A market crash is when the astute investor can make astounding profit, says Asia’s Warren Buffett

By Lee Min Keong

The health, economic and equity market crisis spawned by the Covid-19 pandemic is shaping up as a perfect storm that could potentially decimate the wealth of some investors while generating massive profit for others.

However, award winning fund manager Dr Tan Chong Koay is turning the crisis into opportunity for those who invested in funds managed by his fund management company, Pheim Asset Management Sdn Bhd. 

“The beauty of a crisis is that the good and bad shares all go down. But you only want to buy the good shares as they’re the ones that’s going to turn around.” 

He highlighted that investors first need to know when the market is overvalued. “It always happens – before a market crash, the market always goes up. So, when the market goes up, the key is that you must start selling your shares,” he said during a webinar organised recently by the alumni association of his alma mater, Chung Ling High School.

Tan founded Pheim Asset Management Sdn Bhd (Pheim Malaysia) and Pheim Asset Management (Asia) Pte Ltd (Pheim Singapore) in 1994 and 1995 respectively. He has been in the fund management industry for 44 years.

‘Never be fully invested’

He stressed that investors need to do the necessary research as well as rely on their experience in order to know when to exit the market.

“That’s why our philosophy – ‘Never be fully invested’ – works. When the market goes up, you try to get out and when it crashes, you have the cash,” said Tan, the company’s chief strategist, who is also referred to as “Asia’s Warren Buffett”.

“In a market crash, the king is the one who has the cash. If you have long-term funds, you are in a very advantageous position as the shares now are very cheap.”

Essentially, this strategy allows you build up a stash of cash you can use to swoop in when the market is near its trough.   

Tan recounted the story of how he followed this playbook to register his first major success as a fund manager during the infamous Black Monday Crash of 1987.

“In 1987, the market shot up to ridiculous levels. So I started selling off shares (from his funds). I kept on selling until I raised almost 65% cash. And suddenly on 19 Oct, the market crashed.

“After it crashed, the prices of shares were extremely low. So I bought shares when many people didn’t want to,” said Tan, who outperformed his peers and won an award for being the retirement fund’s Top Fund Manager that year.

“There’s no perfect formula to make money, but you must do your research, leverage on your experience and do value investing,” he adds.

Reluctance to sell can be fatal

One of the crucial mistakes made by investors or even fund managers is they are unwilling to trim their portfolios in a bull market, expecting prices to go ever higher.

Tan sought to explain this. “When the market goes up and you sell the shares, you’re actually going to underperform as you’ll have lesser shares. And many people are not willing to do that. So the guy who is 95% invested will be surging ahead. 

However, trying to chase the market higher can be highly risky because “you cannot time it so accurately most of the time”, said Tan. 

“I’ll give you an example. In 1987, after I sold off the shares, I was underperforming the last four months (before the October crash) And that is the pain you need to go through.

“However, when the market crashes, your opponent is going to get hurt to the maximum as he is fully invested. So fund management is not an easy job. It’s also very stressful,” he added.  

In explaining the market’s behaviour, Tan said, “When people are optimistic, they are overly optimistic – that’s what happened at the beginning of this year. 

“But when they are pessimistic, they are overly pessimistic. They just sell the shares down, and the market goes way below its intrinsic value.

“So, if you are strong believer that crisis is an opportunity, you must dare to pick up the shares. Make sure the company has no gearing, the management is good and trustworthy, and it’s in an industry that can bounce back.”

On whether small-cap stocks are high risk, he says: “It’s not totally true. If you pick the good small caps, they are the super stars. They are the dark horses.” 

Making exponential profit

Tan said it’s in a market crash that investors can reap huge profits. “Let’s take an extreme case i.e. when a share drops 80%. Assuming the share was previously at RM1, and you buy it at 20 sen. When it rebounds to RM1, it’s a 400% increase. 

“Typically, if your shares can rise 20% you’ll be so happy. What is your chance of buying a share that rises 400%? Only when there’s a market crash!,” said Tan, the author of best-selling book Rising Above Financial Storms.

On why he puts much faith in the Asean region, Tan said besides China and India, Asean remains one of the highest growth regions in the world.

“Asean has a lot of resources – It has young people and good people. But we must make use of the good people and their talent, that’s the key. You need to educate and train them, give them the opportunities to perform.” 

Tan expects the Malaysian economy to fall into recession this year from the impact of the Covid-19 pandemic and the ensuing lockdowns, not only in Malaysia but around the world.

“It looks like a recession is going happen. The International Monetary Fund (IMF) is forecasting recession for most countries including Malaysia (-1.7%).”

Forward looking markets 

Tan pointed to the Asian Financial Crisis in 1998 as an example of how equity markets can be forward looking even while the economy is mired in the throes of a recession. 

He noted that Malaysia’s economic growth rate was -7.4% in 1998 and that the Kuala Lumpur Composite Index (KLCI) hit its lowest point on Sept 1. “The economic growth rate was -10.2% for 3Q (July-Sept) and -11.2% for 4Q. It was very bad. 

“But do you know that the stock market already started to run up. From Sept 1 till 31 Dec, the market rose more than 100%,” he added. 

Tan’s firm Pheim Asset Management notched another feather in its cap when bagged seven awards at the Refinitiv Lipper Fund Awards recently. 

Dana Makmur Pheim received awards for Best Mixed Asset MYR Balance (Islamic) in the three, five and 10-year categories as well as awards for Best Mixed Asset MYR Balance (Provident) in the three, five and 10-year categories. This was the fifth consecutive year it bagged these awards in the five- and 10-year categories. 

Its Pheim Asia Ex-Japan Islamic fund grabbed the Best Equity Asia-Pacific ex-Japan (Islamic) award in the three-year category.


Read this article in the May/June issue of Smart Investor.  Download a free digital copy of Smart Investor below.