Is Thailand a Good Buy at this Time?

Here's an investment idea that came about recently in Asia. And a lesson I learnt about portfolio sizing.

On New Year's eve, several bombs went off in the Thai capital of Bangkok, leading to increased uncertainty in the political and economic situation. Following up from the Christmas-week about turn on foreign investments, this seemed like the ultimate "buy" situation. While one school of thought advocates buying when there's fighting in the streets (with P/Es being the cheapest of all Asian markets now), the other argues that fundamentals have changed (viz increased uncertainty in terms of capital flows, businesses suffering real losses).

With both camps having valid arguments, it becomes an issue of balancing the probabilities and understanding the risk involved. From my perspective, it does appear that the uncertainty is creating a good buying opportunity, as prices are depressed from their fundamental levels. However, this is conditional upon there not being a further disturbance or disruption, which could lead to more capital outflows and further price drops.

Which leads to the discussion of capital allocation. The dailywealth.com site that sends me a daily newsletter alluded to individual trades as a percentage of the entire portfolio, instead of how most retail investors talk about investments (5000 shares, 5000 dollars, etc.) The recommended size for any investment should be no more than 5% of the entire portfolio.

The answer to why this is so goes beyond the fact that institutions are limited to 4-5% of their portfolio on any one investment. Rather, the logic of the following analysis shows more intuitively why - at 4% of a portfolio, we can afford a drawdown of 25% of that investment before deciding that it is not going to go in the direction we originally intended. 25% of 4% is 1% of the entire portfolio. With a loss of 1% of the portfolio, we would definitely be able to live to fight another day, with little significant loss to the portfolio. Balance this with the returns of other components of the portfolio, and one realises the immediate intuitiveness of this.

So this one thing i learnt in the new year, to make money like a professional, one has to trade like a professional. Trade sizing is one important component.