense. The risk of something going wrong when you own just a couple of stocks is simply higher than can be justified by those stocks’ potential return.

A better strategy is to purchase the entire asset class (in this case, US large-cap growth stocks). While some of the companies in an asset class may experience real difficulty, overall a broadly defined asset class will not. Instead, the value of the asset class can be expected to appreciate over the long run, corresponding with the aggregate growth of the underlying companies in that particular asset class.

In today’s world buying an asset class is easy to do—you can purchase an index mutual fund or exchange-traded fund (ETF) that tracks the entire asset class. That way, you get the overall growth of the asset class combined with diversification benefits, but at a far lower cost than you could do on your own.

  1. Asset Allocation — the Driver of Long-Run Returns

Allocating your savings between a defined mix of different asset classes is called “asset allocation,” and numerous studies have shown that it is asset allocation (as opposed to market timing) that is the major driver behind the long-run return of a portfolio. The greater proportion of volatile asset classes (equities and alternatives) that you include in your portfolio, the greater your chance at a higher return over the long run. But to have a shot at the greater long-run returns, you’ll have to put up with volatility.

Remember that while diversification will reduce your risk of loss, it doesn’t guarantee that your portfolio won’t experience a down year.

  1. Investment Returns — What to Expect

The following table is intended to give you some realistic expectations of what kind of long-term returns investment portfolios at different levels of risk (in this case, short-term volatility) might generate, as well as what types of short-term or single-year losses you might have to put up with on the way to achieving those returns.

As this table shows, if you were to look back after 40 years of investing, the path to the end result would have been volatile. This is shown in the columns “Worst 1-Year Return” and “Range of Annual Returns Expected (2/3 of the Time).” However, if you look at the value of your investments at the end of the period and compare the average percent returns achieved, you would find that you’d done well as compared with keeping your savings on fixed deposit.

AddInvestment Returns by Asset Allocation (1972–2019, in US Dollars, Excl. Tax) Your Heading Text Here

Broad Asset Allocation

Value of $10,000 After 40 Years


Worst 1-Year Return

Avg. Annual Return

Range of Annual Returns Expected (2/3 of the Time)




Equity: Fixed Income

Short-Term Volatility






Very Low



0.0% (2013)






35% : 65%




-6.9% (2008)






45% : 55%




-12.2% (2008)






55% : 45%




-17.3% (2008)






65% : 35%




-22.3% (2008)






Source: Ibbotson & Associates, MGP.


Notes: Both equity and fixed income are globally diversified among several sub-asset classes. Returns are pretax, exclude fund fees, and assume annual rebalancing. *Real return excludes average inflation of 3.86% per year during the period. Expected range of returns corresponds to one standard deviation from the total return, or the range that occurred within two out of every three years.

  1. Passive vs. Active Funds — Why Minimizing Fund Fees Matters

To get exposure to a certain asset class, you can choose a passively managed fund, such as an index mutual fund or an ETF. Alternatively, you can choose a mutual fund with an active fund manager.

In most cases, buying passively managed funds is preferable. This is because, in general, most active managers don’t outperform their passively managed fund peers in a single year, let alone consistently over the many years you’ll plan to invest.

While there are exceptions, it generally just doesn’t make sense to purchase an actively managed fund, which may have a front or back load fee and running costs of 1.5–3% or higher each year. All this can equate to giving up a substantial portion (more than half) of the real rate of return that you might otherwise have expected to receive over time.

  1. The Importance of Rebalancing

When the markets get rough, you may be tempted to bail on your investment portfolio and move to cash or fixed deposit. Conversely, when markets are booming, you may also feel enticed to put all of your holdings into the hot asset classes. In fact, that’s exactly what market greed and fear will be telling you to do.

As tough as it may be, when your portfolio’s asset allocation percentage holdings have moved substantially away from your targets (or perhaps once a year), you’ll want to rebalance your portfolio back to the original weightings. This may require you to sell what has outperformed and purchase what has underperformed, or it may be done by adding new cash savings.

Rebalancing may sound easy, but it can be difficult in practice since it goes against what most market players will be doing. However, over the long run, rebalancing ensures that you buy low and sell high, one of the basic principles to successful investing.

Additional Resources

Hopefully, this article has taught you useful concepts to help you succeed in investing. As we mentioned in the introduction, there’s a lot more to this topic, and we encourage anyone interested in the subject to consider reading the following excellent books:

The Crevelings are Thailand-based CPAs who advise expats on personal financial planning and investment. To learn more, visit their website www.crevelingandcreveling.com

Threats to Big Tech

2020 was another glorious year for Big Tech as lockdowns and a stay-at-home culture gave an explosive boost to demands for its products and services. But perhaps it was the apogee of their decades-long rise from obscurity to emergence as the world’s most powerful corporations.

Their new ways of doing business have allowed them extraordinary freedom to prosper. Now the political classes are turning their attentions to taming those freedoms. But how? Should regulators deploy their creaky old laws such as anti-trust or evolve a comprehensive suite of new legal rules? If so, what benefits should those new rules seek to deliver? Should the priorities be more effective taxation or more acceptable services?

In Europe governments are determined to have their share of the earnings that multinationals derive from doing business in their countries but collect elsewhere, paying little or no tax. They contemplate fierce penalties to force megabusinesses to bring those profits ashore. Regulators are planning penalties as high as 10 per cent of such firms’ global annual revenue to get compliance.  

A major issue is the way infotech giants use their dominance to crush competition and use their platforms to promote their in-house services.

In the US social media providers have blatantly abused their power of censorship to advance their political views, a notorious example being their suppression of news about presidential candidate’s son Hunter Biden until after polling day – arguably delivering a wafer-thin victory to Joe Biden.

Furious Republicans have, in the dying days of the Trump administration, used federal regulators and state-level attorneys-general to unleash a barrage of anti-trust cases against the companies.

The lawsuit against Google by the Federal Trade Commission is said to be based on e-mails showing that it colluded with Facebook to block on-line advertising competition to clear the way for a takeover years ago.

Emerging Markets: Bargain Buys

 Emerging markets offer many attractive firms that offer growth regardless of conditions in their domestic economies, say New York asset managers Jennison Associates.

Emerging-market companies have challenges different from those of their developed-market counterparts that spur them to innovate and disrupt existing practices. “They are moving up the value chain, from export-oriented business models built on low-cost labour and cheap manufacturing to higher-value-added businesses based on technological and scientific innovation.

“Low recognition of these dynamics by investors and indexes creates an opportunity for growth-minded investors. Add to the mix companies that execute well to exploit a superior economic growth backdrop and the opportunity set expands.”

FullerTreacyMoney  says this is happening in Asia in the context of a continuing expansion of the middle class. But the next decade is much more likely to be an India, Indonesia, Vietnam, Thailand and Philippines-led story than a China one.

Foreign ownership of stocks in Southeast Asian countries such as Indonesia, Thailand, Malaysia and Philippines are at almost historic lows. A significant number of funds specializing in these markets hold zero positions in those countries. Global holdings of such funds account for about 7 per cent of all global mutual funds under management.

It won’t take much to spur such depressed emerging markets, says NTAsset fund’s Kenneth Ng, as most of them are increasingly popular with smaller investors and new investors are coming into them. With his own funds’ portfolios trading on 9.6 times current year earnings on the back of 46 per cent earnings per share growth, and with a next year’s forecast of 20 per cent earnings rise, “we should see strong momentum going into 2021/22.”

Investing in Joe Biden

It’s now possible to invest in the right American political connections. Pine Island Acquisition Corp., recently listed in New York, has ties to people selected to serve as ministers in Joe Biden’s Cabinet. Specifically named are foreign minister Tony Blinken and defence minister Lloyd Austin.

The company promises “access” to the “current and future opportunities” in government and associated industrials such as defence and aerospace. Analysts say : “It’s not every day that the machinations of influence-peddling are made so public. The fact an investment vehicle to take a view on the success of such strategies is easily available” is “a new and unsettling development.”

Clearly there is a market for lobbyists, who provide a useful service to anyone who wants to influence policy. They are “the soft underbelly of the US political system.”

Investing in China

A commonsense strategy for investing in China  is to buy the assets that domestic investors favour, Eoin Treacy says in FullerTreacyMoney. They are the ones most likely to gain government support in a crisis.

In the US they’re “equities, in Germany it’s bonds – and in China it’s properties.”  It seems that last year real-estate investment again outstripped economic growth, as it has done in 16 of the past 17 years.

“China presents an uncertain investment environment for local investors. Returns on bank deposits are persistently below inflation, the stock market is a casino in terms of the predictability of returns, bonds are now riskier, with increasing numbers of defaults, government bond yields barely keep up with inflation, and investing abroad is not an option for the majority of people.

“The easy answer is to buy properties… or gold.”


Warding off Chinese takeovers: The British government has initiated legislation to control any companies planning transactions within 17 areas of the economy focused on technology, including broad categories such as computing hardware, artificial intelligence and data infrastructure. This will give the state control over any activity involving flow of data, which underpins most of the categories targeted.

The government will also have the power to unwind any transaction completed within the last five years that is deemed to be a matter of national security.

The law is aimed at Chinese investment. The US, Germany, France and Australia already have similar laws.

The pandemic: The Covid-19 virus has had no effect on the overall number of deaths in America. In other words, a fall in the number of deaths from all other causes has been offsetting the number attributed to the virus. This is according to Centers for Disease Control & Prevention data covering the period from early February to early September analyzed by Genevieve Briand of Johns Hopkins university.

She suggests that the death-toll attributed to the virus is misleading; that they ought to be recategorized as being due, not to the virus but to usual causes such as heart and respiratory diseases.

Southeast Asia: Indonesia’s health ministry has been so corrupted by embezzlers that when the pandemic struck it struggled to respond. Its levels of testing are among the lowest in the world. The Economist reports this in its Banyan column as an example of how powerful is the region’s “immovstoryable mass” of “kleptocrats, self-serving bureaucrats and strongmen.”

Now the biggest: In purchasing-power terms China’s economy is now the world’s biggest, according to the IMF’s World Economic Outlook – it’s one-sixth larger than the US’s. In the exchange rate conversion commonly used the IMF values the Chinese economy at $14.5 trillion, but in purchasing-power terms, at $24.2 trillion; the US at $20.8 trillion by both measures.

Armaments: Russia has developed a defence against the drone weapons such as those used so successfully in the recent Nagorno-Karabakh conflict. Its Derivatsaya-PVO self-propelled anti-aircraft gun creates a shield with a hail of projectiles – up to 120 shells a minute – that form an impenetrable barrier of shrapnel against incoming enemy missiles.

Black benefits: The US state of Oregon has allocated almost one-third of its Covid relief fund to Blacks who suffered losses because of government-imposed shutdowns  (grants of up to $3,000 a family)  and Black businesses (up to $100,000).  Less than 3 per cent of the state’s population are Blacks.

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