Disclaimer: Everything in this post is written for educational purposes and reflects data available as of July 11, 2026. It is not financial advice, and nothing here is a recommendation to buy, sell, or hold any security. Probability estimates are our own judgment based on public data — please do your own research before making investment decisions.

Update — July 13, 2026: after this post was drafted, S&P completed its scheduled review and affirmed Indonesia at BBB/A-2 with a Stable outlook — projecting ~5.1% growth for 2026, pointing to relatively low government debt and the H1 revenue recovery, and calling the current fiscal and external strains temporary. The JCI rose about 1.9% the next session. We’ve updated the relevant sections below; the rest of the analysis is unchanged.

If your group chats look anything like ours lately, you’ve heard the whisper: Indonesia is about to be labeled “junk.”

The rupiah has broken past 18,000. The stock market, from its peak, has at one point fallen about 40%. And in March, Fitch — one of the three big credit rating agencies — cut its outlook on Indonesia to Negative, weeks after Moody’s did the same. Somewhere between the headlines and the WhatsApp forwards, this has curdled into something close to panic.

So we did the unglamorous thing. We sat down with the actual rulebooks — S&P’s own criteria document, Moody’s official definitions, Fitch’s methodology, and an EU regulation that governs all three agencies — plus the history of every major country that has actually fallen to junk. Then we ran Indonesia through it.

TLDR: the fear is running well ahead of the math. Let’s get into it fellas.

First, what actually happened (and what didn’t)

A sovereign credit rating is basically a report card on one question: how confident are we that this government will pay back its debt?

Somewhere on that report card there’s a line. Above the line, your bonds are called investment grade — safe enough that the world’s most conservative money (pension funds, insurers, central banks) is comfortable holding them. Below the line, you’re in speculative grade — the unflattering nickname is “junk.”

Here’s where Indonesia actually stands today:

Notice two things. First, nobody downgraded Indonesia’s rating. What Moody’s (February 5) and Fitch (March 4) changed was the outlook — the weather forecast, not the weather. The grade itself, BBB, was affirmed by all three agencies — most recently by S&P on July 13, 2026, with its outlook still Stable.

Second, Indonesia sits two full steps above the junk line at all three agencies. Think of it like a football league table: we’re not in the relegation zone. We’re two wins clear of it. What happened this year is that two of the three referees said, “we’re watching you.”

That distinction matters more than anything else in this post.

There’s an actual rulebook for this — and it’s surprisingly strict

Most people imagine rating downgrades as a guy at S&P waking up grumpy one morning because they see unfavourable news on the headline.

The reality is bureaucratic to the point of being boring. And that seems like a good news, because at least boring is more predictable than guessing the mood of an S&P analyst.

Start with what “Negative outlook” officially means. This is from S&P’s own criteria document, word for word:

“Standard & Poor’s assigns positive or negative outlooks to issuer ratings when we believe that an event or trend has at least a one-in-three likelihood of resulting in a rating action over the intermediate term for investment-grade credits (generally up to two years)...”

Read that carefully. A negative outlook means at least a 1-in-3 chance (33.3%) of a downgrade over roughly two years. Flip it around: even by the agency’s own definition, the more probable outcome is that nothing happens.

There’s also a more urgent stage called CreditWatch (Moody’s calls it the “Watchlist”) — that’s when a downgrade has at least a 1-in-2 chance within 90 days. Indonesia is not on anyone’s watchlist. We’re at the “stern warning” stage, not the “pack your bags” stage.

And here’s the part almost nobody knows: rating agencies are not allowed to surprise you with the timing — except in genuine emergencies.

An EU regulation (which binds S&P, Moody’s, and Fitch) requires them to publish, every December, a calendar of sovereign review dates for the following year — capped at three per country, scheduled on Fridays, announced after markets close. Deviating from that calendar is permitted only where the agency’s own monitoring obligations force it to act, and every deviation must be accompanied by a detailed written justification (Article 8a of the EU CRA Regulation; ESMA’s guidance adds that deviations “should not happen” as a matter of course). And that scheduled review has now happened: on July 13, 2026, S&P affirmed Indonesia at BBB/A-2 and kept the outlook Stable, citing solid growth prospects, prudent macro policy, and relatively low government debt — and describing the current fiscal strains as temporary. Exactly the kind of boring, scheduled, no-surprise outcome this section describes.

To be fair: agencies can break the calendar — and can cut several notches at once

We’d be cherry-picking if we didn’t show you the exceptions, because they’re real. Here is every notable case of a sovereign getting the “emergency treatment”:

Look at the triggers: war, sanctions, currency collapse, default, coup. That is the admission price for skipping the queue. Now hold Indonesia against that list: no war, no sanctions, no default — the economy is growing ~5%, government debt is ~41% of GDP, the primary balance just posted a first-half surplus, BBB was affirmed by all three agencies, and the market’s own insurance price on Indonesian debt (~91 bps, more on this below) is nowhere near crisis levels. The gap between Indonesia and that table isn’t a few steps. It’s a different universe.

So yes — the emergency exit exists. But every country that ever used it was already on fire. Indonesia isn’t.

One more thing from the rulebooks that reframes the whole debate. When you look at what the agencies actually grade, the heaviest weight isn’t the size of government debt.

In Fitch’s model, governance and institutional quality carry more than half the total weight — more than public finances, external finances, and economic growth combined. Indonesia’s debt-to-GDP is around 41%, comfortably below the typical BBB country’s 58%.

Our problem was never the amount of debt. It’s that revenue is thin (roughly 13% of GDP versus 25% for BBB peers), the interest bill eats a growing slice of it, and this year’s policy noise — the fiscal program overruns, the pressure on Bank Indonesia, the Danantara questions — lands exactly on the governance box that the models weigh most heavily.

That’s what the outlook cuts were really about.

TL;DR — what the rulebook actually says:

• A Negative outlook is a warning, not a verdict. By S&P’s own definition it means at least a 1-in-3 chance (33.3%) of a downgrade over roughly two years — so the single most likely outcome is that nothing happens.

• The real alarm bell is CreditWatch (S&P) / the Watchlist (Moodys): The downgrade probability becomes at least a 50% chance within 90 days. Indonesia is not on it (yet).

• Falling to junk requires two more cuts, at two different agencies. Indonesia is two steps above the line at all three.

• No surprise ambushes in normal times. Review dates are published a year in advance — at most three per year, scheduled on Fridays. Agencies can act off-calendar or cut several notches at once, but historically only under extreme shocks (war, sanctions, default, coup) — and any deviation must be published with a written justification. S&P’s July review has since landed: rating affirmed at BBB/A-2, outlook Stable (July 13, 2026).

• The agencies grade governance hardest, not debt. Indonesia’s debt is low (41% of GDP vs 58% for BBB peers); the pressure comes from thin government revenue and this year’s policy noise — which also means the fix is within the government’s own control.

And here’s the encouraging part: the course-correction has already started. In June, President Prabowo ordered the budget of his own flagship program — the Free Nutritious Meals (MBG) — cut from Rp335 trillion to Rp268 trillion, a Rp67 trillion (≈$3.8 billion) trim, in the name of “budget efficiency.” Two weeks later, Reuters reported the National Nutrition Agency was weighing another Rp40–50 trillion cut, with fewer kitchens and a refocused list of beneficiaries.

Cutting your own flagship program’s budget is politically expensive — which is precisely why rating agencies read it as a genuine signal, not lip service.

And the first-half numbers suggest it's more than talk: state revenue grew +21.4% year-on-year (tax collection +24.6%, helped by the new Coretax system), the primary balance posted a Rp85.1 trillion surplus, and the first-half deficit came in smaller than last year's (0.76% vs 0.84% of GDP) — with the Finance Minister saying the full-year deficit "can still be pushed lower."

Okay, but what if the worst actually happens?

Let’s play out the nightmare scenario properly, because this is where the social media misses.

To actually become “junk” in a way that matters, Indonesia doesn’t need one downgrade. It needs two downgrades each from at least two agencies — because the big global bond indices classify a country using the middle rating of the three. One agency getting cold feet changes almost nothing mechanically.

And about that scary phrase you’ve seen by social media fear mongerering — “forced selling.”

The fear is that index funds would be required to dump Indonesian bonds the moment we lose investment grade. We went and checked the actual index rulebooks. Three facts:

• The largest pool of foreign money in Indonesian government bonds tracks an emerging-market index (JPMorgan’s GBI-EM) that has no rating requirement at all. Junk-rated Brazil and South Africa sit in it today. Nobody there is forced to sell anything.

• The index with the strictest rating rules (FTSE’s world government bond index) — Indonesia isn’t in it. You can’t be kicked out of a club you never joined.

• The one index that would matter (Bloomberg Global Aggregate) only ejects a country when two of the three agencies rate it junk — which is exactly why the two-step, two-agency math above matters.

Meanwhile, foreign investors hold only about 13% of Indonesian government bonds today, down from 39% at the peak in 2017-2019. The sellers, bluntly, have mostly already left. The buyers on the other side — local banks, insurers, pension funds, and Bank Indonesia — have absorbed everything foreigners have thrown at them for two years.

So where would a real downgrade actually hurt? Two places. First, state-owned companies: Pertamina’s and PLN’s ratings are chained to the government’s (agencies call this the “sovereign ceiling” — a company generally can’t be rated higher than its own government). Sovereign goes junk, they go junk, and their dollar borrowing costs jump. Second, the rupiah, through the one channel no rulebook can protect: confidence.

(And to be clear — the stock market has no rating rule at all. The separate scare you’ve read about, MSCI possibly demoting Indonesia from Emerging to Frontier market, is a different story with a different rulebook and a November deadline. Related mood, unrelated mechanism. Our friend Erik Hartanto has written a full analysis of that one: Will Indonesia get demoted to Frontier?)

What actually happened to countries that fell to junk

This is the part that changed how we think about the whole thing. Since 2015, four big emerging markets have lost their investment grade: Brazil (2015-16), Turkey (2016-17), South Africa (2017-2020), and Colombia (2021). We pulled the market data around each downgrade. The same pattern shows up every single time:

The crash happens before the downgrade. Not after.

• Brazil lost investment grade in September 2015, after its currency had already fallen 33% and its stock market had been sliding for over a year. The market bottomed in January 2016 — before the last agency (Moody’s) even pulled the trigger — and then rallied nearly 40% that year.

• South Africa dodged the final bullet for three years. When Moody’s finally cut it to junk in March 2020, bonds rallied within days. Everyone had seen it coming for years. It was fully priced.

• Colombia is the closest cousin to Indonesia’s situation: solid economy, fiscal slippage after COVID, a failed tax reform. When S&P and Fitch cut it to junk in 2021, the market reaction was a shrug — its bonds had been trading at junk prices long before, and the big EM index never ejected it. Stocks were higher a year later.

Three lessons, and they’re remarkably consistent: markets sniff out downgrades months in advance (credit markets start pricing them roughly 90 days early, per academic studies); the official announcement often lands near the bottom, because by then the fear has nowhere left to go; and the real damage in every case came from the underlying fundamentals — recession, politics, commodity crashes — not from the rating action itself. The downgrade is the thermometer, not the fever.

And here’s the test that matters for an investor: what happened if you bought on the very day the last investment-grade rating was taken away — the moment of maximum bad news — and simply held for one year? Measured in US dollars, so currency collapses can’t hide anywhere:

Approximate figures, measured with US-listed country ETFs in USD: EWZ (Brazil), EZA (South Africa), TUR (Turkey), COLO (Colombia) — 12 months from the date the last investment-grade rating was lost, rounded. Honest caveats: Turkey’s gains were later wiped out by the 2018 lira crisis; Colombia’s negative year includes the mid-2022 election selloff.

Three of the four delivered positive dollar returns — one of them spectacular — to whoever bought at the moment of maximum pessimism — not because junk is good news, but because by downgrade day the bad news had been priced in for months.

And one more fact that makes the point even sharper. None of these four countries has ever regained its investment grade — Brazil is now a full decade into junk territory, South Africa and Turkey close behind, Colombia five years. The countries that did eventually claw their way back needed years of reform: South Korea took about two years after the Asian crisis, Russia three, Greece thirteen, and Indonesia itself fourteen (junked in 1997, restored in 2011). Sit with the asymmetry: the ratings stayed down for a decade or more, while the markets bottomed within months. Ratings move in decades. Prices move in months. That gap is the whole story.

Nobody posts this on Instagram: Indonesia is already priced like a crisis

If markets move before ratings do, a fair question is: how much fear is already in Indonesian prices right now?

Here’s one way to measure it. Take Indonesia’s “too big to fail” companies — the biggest banks and the household names — and compare how the market values them today against the two worst crises of the past twenty years: the 2008 Global Financial Crisis and COVID in 2020.

A quick tool note: the cleanest yardstick here is price-to-book (P/B) — what you pay for each rupiah of a company’s net assets. (Price-to-earnings gets distorted in crises, because profits collapse and make the ratio look artificially high — so we deliberately use P/B throughout this table.)

Valuations for 2008 and 2020 taken around the trough of each crisis; “today” from Stockbit Key Stats as of July 11, 2026.

One honest caveat before you read too much into any single row: this table ignores company-specific fundamentals. Some of these discounts are deserved. UNVR is the clearest example — its ROE and profit growth have been declining for roughly a decade, so its de-rating from 56.8x is not pure fear; part of it is the market correctly repricing a weakening business. The same logic applies, in smaller doses, to several other names. Treat this table as a sensing tool for how much pessimism is embedded in the market as a whole — not as a list of fifteen bargains. Whether any individual stock is actually cheap still requires bottom-up work on the business itself.

Sit with this for a second. Every single one of the fifteen large-caps above is cheaper today than it was during COVID. Twelve of the fifteen are cheaper than during the global financial crisis of 2008 — a moment when the world’s banking system was genuinely collapsing.

No downgrade has happened. Indonesia is still rated investment grade by all three agencies, still growing at 5%, still running a nearly balanced current account. Yet the market has already marked its blue chips down to prices last seen when the global financial system was on fire. Whatever a downgrade is supposed to do to prices — a lot of it appears to be in there already.

What the market’s own insurance price says

One more sanity check, and it’s our favorite because it can’t be spun: the price of insurance on Indonesian government debt.

There’s an instrument called a CDS (credit default swap) — think of it as an insurance premium that big investors pay to protect themselves if a government fails to pay its debt. The riskier the market thinks a country is, the higher the premium. It’s the closest thing to an honest, real-money opinion poll on default risk.

Countries that are rated junk — Brazil, South Africa, Turkey in their post-downgrade years — typically pay premiums of 200 basis points or more. Indonesia’s premium today: about 91. Even at the peak of this year’s panic in March, it touched just 101 — roughly half the level Indonesia itself hit during the 2013 taper tantrum (~285) and COVID (~290), both times when the premium spiked briefly and came right back down.

In plain language: the people with the most money on the line are pricing Indonesia as a normal BBB country having a rough year — not as a junk candidate.

Probable Outcomes

Time to put numbers on it, with the honesty that these are estimates, not prophecy:

The single most likely bad outcome — a one-notch downgrade — would leave Indonesia exactly where Colombia, Brazil, and South Africa were years before their junk moments: still investment grade, with time and levers to fix things. And if the Colombia playbook holds, much of that scenario is already sitting in today’s prices.

Dates and numbers worth noting

• S&P’s scheduled review — resolved. On July 13, 2026, S&P affirmed BBB/A-2 with a Stable outlook and called the fiscal strains temporary. The bear case needed S&P to join the other two at Negative — it didn’t. Attention now shifts to the next scheduled Moody’s and Fitch dates.

• The 2026 budget deficit vs. the 3%-of-GDP legal cap. The government’s own revised outlook says 2.85%. The IMF projects 3.05%. This is the single most explicit trigger the agencies have named.

• How much of the bond market Bank Indonesia ends up owning. It already holds roughly a quarter of tradable government bonds. Escalation here is the reddest of red flags in the agencies’ models.

• MSCI’s November decision on Emerging vs. Frontier — different rulebook, same confidence channel.

• The CDS premium. If it climbs past 150–200 and stays there, the market has changed its mind about everything we wrote above. That’s the honest kill-switch on this thesis.

The bottom line

The narrative racing around social media — “Indonesia is about to become junk” — skips about four steps of a process that is written down, regulated, and scheduled a year in advance — and which, outside of war-, default-, or coup-level shocks, has historically been slower and less dramatic than the panic that precedes it.

Could Indonesia eventually lose its investment grade? Yes — roughly a 5 - 10% chance over the next two years, by our estimate, and the watchlist above tells you exactly what would change our mind. But history’s most consistent lesson about these episodes is uncomfortable for panic-sellers: by the time the downgrade becomes official, the fear has usually peaked, the prices have usually bottomed, and the people who sold into the panic have usually handed their shares to the people who read the rulebook.

Truth be told, fear is already at crisis levels.

The rulebook, the history, and the market’s own insurance prices are not.

Sources & references

Rulebooks & regulation (primary sources)

• Regulation (EU) No 462/2013 (CRA III), Article 8a — sovereign rating calendars, publication timing, and deviation requirements: EUR-Lex · ESMA interactive rulebook, Art. 8a

• ESMA, Questions and Answers on the CRA Regulation (ESMA33-5-87) — guidance on calendar deviations: PDF

• S&P Global Ratings, Ratings Definitions — official definitions of Outlook (≥1-in-3 over ~2 years) and CreditWatch (≥1-in-2 within ~90 days): spglobal.com/ratings

• Moody’s, Rating Symbols and Definitions — Outlook and Watchlist definitions: ratings.moodys.com

• Fitch Ratings, Sovereign Rating Criteria — Sovereign Rating Model pillar weights (governance ~53.7%): fitchratings.com/criteria/sovereigns

• Index rulebooks: J.P. Morgan GBI-EM (no rating requirement), FTSE World Government Bond Index (rating floor; Indonesia not a member), Bloomberg Global Aggregate (middle rating of the three; ejection requires two agencies at junk) — per each provider’s published index methodology.

Rating actions & history

• S&P Global Ratings — Indonesia Ratings Affirmed At ‘BBB/A-2’; Outlook Stable (July 13, 2026): press release · coverage: The Jakarta Post · IDNFinancials — JCI +1.92% on the news

• Turkey 2016 off-calendar action: Bloomberg — S&P cuts Turkey credit rating, Jul 20, 2016

• Russia 2022 multi-notch cuts: Bloomberg — Russia cut six levels to junk by Fitch, Mar 2022 · The National — S&P cuts Russia to CCC−, Mar 2022

• Brazil (2015–16), South Africa (2017–2020), Turkey (2016–17), Colombia (2021) downgrade timelines: agency press releases and contemporary Bloomberg/Reuters coverage.

Indonesia fiscal & policy

• MBG budget cut Rp335T → Rp268T: Jakarta Globe

• Potential further Rp40–50T cut: Reuters via TradingView

• H1 2026 APBN realization (revenue +21.4% YoY, primary surplus Rp85.1T, deficit 0.76% of GDP): Stockbit Snips

Market data

• P/B valuations (”today”, as of Jul 11, 2026): Stockbit Key Stats; 2008/2020 troughs from historical financial statements and price data.

• Post-downgrade 12-month USD returns measured with US-listed country ETFs: EWZ (Brazil), EZA (South Africa), TUR (Turkey), COLO (Colombia; the same fund formerly traded as GXG — full price history under COLO).

• Indonesia 5Y USD CDS levels (≈91 bps today; ~101 at the March 2026 peak; ~285/~290 during the 2013 taper tantrum and COVID-2020): market data.

• MSCI Emerging vs Frontier review context: Erik Hartanto — Will Indonesia get demoted to Frontier?

All data as of July 11–12, 2026 unless stated otherwise.

Disclaimer: Everything in this post is my personal opinion, written for educational purposes. It is not financial advice, and nothing here is a recommendation to buy, sell, or hold any security — or to hire or fire any particular advisor or fund manager. Track records, including the ones discussed here, do not guarantee future results. Please do your own research and consult a licensed professional before making investment decisions. And no, one good blog post is not a track record either.

In December 1989, Pete watched his favourite team lost to Crsytal Palace at Old Trafford. The manager from Aberdeen seemed promising at the start when he was signed to manage the club. But after 3 years being in charge, results didn’t show.

Pete decided that he has had enough of this manager. And he put up a banner demanding the club to sack the manager below.

And of course, the manager is none other than Sir Alex Ferguson.

I couldn’t imagine if they actually went on to sack him. My childhood would probably be destroyed without Cristiano Ronaldo, Paul Scholes, Rio Ferdinand, Wayne Rooney and so many other man utd star players who won so many trophies in the decades that follow.

But to be fair to Pete, I understand how he was measuring Sir Alex. At that time, Man Utd was the club of Sir Matt Busby. Five league titles in the 50s and 60s. The Busby Babes. The first English club to lift the European Cup, in 1968. That was the bar at Old Trafford — and by 1989, United hadn't won the league in over two decades.

Would you have sacked him?

Be honest. Because after understanding the context as such, I would at the very least have considered it. So Pete is definitely not out of his mind. He probably just had the wrong sample size. And the wrong benchmark. Sound familiar?

Investing has the exact same disease

We do this to investors constantly. Someone posts +62% in a year and the group chat crowns them a genius. A fund underperforms for six quarters and clients pull their money. A friend's portfolio beats yours in 2025 and you quietly wonder if your entire approach is wrong.

And we anchor on golden eras too, just like the Old Trafford’s most faithful fans. The investor who made 40% in the 2021 bull run would be tempted to judge every year after against that number.

Let me make the parallel with football explicit, because it's not only serving a fun analogy — it's the same mathematical problem. The reason I opened with football at all is that somehow, in football, we all intuitively get this.

You wouldn't go to Manchester United today and ask for $300K weekly wages after you scored ONE beautiful bicycle kick against Jordan Pickford (England’s goalie). Everyone — the club, the fans, probably even your parents — can see that one moment of brilliance is not a career.

Yet in investing, one +62% screenshot in a group chat and we hand out exactly those wages: our trust, our money, sometimes our life savings.

Worse, in investing that one bicycle kick comes with a business model. A couple of multibagger screenshots and suddenly you have the license to sell ridiculously priced investment courses — screenshots that conveniently leave out every item that would describe your true skill.

• The losing positions.

• The size of the bet.

• The risk taken.

• The years before and after.

It is also somehow intuitive to understand that in football, every single match result contains randomness. A deflected shot. A wrongly disallowed goal. The opposition striker having the game of his life. The better team loses all the time.

Investing is identical. There is a degree of randomness baked into every investment outcome at a point in time. The stock you bought went up — was that your thesis playing out, or a flood of liquidity lifting everything? The fund that beat the index this year — genuinely insightful, or one lucky concentrated bet? At any single point in time, skill and luck can produce the exact same looking number. You cannot tell them apart from one outcome alone.

Which means that if you evaluate an investor over a short window, you are not necessarily seeing skill. This is because you could be measuring an outcome from pure randomness.

So the natural question: how short is short? And how long is long enough?

A quarter is noise. A year is a single draw from the distribution. Even three years can be one uninterrupted bull run, which I believe, is the least informative environment there is. Here football actually has it easier: a manager gets 38 data points every season. An investor's true "season" — a full market cycle, from euphoria to panic and back can take years to complete.

And that’s the real answer. The minimum honest sample is not a number of years but at least one full trip through a good market and a bad one. In practice that usually means at least 3 years. Not because five is magic, but because that’s roughly how long the market takes to hand out both exams.

Why both? Because there’s a second problem, one almost everyone misses: in investing, the score alone is not the score.

Shape of returns

In The Most Important Thing, Howard Marks has a chapter called “Adding Value” that explains clearly how people can evaluate investors.

He sketches four types of investors, along two dimensions: how aggressive their style is, and whether they actually have skill. It’s worth drawing out, because once you see the quadrant, you can never unsee it:

Here’s the punchline of the quadrant: the left column is not adding anything. The aggressive investor without skill isn’t bold, he’s just turned the dial up. The defensive one without skill isn’t prudent, he’s just turned the dial down. In both cases the market is doing all the work, and their results are just the market’s results passed through a volume knob.

Skill only becomes apparent on the right column. And notice what both right-column investors have in common: their good years and bad years are not symmetrical.

Howard Marks compresses it into one line:

“The performance of investors who add value is asymmetrical. The percentage of the market’s gain they capture is higher than the percentage of loss they suffer.”

Let me make that concrete with numbers, because “asymmetry” is abstract until you see it.

Suppose the market goes up 20% in good years and drops 20% in bad ones.

Investor A returns: +30% and −30%.

Investor B returns: +25% and −10%.

Look at Investor A. Impressive on the way up! Probably there’s a multibagger stock in his portfolio that he could screenshot to claim that he’s a good investor. But if you consider his performance during bad years, he also sees 150% of the market loss.

That’s the top-left box: no skill, just a dial.

Investor B captures 125% of the upside but only 50% of the downside.

That gap — between his up-capture and his down-capture — is skill. It’s the only place skill can reliably be seen.

So when we say skill is a shape, it is not the height of any single year’s return, but the relationship between the good years and the bad years across the whole record. A +40% year, on its own, cannot tell you whether you’re looking at Investor A or Investor B. You need the pair.

For many, the bad year is the exam

This is why, counterintuitively, the most informative moment in an investor’s track record is not their best year. It’s their worst one.

Bull markets grade everyone an A. When the whole market is up 30%, the skilled and the reckless are indistinguishable — in fact, the reckless usually look better, because recklessness is rewarded on the way up.

Then a 2008 arrives. Or a March 2020. Or a black swan nobody modelled.

The crisis year is the single clearest picture of skill you will ever get, because it’s the one year where the market isn’t doing the work for anyone. The investor who was up 40% and then down 60% was never skilled — you just hadn’t seen the second half of the shape yet. The investor who captured most of the rally and only a fraction of the crash? That asymmetry is nearly impossible to fake.

So what do you actually do with this?

None of this means you should lower your standards. Quite the opposite.

You want high standards when you work with people, especially people who sees your money. Think about how you hire. Before anyone joins your team, there’s a set of criteria and a set of deal breakers. You don’t hand someone the job because they had one great interview, and you don’t reject them because they stumbled on one question. You assess the things that actually predict whether they’ll do the job well.

Evaluating an investor deserves the same rigour.

So here are the four criteria I’d actually have, whether you’re evaluating a fund manager, an advisor, a finfluencer with a screenshot, or your own portfolio.

How long is the sample? One year is one sample drawn. Anything under a full market cycle is more like an audition, not a track record. Ferguson needed four years before the evidence turned. Your judgment of an investment approach deserves at least that much patience.

What happened in the worst year? Don’t ask for the best return. Ask for the worst one, and what the market did that same year. This single question filters out more noise than any other.

What risk was taken to get the return? Two portfolios that both returned 15% are not equal if one was concentrated in speculative small-caps and the other held boring cash-generating businesses. The return you can see; the risk you have to ask about.

How do they measure against you? Measure their performance against your own. If you could do better yourself — honestly, over the same period, with real money at stake — why bother having an advisor or a fund manager at all?

One warning about this test though: we are often biased graders of our own performance. We remember the wins vividly, quietly dismiss the losses, and prioritise looking good over actual CAGR. Ask someone their portfolio return and you’ll usually get their best year; ask for the full audited number and the room becomes silent.

The good news is there’s a non-biased way to do it, and it’s not complicated. Pull your own account statements. Account for every top-up and withdrawal — money you added is not return, no matter how good it feels watching the balance grow. Construct your Net Asset Value over time, the same way a fund would. Then compute the actual CAGR of your portfolio. Not the CAGR of your favourite position. The whole portfolio, cash drag and losers included.

I wanna do this but I don't know how

If that number beats the track record of the advisor or fund manager you’re evaluating, then hiring them makes less sense — unless what you’re really buying is time, so you can focus on something else altogether. (Which, by the way, is a perfectly legitimate reason. Just be honest that it’s the reason.)

But here’s the thing about skipping this exercise and grading yourself from memory: sooner or later, it does its owner (you) a disservice. Inflating your own scorecard doesn’t harm the advisor you dismissed or the fund you never joined. It really will not harm anyone but yourself — you’ll keep managing money you shouldn’t be managing, benchmarked against a track record that never existed.

This is, incidentally, why we built Recompound around long-horizon accountability rather than quarterly performance assertions. When your advisor’s incentive is tied to your outcomes over years. The asymmetry stops being a nice idea in a book and becomes the actual goals in place.

The banner guy at Old Trafford wasn’t stupid. He just judged a 26-year story on a 3-year sample.

If someone in your circle is currently crowning (or crucifying) an investor based on one year of returns, perhaps this article could be useful 😉. It might save them from a costly mistake.

Cheers!

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This article was originally published in Asian Banking and Finance on 18th of June.

Disclaimer: This article is for informational and educational purposes only and does not constitute financial, investment, or legal advice. It does not take into account your individual circumstances, objectives, or financial situation. Any examples, securities, or indices mentioned are for illustration only and are not recommendations to buy, sell, or hold. Past performance is not indicative of future results. You should conduct your own research and consult a licensed financial advisor before making any investment decision. The author and publisher accept no liability for actions taken based on this content.

One of Warren Buffett’s most popular pieces of advice for amateur investors is to buy a low-cost index fund and forget about it.

In the United States, it is a reasonable thing to say. The S&P 500 has compounded steadily for decades, the market is genuinely efficient, and the costs of trying to beat it usually exceed the rewards. Even Berkshire Hathaway, which is run by professionals, has trailed the index over the past 10 to 15 years; the gap has widened noticeably since the rise of the mega-cap tech rally.

Well, drop the same advice into Indonesia, and it quietly fails.

Over the past five years, Indonesia’s real GDP has grown by about 18%. Over the same window, LQ45, the country’s most-watched index, has gone nowhere. A retail investor who bought the index in Jakarta has not captured the country’s economic growth. They have captured the dysfunctions of a market whose structure has not meaningfully changed for decades.

Buying the index does not eliminate the risk of investing. It only eliminates the risk of underperforming against the index. When the index itself goes nowhere, a portfolio that comprises the index follows suit.

The inefficient market is the point
Indonesia, like most emerging markets out there, runs on an inefficient market. Price manipulation remains common, whilst regulatory enforcement still requires improvement. Liquidity is thin compared to developed peers.

As a further illuminating example, Indonesia’s Finance Minister Purbaya recently declined to give fiscal incentives to the Indonesian Stock Exchange because the culture of “goreng-menggoreng” (artificially engineering stock prices) is still everywhere. Indonesia today has more in common with the American capital markets of the 1970s than today’s S&P 500.

Howard Marks, co-chairman of Oaktree Capital (managing well over US$100b), built his career exactly here. He delved into the US high-yield bond market when it was illiquid, ignored, and full of mispricings. It was so inefficient that people called it “junk bonds.”

His core lesson has aged well: Successful long-term investing comes down to buying an asset for less than what it is worth. The more inefficient a market is, the more often prices stray from underlying value, and the more room there is for active and disciplined work to outperform.

The information-era paradox
There is a generation of working professionals across Southeast Asia who, for the first time, know they should be investing. They have brokerage apps. They have podcasts. They have a thousand influencers and an unlimited supply of artificial intelligence (AI) chatbots willing to explain compounding.

What they do not have is a practical framework that rewards that very knowledge.

AI, in particular, is tempting but flawed. The economics of consumer AI products favour engagement, not returns.

The model is built to keep you typing and putting in prompts further. For example, if you feed it a hypothesis you already believe, it will help you justify it. True, you can ask AI to spit out a bunch of bear cases for you to be wary about. Or a list of unknowns. But you largely still need to build the conviction yourself. It is how their business model is designed. The more users engage, the more money they make.

So, you end up with a unique group of investors: People who understand the philosophy of long-term ownership through investments, who have easy access to investment instruments their parents never did, and who are well aware from firsthand experience that “investing in the index” is not a good enough solution to all this.

As a result, they get funnelled into either expensive, over-regulated mutual funds or do-it-yourself trading apps that wear them down emotionally during every drawdown.

Why the culture will evolve differently
Morgan Housel makes the point in The Psychology of Money: Our behaviour with money is shaped less by abstract theory than by the monetary events we — or our societies — have lived through. The collective memory of Weimar hyperinflation helped create a persistent preference for gold. Today, private German households hold more physical gold than the Bundesbank itself.

Indonesians and their neighbours also have unique formative experiences: The 1997–98 Asian financial crisis, repeated bank failures, multiple rupiah meltdowns, and a class of individuals burned by “blue-chip” stocks. That is the structural feature of Southeast Asian societies that rarely gets discussed in investing talks: We live in low-trust environments, and we will continue to do so for the foreseeable future.

That fact reshapes the whole map. In the United States, retail investing culture evolved around self-service, Vanguard, Schwab, ETFs, and robo-advisors. The implicit assumption was that the institution would behave, the disclosures would be honest, and the customer could safely automate their decisions.

Again, in Indonesia and most of its neighbours, that trust assumption does not hold. Customers have learned, often the hard way, that handing assets to an opaque counterparty is a real risk.

So, the services that require the least possible trust, full custody by the customer, transparent positions, lean cost structures, and no opacity around fees, are the ones that will scale. That is the inverse of how Western retail investing developed, and it is why the local solution will not look like a copy-paste of Robinhood or Vanguard.

What the local solution probably looks like
If the developed-market answer is to automate everything and trust the index, the Southeast Asian answer likely points the other way. It might look more like a small, human-mediated layer over a market that genuinely needs active interpretation. Lean enough to be affordable. Transparent enough that the customer never has to take anyone’s word for it. Disciplined enough to keep clients invested through the drawdowns the index itself will not protect them from.

Buffett was most probably right for his market. The interesting question for Southeast Asia is not whether to copy him. It is what to build instead after understanding the monetary and investment context in the society that we live in as it is.

We’ll find out soon enough.

Disclaimer: This article is intended for educational and informational purposes only. Nothing in it constitutes — and it should not be construed as — financial, investment, tax, or legal advice, nor as an offer, solicitation, or recommendation to buy, sell, or hold any security or currency. Specific companies and tickers mentioned below (including the banks and blue chips in the tables) are used purely to illustrate a point, not as endorsements or recommendations.

Figures such as index levels, exchange rates, and valuation multiples move constantly and may be out of date by the time you read this. Any forward-looking statements are opinions, not predictions. All investing carries risk, including the possible loss of capital, and past performance never guarantees future results. Please do your own research, and consider speaking with a licensed professional before making any decision. Reader’s discretion is advised.

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We normally keep our monthly letters between us and our clients. This month we are making an exception, because the question landing in our WhatsApp groups is the same question landing in every Indonesian investor’s group chat right now. So we are publishing our answer for everyone.

First, what just happened. Since mid-May 2026, the broad market has fallen roughly -12%. On 5 June alone, the IHSG dropped -4% in a single day. Measured from the January 2026 peak, the index is now down about -39%. This is no longer an ordinary correction. By depth, it now sits alongside the worst Indonesian sell-offs of the last three decades.

We will not pretend this is comfortable. It is not. But we have been here before — not this exact scene, but this exact feeling.

The question everyone is asking

“I don’t really trust the government. So why keep holding, and not sell everything now?”

It is a fair question, and we want to answer it directly rather than wave it away. Distrust of policy is reasonable; many of you have lived through enough market cycles to have good reason for doubt. But notice that “I don’t trust the government” and “therefore I should sell everything now” are two different statements. The first is a worldview. The second is a market-timing decision — and market timing is a far harder, far less forgiving game than most people realize.

Below are five reasons we think panic-selling at this level is not the wise move.

Reason 1 — Nobody can time the exact bottom, and the news flow is the worst possible guide

We say this as people who watch this market every single day: we do not know where or when the bottom is, and neither does anyone shouting on social media. Kita bukan dewa. If we are honest, the loudest market “signals” — viral posts, doom threads, confident predictions — have historically been a contra-indicator, not a guide.

You don’t have to take this on faith. In early 2025, sentiment reached what we can only call absolute madness — the moment Danantara was first formed and Trump announced his tariffs, the consensus was that Indonesia was uninvestable. That precise moment of maximum skepticism marked the absolute bottom of that cycle. Those who sold into the panic locked in the loss. Those who held, and those who added, recovered and then some.

Right on cue: “Sell Indonesia” hits the front pages

On 5 June, the Straits Times ran a Bloomberg piece titled “’Sell Indonesia’ sweeps trading desks as Prabowo tightens grip”. Foreign investors are now openly giving up on Indonesia — what traders call capitulation. A detail worth noting: the fund manager quoted in the piece, by his own account, exited Indonesia back in 2024 — the bearish view is two years old. Only the megaphone is new. And that is how this genre works: the “investors flee” story gets written after the fall, once the gloomy narrative is safe to print.

The timing of these headlines tells us a lot. We went back through every Indonesian crisis since 2008 and matched the loudest foreign "giving-up" headline against the actual market bottom:

Read the middle column again. In all five resolved episodes, the loudest foreign capitulation printed within roughly three weeks of the bottom — sometimes just before it, sometimes just after. And a buyer on the very day the doom article ran — not at the perfect low — was up between +14% and +70% one year later, five out of five times. The lag is the signal: these stories need a large drawdown to already exist before they can be written. By the time they are printed, the sellers are usually almost done selling.

One honest caveat, because we promise no cherry-picking: 1998 is the counterexample — the year the apocalyptic coverage was right, the economy contracted ~13%, and buying the headlines was a value trap. The 1998 headlines read exactly like the 2026 ones; the difference sat in the fundamentals underneath, never in the headlines. Which is exactly why Reasons 2 and 3 below matter more than any base rate. (And on the specific fear that this is “the precursor of 1998”: the leading indicator of a 1998-style collapse is not the exchange rate — it is whether a “dollar bomb” of unhedged foreign-currency exposure sits on the banks’ balance sheets. FY2025 Net Open Positions: BBCA ~0.1%, BBNI 1.1%, BMRI 1.8%, BBRI 2.5% of capital, against a 20% regulatory cap, with industry capital adequacy around 26% and bad loans near 2%. The bomb is not on the balance sheets this time. Toby wrote the full analysis in The Dollar Bomb — worth ten minutes if 1998 is the fear keeping you up at night.)

A live example — beware of the hoaxes circulating right now

We wish this were hypothetical. It is not. In the past days, an edited screenshot of an MSCI document has been spreading on social media and group chats, claiming that Indonesia has been reclassified to MSCI Frontier Markets. It looks official. It is fake.

The authentic document — the MSCI Global Investable Market Indexes Methodology, May 2026 (page 100 of 192, available directly at msci.com) — lists Indonesia exactly where it has been: under Emerging Markets, alongside China, India, Korea and Taiwan. MSCI has made no announcement changing Indonesia’s market classification. The fabricated version even carries a document title MSCI does not use and strips the page numbering.

Think about what this means: someone created a fake official-looking document to spread panic in a falling market. Whatever their motive — driving prices lower to buy cheaper, or simply chasing clicks — the people who sold because of that screenshot turned a hoax into their own permanent loss. Before acting on any explosive claim, check the primary source. Stay safe out there.

Reason 2 — The domestic economy is still genuinely strong

This is the part the market narrative is currently ignoring. Strip away the headlines and look at what Indonesians actually bought, produced, and exported in the first four months of 2026. The real economy is not in crisis. It is growing.

We know some of you don’t trust government statistics right now. Fair enough. So notice what we did: none of the numbers below come from the government. Car sales come from GAIKINDO, the carmakers’ own association. Motorcycle sales come from AISI, the manufacturers’ association. The PMI is compiled by S&P Global, a private American firm. And the banking data comes from BCA’s own published monthly figures. These are private-sector bodies counting their own units sold and their own loans booked, with no incentive to flatter anyone.

Car sales (GAIKINDO, YTD Jan–Apr 2026 vs 2025):

Motorcycle sales (AISI, YTD Jan–Apr 2026 vs 2025):

Manufacturing is steady: Indonesia's S&P Global Manufacturing PMI rose to 50.0 in May 2026 from April's 49.1, with new orders expanding for a second straight month at the fastest pace since February. There is genuine pressure — export orders are softer on the Middle East conflict, and input-cost inflation is high — but this is an economy operating at, not below, capacity.

Commodities, which drive a large share of Indonesia's export earnings, are rising, not collapsing. The Indonesian Coal Index has turned firmly upward: GAR 65 is back to $127/ton and the lower grades have rallied hard off their mid-2025 lows (GAR 50 from ~$55 to $86).

And the bellwether of Indonesian banking is fine. BCA’s own 4M2026 figures show loans +4.5%, third-party funds +8.6%, operating profit +3.4%, and an annualized ROE of roughly 24.5% — essentially flat versus a year ago. The share price is down sharply; the bank’s earnings power is not.

Put plainly: the prices are behaving like a crisis. The economy is not. That gap is exactly where patient capital gets paid.

Reason 3 — Valuations are now back to GFC-2008 and Covid-2020 levels

Before the numbers, the simplest way to think about what a stock actually is.

Imagine someone offers you a house. Its fair value — the land and the building — is around Rp2 billion, and you have checked that it reliably rents out for Rp100 million a year. But the owner is trapped by debt and must sell fast, so he offers it to you for Rp1 billion. Would you take it? Of course. Now imagine that the day after you buy, a neighbour with an identical house panic-sells his for Rp900 million.

Do you rush to dump yours too — just because someone else sold cheaper, and maybe the next neighbour will sell at Rp700 million? Of course not. Your house still rents for Rp100 million a year. The falling sticker price next door changed nothing about what your house earns you.

A stock is exactly that house. It is a small ownership slice of a real business that earns real money. When the share price falls but the business keeps earning — keeps lending, selling, mining, paying dividends — a lower price is not a danger, it is a discount. This is the whole of value investing and nothing more: work out what a business is worth, and only buy when the price sits well below that.

So the only question that matters is how cheap that “rent” has become. This is the most striking finding of the month, and it surprised even us.

We pulled the full history for Indonesia’s largest, most systemically important “too big to fail” companies and compared today’s valuations against the two worst crises in living memory: the 2008 Global Financial Crisis and the 2020 Covid crash. Across the 25 biggest blue chips we measured, the aggregate price-to-book is now ~1.3x (at 5 Jun 2026 closing prices) — below the 2.0x at the end of 2008 and the 2.6x at the end of 2020. It is even below the price-to-book at the worst daily closes of both crises (~1.6x). On book value, these blue chips are cheaper today than they were at the bottom of 2009 and the bottom of 2020.

Here is the company-by-company picture:

Look at the banks — all 2026 multiples at 5 Jun 2026 closing prices. BBCA at 2.4x book versus 4.5x at end-2020. BBRI at 1.2x versus 2.6x. BBNI below book at 0.8x. Indofood at 3.5x earnings and 0.7x book — cheaper than at either crisis. These are not failing businesses. They are the same dominant franchises they were six months ago, now on sale.

We will be honest about the one exception in the table: Telkom (TLKM) is not cheaper than its crisis multiples on earnings — its Telkomsel profit has structurally declined, and we show it precisely because we are not cherry-picking. Cheap usually has a reason; the job is to separate the temporarily-cheap from the permanently-impaired. For most of this basket, we believe the cheapness is the market’s mood, not the businesses’ fundamentals.

“But 2008 and 2020 were global crises. This one is domestic!”

True — but it means less than it sounds. No crisis ever happens the same way twice. 2008 was a banking collapse imported from Wall Street. 2020 was a virus nobody had ever traded through. 1998 was a currency and political implosion. 2025 was a tariff shock plus a sovereign-wealth-fund scare. Each one had a brand-new shape, a brand-new reason why “this time it’s different and therefore unrecoverable” — that novelty is precisely what makes a crisis a crisis. If it looked exactly like the previous one, nobody would panic, and prices would never get this cheap.

What repeats is not the cause. What repeats is the arithmetic: dominant businesses, still earning, priced at or below book value — and the eventual reversion once fear runs out of sellers.

“You haven’t addressed the rupiah! USDIDR is past 18,000!”

No — and here history repeats itself very consistently. Look at every past time the rupiah weakened rapidly. 2008: USDIDR spiked +39% (to ~12,650) at the very same time the stock market crashed — then gave back -29% as the recovery took hold. 2013 taper tantrum: +26%, then -8% back. 2015: +27%, then -12% back. 2020 Covid: +21% in weeks (to ~16,500), then -16% back within months. The same shape, four times in a row: the currency spikes together with the equity bottom, then recovers swiftly.

Rapid rupiah depreciation is a byproduct of foreign capital rushing out — the same selling that crushes stock prices — not a precursor of some second crisis still waiting to happen. Historically, the moment the currency is falling fastest has been close to the moment of maximum fear, and therefore close to the moment of maximum opportunity in equities. We watch the rupiah — it matters for importers and for inflation — but we read today's 18,000 print as the thermometer of the panic, not the forecast of the next one.

Reason 4 — After crises settle, the market has always recovered

We are not asking you to take this on optimism. We are asking you to look at the record. Here is every major Indonesian market drawdown since 1997, the depth of each, and what happened afterward:

Twelve crises. Every single resolved one was followed by a recovery — and the deepest drawdowns produced the largest rebounds (GFC: -61% then +441%; AFC: -66% then +310%). We cannot promise this time follows the pattern, and we won’t. But the burden of proof sits with the person arguing “this time the recovery never comes” — not with the person who has three decades of Indonesian market history on their side.

Reason 5 — Even a frontier downgrade is already in the price

One fear deserves to be addressed head-on, because it is the engine of this whole sell-off: will MSCI demote Indonesia to Frontier Markets? Honestly — we think that is the wrong question. Whether the downgrade happens is MSCI’s decision, on MSCI’s timeline, and nobody on your feed knows it. The investable question is different: has today’s price already assumed the downgrade happens?

First, for the record: we think the odds of demotion are lower than the panic implies, because the exchange is not sitting still. In the space of months, BEI and OJK have delivered exactly the reforms MSCI asked for: disclosure of every shareholder above 1%, the minimum free float raised from 7.5% to 15% (compliance by March 2027–2029), and a Hong Kong-style High Shareholding Concentration list that names tightly-held companies publicly. MSCI’s May review kept Indonesia on hold, under restrictions — a yellow card, not a red card — while it assessed these reforms.

But let’s be conservative and assume the worst-case scenario anyway — with numbers, not feelings. Take Bank Mandiri (BMRI), one of Indonesia’s largest banks, as an example.

One of the textbook ways to ask “what multiple is fair for a company?” is the Gordon Growth Model:

In words: r is the yearly return an investor demands before bothering to own the stock. Its base is the 6.9% government bond yield — the risk-free alternative — and note that 6.9% is itself already a pessimistic number: it carries this year’s panic inside it. On top of that base, shareholders demand an extra premium: roughly the 4.3 points that even safe US equities command over bonds, plus another ~2.4 points for Indonesia-specific risk (derived from Indonesia’s sovereign default spread of ~1.8 points at its Baa2 rating, scaled up by ~1.3x because equities swing harder than bonds). Indonesia’s equity risk premium therefore sits near 6.7%, and the total hurdle at 13.6%.

Even against that already-pessimistic bar, with BMRI paying out 80% of earnings and growing at a deliberately harsh 3% — the bank compounded earnings at double digits over the past decade, and its retained profits alone fund ~4% — the fair multiple is 7.5x earnings.

BMRI actually trades at 5.8x (price as of 5 Jun 2026). Run the formula backwards: what hurdle rate would make 5.8x fair?

Today’s price is only “fair” if you demand a 16.6% return from Indonesian equities, permanently. That is three full percentage points of additional, permanent risk silently baked into the price. How big is three points? A BI rate hike is 0.25. A one-notch sovereign downgrade moves the risk premium by roughly half a point. The taper tantrum and Covid — real crises — lifted Indonesia’s equity risk premium by one to one-and-a-half points at their worst. Three points is not “more bad news”; it is a re-categorization — the market silently moving Indonesia into a different risk class altogether. And the only candidate event of that size on the table is the frontier downgrade. The fear is not hypothetical; it is literally the number inside the price.

Which leads to the fork: if the downgrade never comes, today’s prices are pure panic, and panic gets repriced. If it does come, today’s prices already contain it — the bomb has already gone off, and the market is trading at post-explosion prices. And while everyone waits, these companies keep paying: BMRI’s dividend yield alone is already in double digits — around 12% at the 5 Jun 2026 price, based on last year’s dividend.

“But won’t the forced selling cause another leg down?”

A sharp objection: the fear may be priced in, but the mechanical selling is not. Index funds do not sell on fear — they sell on the effective rebalancing date, when the rule says they must. We saw this in May: the MSCI changes were announced on 13 May, yet the roughly US$1.1 billion (~Rp19.5 trillion) of passive outflows hit on the 30 May effective date — and prices still moved on that day, even though everyone had known for two weeks. So yes: if a downgrade eventually happens, there will be forced selling that has not happened yet. Another leg down from that flow is a real possibility. Three things keep it in perspective.

First, the downgrade is a tail risk, not the base case — the exchange is visibly fixing what MSCI complained about, and reclassification is a slow, multi-review process. What the market is doing today is charging a near-certain discount for an unlikely event.

Second, even in that scenario the seller is limited. After the May purge, Indonesia is already down to roughly 0.5% of the EM index — the passive money that can still be forced out is a known, finite amount: a one-time seller with a deadline, not a permanent change in the businesses. The companies do not know they got downgraded. Index membership changes the price of a stock, not the business behind it.

Third, run the simple math on what a flow-driven crash actually does to a long-term owner. Imagine a stock at 1,000 paying a 100 dividend — a 10% yield. Forced selling cuts the price to 500: same business, same dividend, now a 20% yield — and every rupiah of dividend reinvested buys twice the earnings it bought before. A seller who must dump a cash-generating asset for non-business reasons is handing value to whoever buys it. The cost is a temporary drawdown; the gain is a permanently higher return on every rupiah invested at those prices.

Does any of this actually work? The honest scoreboard

You might reasonably say: these reasons are nice, but a philosophy is only as good as its behavior in a storm. Fair. So here is ours, in this storm.

Measured from the February 2026 peak, our clients’ overall portfolio drawdown is around -15% as of 5 June 2026, versus the broad market at roughly -40% — helped greatly by the dividends the companies kept paying through the chaos. (You can see the up-to-date comparison in the Portfolio Resilience section at www.recompound.id, updated daily. Past performance does not guarantee future results.)

In a market that fell -40% from its peak, holding the decline to well under half of that is not luck; it is the direct output of buying good businesses with a margin of safety and sizing every position so the bear case is survivable. And remember the arithmetic of holes: -15% needs +18% to climb out; -40% needs +64%. The portfolio that falls less needs far less heroism to recover.

Price swings are the entrance fee of long-term investing. The real risk is losing money permanently — not a price that is temporarily down.

So what should you do?

This is a public article, so we will not tell you to buy or sell anything. What we can do is leave you with the questions we ask ourselves, and the math that goes with them.

“Shouldn’t I just convert everything to USD?” Think through the mathematics of that switch. It means selling Indonesian businesses at 1.3x book — cheaper than the bottoms of 2009 and 2020 — in order to buy a currency at 18,000 (5 Jun 2026), after it has already risen +10.8% in a year. That is selling low and buying high, simultaneously. And as we showed in Reason 3, the rupiah’s sharpest weakness has historically arrived together with the equity bottom and then reversed. Currency diversification as a long-term structural decision is perfectly sensible — made calmly, in normal times. As a crisis response, it has usually meant locking in both sides of the loss at once.

“What’s the point of buying cheap when there’s no catalyst in sight?” The answer is counterintuitive: prices are only this cheap because no catalyst is visible. The moment a catalyst becomes obvious to everyone, the price has already moved and the discount is gone. 2025 was the textbook case: at the peak of Danantara skepticism and the Trump tariffs, no catalyst was in sight anywhere — that was precisely the bottom. Only after the market recovered did everyone busy themselves explaining what the “catalyst” had been. The market moves first; the narrative catches up later.

“And while waiting?” You are paid to wait. At roughly 8x earnings (5 Jun 2026 prices), the blue-chip basket’s earnings yield is about 12% against a ~6.5% government bond, and BBCA alone now pays a ~6.5% dividend yield — essentially the risk-free rate, with growth on top. Even in the skeptics’ sideways scenario, profits keep coming and dividends keep landing. Those who insist on visible signs of improvement will buy after the recovery, not before it.

What we will not do — and what we’d gently suggest nobody does — is panic-sell quality businesses into a fearful market to chase a bottom nobody can see. That is the one move with a reliable track record: of destroying long-term returns.

Closing

Look — we are humans too. We read the same headlines you do, every day, all day. Absorbing this much negative energy is draining, and we will not pretend otherwise.

But we have been doing this for four years — through the Covid hangover, the Russia-Ukraine war, the Danantara panic, the Trump tariffs, the Iran war, and now this. What carried us through every single one was not bold talk, and certainly not an ability to predict the future. It was discipline. Buy good businesses below their value, size them so the bear case is survivable, collect the dividends, and refuse — absolutely refuse — to panic-sell the bottoms or FOMO-buy the tops.

Tough times don’t last. Tough people do.

Cheers!

References

1. Bloomberg / The Straits Times (2026). “’Sell Indonesia’ sweeps trading desks as Prabowo tightens grip.” 5 June 2026. [The capitulation headline discussed in Reason 1.]

2. MSCI (2026). MSCI Global Investable Market Indexes Methodology, May 2026, p. 100. msci.com. [Indonesia’s authentic Emerging Markets classification; the basis for debunking the circulating hoax screenshot.]

3. GAIKINDO (2026). Indonesian automotive wholesales, retail, production and trade statistics, Jan–Apr 2026. gaikindo.or.id.

4. AISI (2026). Indonesian motorcycle domestic and export statistics, Jan–Apr 2026. aisi.or.id.

5. S&P Global (2026). Indonesia Manufacturing PMI, May 2026 release (50.0, up from 49.1).

6. Bank Central Asia (2026). Published monthly financial figures, 4M2026. [Loans +4.5%, third-party funds +8.6%, operating profit +3.4%, annualized ROE ~24.5%.]

7. Indomine (2026). Indonesian Coal Index by grade, Sep 2024 – Jun 2026. [GAR 65 at $127/ton; GAR 50 from ~$55 to $86.]

8. Stockbit; Recompound analysis (2026). Blue-chip P/E and P/B comparison, year-end 2008 and 2020 vs 5 June 2026.

9. Limanto, T. (2026). The Dollar Bomb. Recompound Blog, 5 June 2026. https://blog.recompound.id/p/the-dollar-bomb [Net Open Position analysis: why 2026’s banks are not 1998’s banks.]

10. Bloomberg via Free Malaysia Today (2026). BEI/OJK market reforms: >1% shareholder disclosure, 15% minimum free float, High Shareholding Concentration list. 3 April 2026.

11. Damodaran, A. (2026). Country risk premiums and sovereign default spreads. [Basis for the ~6.7% Indonesia equity risk premium used in the Gordon Growth exercise.]

Disclaimer: This article is intended for educational and informational purposes only. Nothing in it constitutes — and it should not be construed as — financial, investment, tax, or legal advice, nor as an offer, solicitation, or recommendation to buy, sell, hold, or convert any security, currency, or financial product. This includes any specific companies named above (and their tickers) and any discussion of the rupiah versus the US dollar; these are used purely to illustrate a point, not as endorsements or recommendations.

The information here is drawn from sources we believe to be reliable as of the date of writing, but we make no warranty as to its accuracy or completeness. Figures such as exchange rates, financial ratios, and fiscal numbers move constantly and may be out of date by the time you read this. Any forward-looking statements are opinions, not predictions.

All investing carries risk, including the possible loss of capital, and past performance is never a guarantee of future results. Please do your own research, and consider speaking with a licensed professional before making any decision. Ultimately, your financial decisions are your own.

Reader’s discretion is advised. Hope it is useful in some way :)

I was sitting down in one of my favorite bank branches while waiting my queue number. You know running errands in a bank like a proper adult ;) When it was my turn and I spoke to the teller about my banking needs, I asked them a number of questions regarding the behaviour of other patrons.

In light of the recent weakening Rupiah against the Dollar, I went straight to ask them

“How do you comfort people who are worried about Rupiah depreciation? People usually associate current levels of depreciation like what happened in the past in 1998 specifically.”

The response was

“ummm.. but it is very different now and then. Nowadays the fundamentals is stronger. and there are more regulation that is in place for the banks now.”

I wasn’t very satisfied with the answer. Because I could tell that people are not going to be comforted with that statement. Also, the teller went on telling me that there they have been busy facilitating transactions of people buying the Dollar lately. They could serve around 6 - 7 people in one branch making big dollar buys. So I could tell that such statement does not comfort people.

The fear is real and contagious

Here is the part I have to be upfront about. I did not remember 1998 (I was only 2 years old). So I am not going to present to people who did and create a debate arguing that their fear is irrational. Especially at that time people watched their savings evaporate and their city burn.

You do not argue someone out of a memory like that.

But the elephant on the room is not about the fear per se. It is about the contagiousness of the fear in the age of social media. A comedian Ronny Chieng has a major rant here summarised in a 90 seconds YouTube shorts:

No matter how ridiculous and funny this video might sound, it is painting a real picture of my experience with many boomers. For the first time in human history, we have a class of individuals who are no longer that productive anymore having access to so much information especially when last time (before the internet was around), information was the biggest edge.

Nowadays, too much information slows you down. It causes people to overthink, be indecisive and be worried about making wrong decisions. But we can’t blame the boomers for this because for most of their lives, information is something that allows them to gain a competitive edge. So it is very counterintuitive to unlearn that and it is very hard to have them be aware of their unhealthy levels of information diet.

Which probably makes the very feeling of fear very contagious

Robert Shiller wrote a whole book about exactly this — Narrative Economics — and his core claim is that economic stories spread like diseases. “Economic narratives,” he writes, “follow the same pattern as the spread of disease.” A story does not have to be true to move an economy. It only has to be infectious. And the 1998 story is beautifully infectious: a frightening number, a remembered trauma to pin it to, and a single simple instruction:

Rupiah is going to collapse so buy dollars, now.

But a story cannot spread that easily if there is no element of truth to it. And it is definitely not my style to make a strawman argument and then attempt to beat it down to say that these people are not rational.

So let me steelman the fear properly

If there are further points that you’d like to add, please add them in for my consideration. It might be an open discussion of some sort as well. The idea is not to dismiss it but it is also not to be consumed by it alive. We want to lean into the fear and see it for what it is. I think that is a much productive use of our time, to make household economic decisions on our daily lives.

Start with the budget (APBN)

In 2025, Indonesia ran a deficit of about 2.92% of GDP. This deficit is seen as the widest outside pandemic years and it is very close to the 3% ceiling. For context, the 3% was written into law after the last crisis in 98.

Plus, tax revenue came in roughly 8% under target in 2025.

So it follows that if government revenue does not hit target, we could expect that budget deficit could grow further surpassing the 3% ceiling. In fact, the government has put that 3% law into review. To me, that’s a clear sign that fiscal anchor is starting to drift.

Danantara

Now we have a new player as well which is designed as a sovereign vehicle to drive economic growth but their reporting is still quite unclear to this date.

• What’s their economics like

• What’s their balance sheet like

• Are they profitable, etc

So it is entirely possible that the liabilities could be accumulating off on the side. But not only that the government is running fiscal deficit, we are also seeing contentious policies that are being passed by the government. Such as free nutritious meals (MBG) that is highly controversial, arguing that this would exacerbate the deficit situation considerably.

I mean how it is not a fiscal monster? The budget in 2025 was Rp71tn and in 2026, it will be up to Rp335tn.

This is still being done despite the 3% ceiling limit. And don’t get me started about the unpredictability that the new export policy started. Yes it sounds great on paper, but it is obvious that investors are jittery about the ability for the entity to execute.

IDX

The situation with the stock market isn’t helping much either. Indonesia received a warning from MSCI in January 2026 that it would be downgraded to the frontier market because there was lack of transparency in the stock ownership which causes price engineering to be more rampant.

In response to that, there has been swift transformation in the ruling such as >1% shareholder disclosure rule, 15% free float minimum requirements and so on. But it remains to be seen if such efforts are sufficient to restore investor confidence.

All in all it seems to be like a perfect storm

Put it all together and it does read like the makings of a perfect storm. Every incentive is now lined up for money to leave Indonesia. And a sizeable chunk of the money in our stock market, by value, is in fact, owned by foreigners: locals now own roughly 61% of the equity market, with foreigners near 39%.

That is not nothing and it is a very serious issue of eroding trust. When you put it together, you get a coherent, sober worry: loosening fiscal discipline, money walking out the door, a central bank defending the rupiah, a currency at all-time lows.

So yes, I take all of this seriously in 2026. Now let’s look at how it started last time in 1998.

How it was back then

My parents’ memory of 1998 is the rupiah number. They said that it weakened from around 2,400 to roughly 16,000 against the dollar, with uglier spikes in the worst of the panic. But just like today in 2026, currency was the symptom, not the disease.

What made 1998 catastrophic rather than merely painful was that four crises stacked on top of one another and fed each other:

1. a currency that broke from its zone,

2. a banking system that was rotten with poor oversight,

3. a corporate sector exposed to dollar debt it could not repay,

4. and a government that collapsed politically while trying to manage all three at once.

We can dig deep into all four pillars above but I find it amusing that they are very consistent with the core finding of Carmen Reinhart and Kenneth Rogoff in their book: This Time Is Different: studies eight centuries of financial crises (banking, inflation, currency and sovereign debt).

They mention that banking crises tend to come before sovereign defaults, not after. In their research around their book, they put forth:

“banking crises... often precede or accompany sovereign debt crises. Indeed, we find they help predict them.” The hidden debts that sink a government, they note, often include “private debt that become public... as the crisis unfolds.”

So the order of events matters. The currency didn’t bankrupt the country directly. It blew up the banks, and then the banks blew up the state.

Let me repeat that, because it quietly reframes the whole fear. The leading indicator of a sovereign blowup is likely not the exchange rate. It is the banks. More precisely, it is whether the banks are carrying unhealthy levels of foreign-currency exposure that a falling currency can detonate.

So the honest question is not “what is the rupiah number?” It is “is that dollar bomb sitting on the balance sheets again?”

And the wonderful thing about that question is that, unlike the future of the rupiah, it has an answer you can simply look up in their annual reports.

You nervous? It could be a dollar bomb that explodes you know

Ok let’s take a look that one number which is net open position (NOP).

After 1998, Bank Indonesia introduced a hard cap on the exact thing that killed the banks last time. It is called the Net Open Position (Posisi Devisa Neto). The formula is:

(foreign currency assets - foreign currency liabilities) / bank’s capital

currency assets example:

• banks’ cash position in foreign currency

• banks’ loans given to customers in foreign currency

currency liabilities example:

• banks’ customer deposits in foreign currency

• banks’ debt in foreign currency

In plain language it means how exposed is this bank to a move in the currency.

But why does that matter so much? Think about what happens when a borrower goes bad. If a bank lends to a company and the company defaults, the bank eats the loss — some borrowers always default, and that part is normal.

That’s why we have provisioning so that writing out that debt will not cause liquidity issues. What made 1998 lethal was that the defaults and the currency crash arrived together. Banks had borrowed in dollars and lent in dollars.

When the rupiah collapsed, their borrowers couldn’t pay. Think about it, if you own a business and you take a USD loan, your loan would shoot up overnight because it is in USD but you earn in Rupiah. As a consequence you will default on your loans because your earnings couldn’t keep up with the ballooning debt.

But the banks? They still have to repay the liabilities they take in USD terms too. So they still owe people (depositors) in dollars but they don’t have the money to repay them back. Which ultimately caused banks to be insolvent.

So now we understand why Bank Indonesia caps the Net Open Position. It limits how far a bank's dollar assets and dollar liabilities are allowed to drift apart relative to its capital.

The dangerous side in a crisis is when a bank ends up owing more dollars than it holds: if the rupiah collapses, the value of what it owes balloons faster (USD) than the value of what it holds (Rupiah), and it has to buy dollars at a punishing exchange rate to settle up. This crystallises the loss on its balance sheet. So banks are to keep the gap small, so that loss stays small.

How much does Bank Indonesia allow?

The cap is 20% of capital. The higher the % is, the more vulnerable a bank is towards currency fluctuations. It is now a figure that is heavily monitored. Today it needs to be reported at the end of a working day by law.

Compare that to 1997, when, in the words of a former senior deputy governor of Bank Indonesia, Anwar Nasution, the rules on foreign borrowing “were generally violated” and corporate dollar debt simply “was not recorded.”

I tried digging the NOP numbers back then in 1998 but couldn’t really find a reliable one. Today the figure is as follows:

When we read the data, we see that the most dollar-exposed of the big four, BRI, is running currency risk at about 2.5% of its capital. The rest sits lower — from BCA’s rounding-error 0.1% up to Mandiri’s 1.8%. Industry-wide, bad loans sit a little above 2% and the capital adequacy ratio sits around 26% (roughly three times the global minimum).

If we look at it as it is, these are not 1998’s walking-zombie banks papering over bad loans with creative accounting. They are some of the best-capitalised banks in the region, and they are not holding the bomb.

But none of that makes the rupiah’s weakness fake. A weaker rupiah genuinely hurts importers, dollar-cost borrowers, anyone with bills denominated in foreign currency. That is a real cost, and I won’t wave it away. But it is a completely different from a banking collapse that precedes a sovereign default.

So what do you do with this

I am not going to tell you where the rupiah will go. Nobody can, and a confident “Relax bro, it won’t hit 50,000” is not entirely useful as well. The currency could keep weakening for entirely ordinary reasons — a strong dollar, higher oil prices, money chasing higher yields elsewhere. The fiscal drift I steelmanned earlier is genuinely worth watching.

What I am saying is that “the rupiah is at a record low” and “Indonesia is about to repeat 1998” are two completely different claims. The first is a price. The second is commonly preceded by a banking collapse.

Fortunately, for the second one you can check rather than predict, by reading the balance sheets. As of now, they read clean.

And I guess this is exactly why we do what we do. When your feed is screaming negativity and you are probably tempted to “convert everything to dollars” — at the worst possible exchange rate, paying the spread to the banks and then surrendering your rupiah. Our job is to give you the data and make sure that your decisions are driven by things that you could check and verify.

Because if that fear stops spreading for whatever reason, at the very least you know that you have made your decision without regret.

References

In case you’re interested in reading the materials consulted in writing this article, below are the entry points:

1. Bank Indonesia (2015). Peraturan Bank Indonesia No. 17/5/PBI/2015 — Perubahan Keempat atas PBI No. 5/13/PBI/2003 tentang Posisi Devisa Neto Bank Umum. https://peraturan.bpk.go.id/Details/135521/peraturan-bi-no-175pbi2015-tahun-2015 [The Net Open Position cap of 20% of capital, and the relaxation from 30-minute to end-of-working-day reporting.]

2. Reinhart, C. M. & Rogoff, K. S. (2009). This Time Is Different: Eight Centuries of Financial Folly. Princeton University Press. [The book-length thesis that banking crises and sovereign defaults travel together across history.]

3. Reinhart, C. M. & Rogoff, K. S. (2011). “From Financial Crash to Debt Crisis.” American Economic Review, 101(5), pp. 1676–1706 (NBER Working Paper No. 15795, 2010). https://www.nber.org/system/files/working_papers/w15795/w15795.pdf [Source of the exact quoted lines: “banking crises… often precede or accompany sovereign debt crises. Indeed, we find they help predict them,” and “private debt that become public… as the crisis unfolds.”]

4. Shiller, R. J. (2019). Narrative Economics: How Stories Go Viral and Drive Major Economic Events. Princeton University Press (NBER Working Paper No. 23075). https://www.nber.org/system/files/working_papers/w23075/w23075.pdf [“Economic narratives follow the same pattern as the spread of disease.”]

5. Nasution, A. (2015). “How Indonesia reformed its risky financial sector.” East Asia Forum, 24 April 2015. https://eastasiaforum.org/2015/04/24/how-indonesia-reformed-its-risky-financial-sector/ [Former BI Senior Deputy Governor on 1997–98: rules on foreign borrowing “were generally violated,” corporate dollar debt “was not recorded”; inflation ~58%, rates >80%, GDP −13.1%.]

6. Indonesia Investments. Asian Financial Crisis — Indonesia. https://www.indonesia-investments.com/culture/economy/asian-financial-crisis/item246 [Rupiah ~2,400/USD pre-crisis collapsing to ~16,000; managed band floated from August 1997; 16 banks closed in November 1997 triggering bank runs.]

7. IDNFinancials / Indonesia Stock Exchange (2026). Foreign outflows from Indonesian shares and bonds, 2026. https://www.idnfinancials.com/news/60974/foreign-dump-indonesian-shares-bonds-outflows-at-idr-12-55-trillion [Foreign net selling of Indonesian equities in 2026.]

8. Bloomberg (2026). Indonesia’s fiscal deficit reaches 2.92% of GDP, near legal limit. https://www.bloomberg.com/news/articles/2026-01-08/indonesia-fiscal-deficit-soars-to-2-92-of-gdp-near-legal-limit [2025 budget deficit of 2.92% of GDP, the widest outside the pandemic years.]

9. Bloomberg (2025). Indonesia adds State Finance Law to 2026 legislative priorities. https://www.bloomberg.com/news/articles/2025-09-19/indonesia-adds-state-finance-law-to-2026-legislative-priorities [The 3%-of-GDP deficit cap — set by Law No. 17/2003 after the 1998 crisis — placed under review.]

10. The Diplomat (2026). “Unpacking Indonesia’s 2025 Fiscal Revenue Shortfall.” https://thediplomat.com/2026/01/unpacking-indonesias-2025-fiscal-revenue-shortfall/ [2025 state revenue came in roughly 8% below target.]

11. East Asia Forum (2026). “Indonesia’s fiscal anchor begins to drift.” 15 March 2026. https://eastasiaforum.org/2026/03/15/indonesias-fiscal-anchor-begins-to-drift/ [Danantara’s borrowing sits outside the deficit rule, raising contingent-liability and transparency concerns.]

12. Kompas (2025). “Anggaran MBG Melonjak Jadi Rp 335 Triliun di APBN 2026.” https://money.kompas.com/read/2025/09/24/112056126/anggaran-mbg-melonjak-jadi-rp-335-triliun-di-apbn-2026 [Free Nutritious Meals (MBG) budget rising from Rp71 trillion in 2025 to Rp335 trillion in 2026.]

13. IDNFinancials / Bloomberg (2026). MSCI halts rebalancing; Indonesia risks downgrade to frontier market. https://www.idnfinancials.com/news/60811/msci-halts-rebalancing-indonesia-risks-downgrade-to-frontier-market [January 2026 MSCI warning over share-ownership/free-float transparency; reforms include 1% shareholder disclosure and raising the minimum free float to 15% from 7.5%.]

14. bne IntelliNews (2026). Indonesian rupiah drops to historic low of IDR18,000 per US dollar. https://www.intellinews.com/indonesian-rupiah-drops-to-historic-low-of-idr18-000-per-us-dollar-446678/ [Rupiah at a record low around 18,000/USD, roughly 10% weaker year-on-year.]

15. Annual Reports 2025 — BCA, BNI, Bank Mandiri, BRI. Risk Management / Net Open Position disclosures. [FY2025 Net Open Position ratios: BCA ~0.1%, BNI 1.1%, Bank Mandiri 1.76%, BRI 2.51%; industry CAR ~26%, gross NPL ~2%.]

Disclaimer: this post is for educational purposes only. It does not constitute investment advice. It is the author’s opinion regarding new export policy that is recently announced and it attempts to consult recent data that is not usually covered otherwise. We hope that our readers could learn a thing or two from the data that we are seeing and we continue to welcome level headed and constructive discussions. Lastly, if you are a client, check your investment thesis in the client dashboard. This write up has been incorporated there also.

This week, per this post is published, President Prabowo announced a PP (Government Regulation) mandating that all exports of palm oil, coal, and ferro alloys must be routed through a designated BUMN (”single-gate” system).

There are very differing opinions regarding this ambitious new export policy amongst pundits on social media. So we’d like to offer our thoughts being investors in the Indonesian capital market ourselves.

First things first

We refrain from making sensationalist comparisons between this current policy vs other failed government policies in the past like BPPC where clove farmers had to sell cloves at a fixed price to a single government entity during the Soeharto era. Just like how we refrain from rushing to extrapolate that a weakening Rupiah necessarily means that a Rupiah is going to fall in the fashion we see in 1998.

We believe that conditions of the present economy, technology, regulation, information and even governments are not the same. Therefore, just because there had been a precedent, it does not mean that it is definitely likely that we will see a repeat of history. For example, it goes without saying that just because we saw COVID in 2020, does not necessarily mean that Hantavirus will cause economies around the globe to see lockdowns again. It might go on a lockdown for real (I am not a public health expert here), but it does not have to be.

And of course this is not an investment recommendation or financial advice. We are first to disclose that we are not a macroeconomics policy expert too.

Why choose to not make sensationalist claims?

Well to be frank because we are not a media company. We don’t get anything from making sensationalist claims. If you like our Substack post or put a comment, we don’t get paid. And getting famous on social media is not our business model. So there’s almost 0 point for us to make such sensationalist alarmist/euphoric claims.

What helps is for us to analyse and reflect on the data that allows us to make an informed decision as a long term investor. Knowing fully our limitations about what the outcome will be in the future.

Don’t get me wrong, it is possible that the policy could be a huge failure. But I stress that it is not wise to dismiss the likelihood of it being successful as well. And we ought to look at both the negatives and the positives as it is so as to stay well informed of what is going on.

Now with that out of the way, let’s get into it.

Key Pointers and Questions

What does the policy actually do?

All exports of three commodities (palm oil US$23B, coal US$26B, ferro alloys US$16B — total US$65B/year, ~23% of national exports) must go through a designated state owned enterprise (BUMN). Implementation is phased: Phase I (June–August 2026) is documentation only — transactions still go directly between company and buyer, while Danantara Sumber Daya Alam (DSI) validates volume, pricing, and delivery. No margin taken. Phase II (September 2026+) is full implementation where DSI takes over all contracts, shipments, and payments. This is the phase the market fears — and the one that may involve a margin.

How massive is the underinvoicing problem?

Based on UN COMTRADE data, cumulative export underinvoicing from Indonesia over the past 34 years (1991–2024) totals US$908 billion (~Rp 15,400 trillion).

For reference, BCA’s profits is about Rp 50 trillion per year. So that 34 years of under invoicing is about 300 years of BCA’s net profits 🤯. Indonesia hasn’t even been around that long. We are in the less than 100 years club (1945 independence).

This is the gap between what Indonesia reported as exports versus what trade partners reported as imports. This isn’t an estimate — its recorded international trade data. From this, I think that the government’s motivation is clear: make more money (increase state revenue) by plugging a leak that is worth hundreds of billions of dollars that has been flowing offshore (primarily to Singapore).

If underinvoicing is successfully curtailed, more USD stays in Indonesia — which is also a positive for the rupiah.

The mechanism is textbook transfer pricing: an Indonesian producer sells to a Singapore affiliate at $100 (below benchmark), the affiliate re-sells to the real buyer at $150 (market price), and the $50 margin stays in Singapore. Finance Minister Purbaya himself stated that he randomly checked 10 CPO companies and selected 3 ships at random — all showed prices to Singapore at half the price to the US. That’s how widespread the practice is.

Who is being targeted?

Not “clean” mining companies — the target is companies that have been invoicing below benchmark. A documented example: Global Witness reported that Adaro used Coaltrade Services International (Singapore) to sell coal below benchmark prices from 2009–2017, avoiding an estimated ~US$125 million in Indonesian taxes. Profits were booked in Singapore (tax rate ~10%) instead of Indonesia (~50%). This policy forces all invoices to be verified against published benchmarks by the BUMN. If a company has always been invoicing at benchmark, the impact is minimal — it’s just a compliance layer.

Who benefits from the practice of under invoicing?

It follows that the ultimate beneficial owners (UBO) who owns the trading companies will benefit. The spread between the sales to the trading company and the sales to the importer gets to stay in the private trading companies (likely owned by majority shareholders).

Are there overseas precedents?

There are many, among others:

• China: Operates a “designated exporter whitelist” for strategic minerals (tungsten, antimony, rare earths). Only government-approved companies can export. Effective for revenue control, but China’s rare earth export quota was struck down by the WTO in 2014 after Japan/US/EU challenged it.

• Malaysia (PETRONAS): Full state control of oil & gas since 1974. Private companies (Shell, Exxon) still operated profitably via Production Sharing Contracts, but long-term investment declined ~40% from peak.

• Chile (CODELCO): Copper was nationalized in 1971, but later opened to a dual-track model — state-owned CODELCO alongside private miners (BHP, Freeport). Private companies remained profitable, just paying higher royalties (up to 46.5%).

• Zambia: The cautionary tale — full nationalization of copper in 1969 ended in disaster. Copper prices fell, the state entity couldn’t respond quickly, mining’s GDP contribution collapsed from 33% to 7.7%. Zambia eventually re-privatized.

Are there more recent local precedents?

PT Timah (TINS) — the most directly relevant domestic precedent: PT Timah formed an internal task force to crack down on illegal tin miners in Bangka Belitung who had been paying zero royalties and zero taxes. The result? Q1 2026 net profit surged

+1,184% YoY

(from Rp 117B to Rp 1.5T), revenue +160%, GPM expanded from 18% to 39%. When the playing field was levelled and illegal competitors were removed, the legitimate company’s profitability transformed overnight. This is the same mechanism as the export rules — when underinvoicing is eliminated, clean companies actually benefit.

There’s another one, Indonesia’s own Berdikari (single-gate importer for SBM / soybean meal): caused short-term price spikes during the transition period, but poultry and feed company GPMs actually improved once stabilized. Although we don’t see this positively (more neutral) because the GPM could also be pushed by increasing poultry prices and volume because of free meal for children policy.

Why is market dominance the key to this policy working?

The logic is straightforward: if buyers (foreigners) have sufficient alternative suppliers, they switch — the added bureaucracy from the BUMN gate becomes a reason to buy from another country. But if the country is dominant and buyers don’t have adequate substitutes, they have to comply.

Indonesia has this leverage in all three targeted commodities: — Thermal coal: #1 exporter globally, 40%+ of global seaborne supply — Palm oil: #1 exporter globally, 55%+ of global supply — Ferronickel: #1 exporter globally

India, China, Bangladesh, and Vietnam cannot replace their entire Indonesian coal supply with Australian or South African alternatives overnight — the volume gap is too large. So as long as the BUMN fee and bureaucratic friction remain reasonable, buyers will continue purchasing from Indonesia. This is fundamentally different from Zambia’s failure — Zambia held only ~7% of global copper supply, so buyers immediately shifted to Chile and Congo when ZCCM’s bureaucracy became burdensome.

Who is the designated BUMN intermediary?

While this can change from time to time, but the one that is identified now is PT Danantara Sumberdaya Indonesia (DSI) — a brand new entity incorporated on 18–19 May 2026 (one day before the announcement), under the Danantara sovereign wealth fund.

Luke Thomas Mahony has been appointed as Direktur Utama (CEO) of DSI. He’s an Australian national based in Jakarta, previously SEVP Business Performance & Optimization at Danantara Indonesia since September 2025. Before that, he was Chief Strategy and Technical Officer at PT Vale Indonesia (INCO) from July 2024 to September 2025, and held senior roles at Vale Base Metals (CTO, then Director-Technical). His earlier career includes stints at BHP Billiton and Xstrata Coal.

The bull case on Mahony: he’s a technical mining person with hands-on operational experience across multiple countries. He understands how multinational mining companies structure their export sales — which is exactly what DSI needs to police. Being a foreigner may also make him more neutral from domestic political pressure.

The skeptic’s case: you’re appointing a former Vale executive to oversee an entity that will audit companies like Vale. Vale Indonesia (INCO) sells ~80% of its output to Vale Canada Limited — this is exactly the kind of related-party export structure that DSI is supposed to scrutinize. There’s probably a potential conflict of interest.

To us, the appointment of a legitimate mining professional rather than a bureaucrat is a net positive signal for execution quality. It partially de-risks the “Zambia scenario” where incompetent state management destroys the industry. But the conflict of interest angle is worth monitoring — especially how DSI handles ferro alloy exports from IMIP/IWIP smelters and nickel shipments.

How will DSI make money?

Danantara CEO Rosan Perkasa Roeslani has confirmed that DSI will operate as a trading company — taking a margin from every export transaction. This is not a flat administrative fee; DSI will function as a commercial intermediary that buys from producers and sells to international buyers, capturing the spread. The stated purpose: to eliminate both

underinvoicing

(selling below benchmark to affiliates offshore) and

overpricing

(inflating import costs to shift profits out).

Where do we see the risk?

How could this hurt miner’s profitability? There are two main risks that we are thinking through:

Risk 1 — DSI’s spread margin is too large. Rosan has confirmed DSI will take a margin — so this is no longer hypothetical. If DSI’s spread exceeds whatever average selling price (ASP) improvement comes from eliminating underinvoicing, the net effect to the exporter is negative. Concrete example: if a miner’s operating profit margin is ~20% and DSI charges a 4% fee on revenue, that’s a ~20% drawdown in operating profit. That’s not trivial.

Risk 2 — DSI becomes a monopsonist and sets buy prices too low. As the sole intermediary, DSI has the power to dictate purchase prices from producers. Exporters lose bargaining power, and profit gets squeezed from the revenue side. This is a bad precedent for foreign investment too — the UNTR’s Martabe gold mine saga shows how this can backfire.

Two scenarios — Scenario 1 (Base case): Nothing changes materially. DSI takes a minimal fee during Phase I, Phase II implementation is gradual, and earnings are broadly unaffected. This is more likely for Phase I (June–August) which is just documentation. — Scenario 2 (Downside): DSI charges a meaningful margin. At a 4% fee on a 20% OPM business, you’re looking at ~20% profit drawdown. This needs to be watched closely once Phase II terms are announced.

The positive case — what if this actually works?

Finance Minister Purbaya’s view during his recent Konferensi Pers is bold: “Profitability must double. It’s time to buy.” Here’s the logic:

1. Win-win if executed well. Underinvoicing is eliminated → ASP rises to true benchmark levels → the government collects more tax and royalties, and minority shareholders get the earnings that were previously leaking to Singapore trading affiliates. More USD stays onshore in Indonesia, supporting the rupiah.

2. Single seller = higher negotiated prices. If DSI successfully consolidates Indonesia’s negotiating position as the world’s #1 exporter of these commodities, it could push global prices higher. Companies with good GCG (corporate governance) benefit directly — they weren’t underinvoicing anyway, so the ASP uplift is pure upside.

3. Non-GCG companies are definitely hurt — and that’s a good thing for the market. Companies that were playing the underinvoicing game lose their edge. The playing field levels. This is structurally positive for investors who pick well-governed companies (which is exactly what we do).

On balance, we believe the positive outcome outweighs the negative

But we are still cautious because there is execution risk. Although Danantara’s recent success in cleaning up PT Timah (TINS) delivered a +1,184% YoY net profit surge is a data point, more successes that lead to better profitability would prove crucial.

Insider signal: does the owner already know before the information was released?

Well we don’t know for sure and I sure wish I could give Mr Anthony Salim a quick call, but a couple months back, our president Prabowo did have a meeting with the conglomerates who own large mining sites. It wouldn’t be far fetched to assume that the bosses have also be briefed regarding the government initiative. Especially the topic of discussion as reported by Kompas: “Indonesia Incorporated”.

And another data point was around this time — when the market was fearful — TP Rachmat increased his personal stake in ADRO from 3.02% to 3.46%. That’s +125.4 million shares added.

Think about that. We acknowledge that this is pure speculation, but the conglomerate owners (TP Rachmat, Boy Thohir, Anthony Salim) likely had early visibility on this policy direction before the public announcement. These are individuals who attend the highest-level government briefings. If TP Rachmat — who would have understood the implications better than anyone — chose to buy more shares rather than sell, that’s not a signal to ignore.

Call it what it is, but to us, insider buying is a bullish signal especially in the middle of widespread market fear. And to be fair, we will check again in the coming months if there are more insider buying or less of insider buying.

But let’s remain level headed and not get carried away. We are investors with limited information anyways. Here are key questions that still need answers:

1. What will DSI’s margin be? Rosan mentioned DSI will take a trading margin, but the rate hasn’t been disclosed. Below 2% = manageable. Above 3% = needs re-evaluation. Worst case: At 4%+ on a 20% OPM business, we’re looking at a ~20% profit drawdown.

2. How will settlement payments work? If DSI adds 30+ days to the payment cycle, working capital can get squeezed.

3. How will DSI handle potential conflicts of interest given its leadership’s prior roles in the mining companies it’s meant to oversee?

Closing Remarks

We will continue monitoring every development that affects the profitability of companies in our portfolio. We think that it is helpful to have every investment decision made based on the best available information at the time — like assembling a puzzle, one piece at a time.

Being right or wrong on any single call is part of the investment business. What matters is that the process is disciplined, the logic is clear, and we keep learning from every outcome. Do our best and never get attached to the outcome. Especially when the outcome is really beyond our control.

Disclaimer: this exposition is an editorial. It is not an academic paper and it should not be seen as facts. It is based on the author’s personal observation and experience. It does not constitute investment advice and is for educational purposes only.

I was playing with Instagram story and created a poll on Recompound. Market was horrendous. And I wanted to check our followers how worried they are about the market. It turns out that a good 30% of the responders were feeling worried. So perhaps this write up could be timely.

We all know where does the worry come from

First things first, we know that worry tends to come from the market itself. The modern stock market is not a place where real ownership exists for many people. It is a place where price movements gets sent to you every moment. Push notification, tickers, news commentary, now we have streams and social media, WhatsApp and Telegram groups among others.

You already know all of this. But it is important to repeat that the market ties you with a rope by design. You get pulled into it the moment you sign up.

Simple observation:

When you see the news saying anything good or bad about the macroeconomics, geopolitics, government policies, etc in whichever outlet, you would be pulled towards checking your investment application. You’d be wondering how does this news or event affect my investments?

This is normal because the market is in the business of transactions, and broadcasting prices loudly is what gets people to act. Feeling something every time prices move is what gets you to trade. Trades generate fees. Fees feed the entire chain.

So knowing where the worry comes from is a good starting point. But it is not good enough cure.

Where does this worry normally lead to?

Worry or anxiety is an unpleasant feeling. So when we are worried, we naturally seek for stimulus or information that counterbalances that worry.

How we do this is usually we search for answers to questions that we have in mind. Among others, these are primary questions that people have in mind:

1. How long is the market going to stay horrendous?

2. Have we made the right investments. I.e. will our holdings recover as the market gets better?

When these two answers are reliably answered by someone we trust, we’d find ourselves comforted. Someone we trust can literally be anyone:

1. It could be your financially savvy brother

2. It could be your capital market friend

3. It could be a YouTuber investment guru

4. It could be an intelligent guy on Substack

5. It could be your super smart colleague in the private equity space

6. You get the idea

While the claims and predictions from people you trust can make you less worried, I argue that the pleasant feeling tends to be fleeting. It is more similar to a pain killer that removes the pain. But likely that the underlying “sickness” is not attended to effectively yet.

Assume that my argument is valid, why do we look for claims and predictions as a natural response to cure our anxiety?

Let’s have a bit of fun first 🙂

Chris Williamson recently interviewed a mentalist named Oz Pearlman. Oz would guess names, birthdays, pin code or numbers they were just thinking about. By the end of the episode, Chris’ face was as red as cherry as he was defeated and felt like he’s a prey in water. Take a look, video is funny.

How do you feel after watching the video? I made Budi and Wilson watch the video at the office. Wilson was entertained. Budi was skeptical. Budi is way too analytical for this stuff. He thought that it must be set up. But I did observe both of them while they were watching. Both of them sat there momentarily in disbelief.

So why does this work? Why are we so intrigued?

Btw, if you say don’t feel anything, please stop trolling me haha.

My guess is because our brain is designed to assume that minds cannot be read. We go through our life thinking that our mind is private and ours alone to observe. What we consciously do not divulge, do not get known by others. So when somebody appears to be able to read minds, the experience feels like breaking law of nature.

Now let’s sit with this for a moment and draw parallel to investments.

Similarly, our brain is also designed to assume that markets cannot be predicted. So when a statement that “looks like” a prediction turns out to be true, the predictor becomes like a wizard. To wit, you could take a look to a conversation that was perceived to be a prediction.

But I promise I didn’t make a prediction. I didn’t say that a certain stock would go to a certain price. I just said that we would be more interested if the price becomes lower.

So here’s what I hope is clearly demonstrated. The feeling when you see a magic trick is very similar, nigh the same as that feeling when you see a market prediction comes true.

That feeling is called wonder.

Wonder is a pleasant feeling when what you thought was impossible, happens. Then you would continue to want to know how on earth does that impossible thing happen.

A mentalist sells wonder through the illusion of accurately reading minds.

An investment person sells wonder through the illusion of accurately predicting the market.

That is the trick.

So what have we learned from watching a mentalist in action

We’ve learned that:

• Worry comes from the market movement

• Our tendency is to search for people we trust who have previously predicted the market because it has generated a sense of wonder.

• When that trusted person makes another prediction that is in favour of your investments, you feel less worried.

So I hope that it is now clear why we naturally look for prediction from people we trust. Because accurate prediction generates wonder → which creates trust. The next time we feel worried, we would go again and seek for the prediction to alleviate our worries.

But here’s what Oz tells us about his tricks

Literally the first question of the podcast:

Chris: “You have said that your career is built on a lie. What’s the lie?”

Oz: “The lie is that I can read people’s minds. I can’t. I wish I could.”

Oz would be the first to tell you that what looks like mind-reading is a very sophisticated set of guesses, observations, and probabilities. The miracle, when you understand it, is just craft of creating an illusion that he’s reading minds.

He has nothing to gain by saying this. He says it anyway, because he is honest about what he does.

And I’d say this to everyone who happens to trust us as well. We believe that the market is too random to make predictions accurately 100% of the time. So we’d rather not make predictions. So when people ask:

“when is the market going to recover?”

“is the currency depreciation going to get better?”

“how is war uncertainty going to impact the market as a whole?”

We will be first to say that we don’t know.

But when we say we don’t know, it does not mean that you must be worried, quite the opposite

There is a neuroscientist named Lisa Feldman Barrett who wrote a book called How Emotions Are Made. She argues something that, if you take seriously, changes how you think about your own worry.

Her argument is that emotions are not universal, hardwired things that just happen to you. They are constructed in your brain, in real time, from concepts. And the most powerful thing is that concepts are not just built from experiences that you observe, but also from words of our language.

Human brains are very unique in the sense that we can construct a reality in our minds using words. The existence of reality depends on a perceiver. Think about it. What is money in a physical sense? Well it is a bunch of bits (or code) that is stored in the database of a bank. If you wire Rp 100.000,- to a monkey, the monkey will not feel a thing because that money to them is not real. But if you send that Rp 100.000,- to Toby. Toby will say thank you and go to Indomaret and buy a box of sparkling water. Indomaret would give Toby that box of sparkling water because they agree with Toby that his Rp 100.000,- is real.

Another example how we construct reality using words.

When you order from Domino’s, you do not say:

“Hi, I’d like a circular flatbread with tomato sauce, melted cheese, and pepperoni baked at 220 degrees. Please.”

You’d say:

“Hi, I’d like to order a pizza. Please”

The word makes the thing real, orderable, recognisable and most importantly gojek-able right to your door step. Without the word, you would have to assemble the concept from scratch every single time, and most of the time you would not bother.

Here is what this means for your worry. How to feel less worried

Barrett’s claim is that emotions as a reality are constructed the same way. The bodily sensations are real — a tightness in the chest, a tug in the stomach. The worrisome thoughts that occur on our mind is also real — I wonder if my investments are going to recover tomorrow or next week.

To feel less worried, you need a competing and name-able state. Btw, naming it is very important as I previously discussed the importance of names.

But what is a good competing state? One that has its own name? Without a competitor, worry has no rival and keeps running. We’d be looking for predictions to make us feel less worried and that’ll feel like a coping mechanism, rather than a long term solution.

Here is the awkward part. Many when asked to name the opposite of worry, would go for calm or peace of mind. But I think that these words are not good enough.

Calm does not specify what changed. If I tell you I am worried, and the next week I tell you I am calm, you do not know why. Did I take a holiday? Did I medicate? Did I just have a good day? Did the market rally? Did I sell everything? Calm describes a state of feeling without describing the underlying condition that produced it.

Peace of mind is something most people associate with a vague spiritual state. It does not feel achievable on a Tuesday morning while you are running a business.

Wonder, in case you are wondering, is not a good opposite too. Because wonder only happens when the predictions have come true. If I hear Warren Buffett says that market would recover, I’d feel wonder only after the market really recovers. Not when it takes another 5% plunge on a Tuesday morning.

So we need a different kind of opposite. Something more specific than calm. More human and grounded than peace. More present than wonder.

Let me propose a word.

Untethered

Most retail investors live with an invisible rope. The rope ties you to the price chart. You do not know the rope is there until it tugs — your stock dips and you feel it in your stomach, your stock jumps and you feel a sudden rush. You check at 9am. You check at lunch. You check at end of day. The rope is taut all day.

Untethered is the day the rope falls off.

It does not feel the same as detachment. Detachment is something you do — a discipline you cultivate. Untethered is something that happens to you once the conditions change. The rope falls off because it is no longer pulling on the other end.

The chart is still there though, just that you are not pulled towards it.

Level of worry depends on who is holding the rope

I want to be honest with you about why feeling untethered is, for me personally, easy.

It is not because I have superior willpower or a better meditation practice. It is because someone else is holding the rope. I use Recompound with whom I can interact with a dedicated advisor. So does my mom. So does my brother. None of us think about the market day in, day out — not because we are unusually disciplined, but because we know there is a dedicated advisor whose actual job is to do the watching. The pull is gone because it has been outsourced to people I trust.

That is the entire mechanism. There is no trick.

Which means the answer to what to do tonight if you feel worried depends on a question only you can answer.

Right now, if I did not look at my portfolio for three months, would I trust that someone is still watching it on my behalf?

If your answer is yes

if you have a wealth steward you genuinely trust, whether that is a finance-savvy sibling, an advisor you have worked with for years, or anyone else competent and aligned with your interests — then here is what to do. Understand them more.

If your financially savvy sibling is taking care of your investments, ask them questions. Understand their philosophy, the assumptions they make, the learnings they have experienced, the mistakes. When you realise that work has already been done, the rope is loose.

If you use Recompound and you feel worried, talk to Budi 🙂

If your answer is no, here is what you can do.

Your worry is not irrational. It is your nervous system accurately reporting that you are alone with the responsibility, in a system designed to keep you tugged. The rope is doing its job. The work is to find someone trustworthy to hold the rope together with you. It can be anyone, but ideally someone honest, competent and aligned with your interest. With whom you can verify their work. Your advisor, your sibling, your uncle, anyone.

P.s. It can be yourself as well. I believe that if you consistently commit to a strategy that is logical and has been proven to work for you, you will likely feel untethered from the volatility of the market overtime too.

Closing remarks

That someone could also be us or it might not. Again, what matters is that the person on the other end of the rope is honest, competent and genuinely on your side. They really don’t have to be a superhuman or a market wizard. But I believe that if those three conditions are met, you can feel untethered. Whoever is holding the rope, make sure they are holding it on a bad week, not just a good one. Because if they don’t hold on to it, you’d end up getting tugged again.

A rope you can name is a rope you can take off. But you take it off by handing the other end to someone competent you trust — not by pulling harder against a system that is built to pull back.

That is what we are doing for the people who work with us. Not predicting the market. Not chasing the trade. But really by helping them hold the rope on their behalf.

So that’s it. While seeking for prediction is an okay solution to feel better for a while, perhaps you could attempt to feel untethered from the market by handing the rope over to someone who’s honest, competent and aligned with your interest. Subsequently, you will feel less worried from market volatility, getting your life back in the process.

Cheers!

References

In case you’re interested in reading or watching the materials consulted in writing this article, below are the entry points:

1. Barrett, L. F. (2017). How Emotions Are Made: The Secret Life of the Brain. Houghton Mifflin Harcourt. [The construction theory of emotion, the role of words and concepts in shaping what we can feel, and the argument that emotions are predicted, not triggered. The pizza-style examples of how language constructs ordinary categories appear throughout.]

2. Williamson, C., interviewer. How to Steal Thoughts Out of Anyone’s Head — Oz Pearlman — #1088. Modern Wisdom Podcast. April 23, 2026. https://chriswillx.com/podcast/ [Source for the “the lie is that I can read people’s minds. I can’t. I wish I could” exchange in the opening minutes, and the “it’s not about me, it’s about them” line later in the episode.]

3. Taleb, N. N. (2001). Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets. Random House. [Background reading on why streaks of correct predictions in finance are usually luck rather than skill, and why we are so easily fooled into mistaking the former for the latter.]

Not only because of the well-known fundamentals — the earnings quality, the governance, the balance sheet — but let’s be honest. It is also because of the social angle.

There’s that subtle validation that comes from owning what every serious/respectable person around you owns. A lot of people I admire ended up with portfolios genuinely concentrated in BBCA, BBRI, BMRI.

To add, you can see that the damn thing is real. You could see bank branches, office towers bearing their names, and ATMs that are virtually everywhere across Indonesia. Even in cities that you have probably never even heard of, like Tambolaka, you see a Bank Rakyat Indonesia.

Mind you the behavior to buy and hold big banks is not easy. You need discipline to set aside your monthly income, month after month, into stocks whose price action is nowhere near as exciting as crypto or the smaller penny stocks that dominate your feed.

You need patience.

You need a certain degree of deafness to shield you from the loud noises of people screaming

“Gua cuan x% beli y”

”I am profitable x% because I bought y”

For years.

You cannot even begin to start counting in your head: how much money making opportunities have I missed because I refuse to listen to the guy next to me talking about these other sexy stocks.

Even worse is the recent drawdown — minus 30 to minus 40 percent from the all-time highs. Portfolios filled almost entirely with big banks. A thing that was assumed to be the prudent action, the prudent decision, turns out to be “blatantly wrong” within the span of less than a year.

All the hard work of slowly saving into a sizeable investment account — gone in a matter of months.

If that’s not painful, I don’t know what is.

Because it must be really difficult to do the prudent thing for so many years and get a less-than-ideal result. It almost feels like a fuck you in the face. From the market, — fuck you, you were supposed to be timing this, trading it, running speculative plays to generate superior returns. Or — fuck you, you should have just stayed in time deposits and risk-free rates.

And if you tried to go one step braver than the risk-free rate — if you bought the bonds of shadow banks offering a couple of extra percent — those shadow banks tend to go under. Another huge risk on your capital you never saw coming.

Painful stuff.

But strangely, watching this has led me to a realization about how I look at failure.

As a kid I was terrified of it. I’ve been getting scholarships, prestigious jobs, venture capital backing, whatever. But underneath all that, I also encountered plenty of failure.

The first time I failed badly was my SAT in high school. I cried for an entire evening because score came back under 2,000. I was so afraid I would end up at a bad university, so afraid I wouldn’t get scholarships. Disappointed in myself.

That night I told myself: I don’t want to fail anymore.

Obviously I didn’t learn anything back then.

A couple of years before we started Recompound, I had a co-founder split. Not catastrophic, but tough. It drained my savings. The opportunity cost was a seat at a prestigious bank. I was questioning everything — what am I doing.

I thought those two events taught me something. They didn’t. Not really. I still carried hesitancy toward failure.

The lesson only arrived when I started feeling it in other people.

Watching many disciplined people fail after doing the right thing. After trying to be a good person. After trying to be a fucking disciplined person who sets aside their monthly wages to plan their future properly, trusting in so-called safe instruments.

And here’s the strange part.

The ones who grow the most from this aren’t the ones who avoid failure — they’re the ones who refuse to resign to it. They suddenly care about why they invested in a stock. They care about the analysis behind it. They care about why a company is actually undervalued — not just whether a more financially savvy person said it was undervalued.

They stop accepting the prescription. They want to verify. They want to understand with their own common sense that a company is genuinely cheap — not take someone’s word for it.

That move — from “this is good because everyone says so” to “this is good because I understand the mechanism” — is a huge, huge shift. It’s the shift that lets people stay invested for the long term.

That’s when I really realise that the biggest growth in a person comes from their biggest failure.

If big banks had never corrected, I imagine these same people would still be doing the same thing, over and over. Maybe the drawdown happened for a reason — to upgrade the critical minds of the general population. To separate the people who want to actively improve from the people who quietly resign to fate.

So wherever you are, if you’re in the middle of this — this phenomenon, this so-called failure — I hope you know which side you want to be on.

I hope you choose growth over stagnation.

Last I checked I don’t think we can time travel and reverse decisions we made in the past. The only thing we can do is improve the next one. And maybe continue to have faith that the next fruit is better because of what this one costs.

If you don’t know who talk to about this, you can always give us a call.

Cheers.

As always, this is not an investment advice on the mentioned ticker. This is for educational purposes only. Always do you own research or consult your investment advisor before making your own investment decisions.

Let’s get into this.

Part of my 2026 new year’s resolution was to get better at running. What better way for me to get better at running by forcing myself to join big running events, so that I could get my coveted 10K or HM Personal Best. One competition for me that stood out was JAKIM 2026. It looked legit as I recalled in the previous years where the competition was organised, there were plenty of road closures in Jakarta area, around the running event.

So when I saw in a running calendar event that JAKIM 2026 was open for registration, I speedily rushed to my phone and attempted to register. The registration process was awful. The instructions was vague and the website load was slow. The worst part? I have to download yet another banking app to register. So I downloaded Bale from BBTN, opened an account and… failed to register because tickets were sold out. I thought to myself, “wow running has been super popular nowadays in Jakarta” but again I thought to myself “wow this Bale app by BBTN must have gotten a lot of users from this running event” so let’s take a look at BBTN.

The app itself must be properly built because it handled large amounts of traffic quite smoothly. As people are forced to make a bank account and settle ticket payments there, I wonder how’s their Current Account / Savings Account ratio (CASA ratio). Banks love low cost funds because they are in the lending business. You’d want the cost of your funds to be low (giving people less interest) so that you can have higher spread when you lend the money out to people, giving you higher net interest margins. So if you hold super established running events and make participants bank with you as a pre-requisite to purchasing those tickets, you’d get access to cheap funds.

Quick note: CASA Ratio measures the proportion of current and savings accounts in a bank’s total deposits. Current accounts are low-cost funds (little to no interest paid), while time deposits are more expensive for banks. The higher the CASA Ratio, the cheaper the bank’s funding base — and generally, the better.

In marketing words, Running is top of funnel (TOFU) and as people get acquainted with the bank’s app and its usability, they get pushed down the funnel as they use the app more extensively for other banking services (like getting a mortgage).

So I went to look at the CASA ratio numbers since 2022 (the first time they held a JAKIM marathon was in 2023).

• Desember 2022: 48.5%

• Desember 2023: 53.7%

• Desember 2024: 54.1%

• December 2025: 48.7%

I’d say the CASA ratio growth is not too shabby, although I have seen better numbers in other banks. But given BBTN’s price to earning’s ratio about ~5 and BBTN’s price to book value which is about ~0.5, it might be interesting for me to go deeper because the bank is showing signs that it wants to stay relevant, but the market is rating it as if it is filled with super bad assets in a sunset industry. So it makes me curious as to what is BBTN’s main business. Why market seems to be quite harsh on BBTN. I don’t think there will be a right or wrong answer to this, but it is fun to explore.

Investors are forward looking

We invest today not to get the returns immediately. There is usually an underlying thesis why the company we invest today will be more valuable tomorrow. We’d be more inclined to invest if the company is poised to grow. So what are the growth drivers for BBTN?

Well, BBTN is a specialised bank that is focused on mortgages. So it really is more of like a property business but with a much faster sales cycle (you don’t have to wait for developers to build and handover to their customer for you to acknowledge sales in your books), the moment a customer takes in a mortgage, the bank gets revenue (remember, you pay the bank an interest if you take mortgages!!). For BBTN’s case, the moment a real estate developer develops their houses, they also get revenue. So they get revenue from both property buyer and real estate developer. But it also has its downside where property developer would get their money as soon as there is a buyer, BBTN has to deal with the uncertainty of home buyers defaulting on their mortgages. Then they are left with illiquid real estate assets.

But what type of property is BBTN focusing on? Affordable housing.

The core portfolio is split between subsidized (FLPP) and non-subsidized mortgages, with the former representing approximately 64% of the total loan book as of 9M25.

Who’s buying the houses? Well we have seen that millennials represent ~79% of the subsidized customer base. This demographic focus typically results in higher Loan-to-Value (LTV) stability and long-term customer retention. But because this is subsidized housing, it follows that not everyone (especially the bourgeoisies) can participate. Your monthly income cannot exceed a certain threshold, otherwise you will have to pay non-subsidised interest on your mortages. But if you do qualify, interest is super attractive and your likelihood to default is also minimised. More encouragingly, the income cap to qualify for FLPP has been raised.

FLPP Income Eligibility Criteria (Updated April 2025)

This tells us that the number of people who can qualify for this loans would also increase. Which translates to better quality loan books for the bank.

Cool, now that the bank potentially will have access to more quality borrowers qualifying for FLPP program, does the bank has enough liquidity to make the loan? Well yes, we can see that the deposit growth is outpacing loan growth. You might think is it because the Finance Minister Purbaya who placed Rp 25 Trillion into the bank? You are correct, but even if we exclude the massive government fund placement, the core deposit growth still stood at a very healthy 9.2% year on year (up to 10.0% in specific institutional/retail metrics).

So it looks like it is going to be very good for shareholders isn’t it? On the cost side we are seeing that macroeconomic factors are giving that extra “ooomph” for the bank to grow. For example, Bank Indonesia lowered its policy rate to 4.75% in Q3 2025.

On the revenue side, we are also seeing the FLPP program growing from the government’s 3 million housing program for millennials who by the way makes up a growing chunk of the population (Indonesia is experiencing a bonus demography).

Since 2015 (back then it was still one million house), BBTN is the dominant contributor to these national figures, consistently contributing ~60% of the national housing realization annually through both demand-side financing (Subsidized Mortgages/KPR) and supply-side financing (Construction Loans for developers)

According to BBTN’s sustainability data, the national achievement of the program per year is as follows:

• 2015: 699,770 units

• 2016: 805,169 units

• 2017: 904,758 units

• 2018: 1,132,621 units

• 2019: 1,257,852 units

• 2020: 965,217 units

• 2021: 632,373 units

• 2022: 875,832 units

• 2023: 878,727 units

Rest assured, BBTN is highly specialised in supporting government programs like this and supporting FLPP would require expertise in cashflow management. Which means it is likely that it will be more and more favoured vehicle to realise the government’s program into the future (2026 and so on). Now we could see that the narrative is there and the case for increase of profitability from higher net interest margin is also there.

But what’s with the market valuing the company as if the company is in a sunset industry? Are investors in IDX crypto bros who believe that blockchain and DeFi will make banks a dinosaur? Jokes aside, let’s try to find out more about potential setbacks that BBTN is facing.

So what are the setbacks

Well COVID. If you noticed during COVID years the number of units that got constructed above took a dip. But more important than that, it is reasonable to believe that COVID would affect the quality of mortgages because many people lost their jobs during that time of lock downs and ceasing of business operations.

During COVID, Bank Indonesia allowed banks to "restructure" loans. This meant a loan could be "non-paying" but still classified as "performing" on the balance sheet. This allows a company to keep booking "accrued interest" as profit even if the customer hasn't paid a single Rupiah in cash.

We see this clearly when we compared accounting profits and actual cash generation. Accounting profits was relatively stable at Rp 1.6 Trillion (ignoring the anomaly in 2019). But Cash receipts dropped from Rp 3.4 Trillion in 2019 to 1.8 Trillion in 2020. So this is already telling me that the bank was hit by a double-whammy: a collapse in new loans (seen in the construction dip) and a deterioration of the existing loan book because of COVID.

If I were in the CEO’s seat, my first priority would be to clean up the balance sheet. Bad assets should be dealt with decisively so they don’t become a structural drag on profitability for years. When Pahala N. Mansury handed over to Nixon L. P. Napitupulu, who assumed the role of Acting CEO in February 2021, the signals suggest that this is precisely what management began to focus on.

One area that reflects this effort is the Loan at Risk (LAR) coverage ratio.

A loan categorized as “at risk” (LAR) has elevated probability of becoming a Non-Performing Loan (NPL), so prudent management would increase provisions to cushion against that possibility.

Historically, throughout the 2010s, LAR coverage hovered around ~15%. Since Mr. Nixon’s appointment, it has been raised to the 19–21% range. Directionally, this is the right move — it signals greater conservatism.

However, as outside investors, we do not know whether this level of coverage is sufficient. Asset quality risk is dynamic, not static. If underlying borrower stress resurfaces, or if post-restructuring performance deteriorates, LAR coverage may need to be increased again. That would come with consequences: higher provisioning, lower near-term earnings, and potentially weaker returns on equity.

In other words, while management appears to be acting prudently, there remains uncertainty around whether current reserves are adequate for the true embedded risk in the loan book. Until that uncertainty clears, the market is unlikely to assign a premium valuation — and as investors, we must acknowledge that limitation.

For now, there seems to be quite a number of puzzle pieces that remain unresolved:

• Is the management going to be able to continue executing the program 3 juta rumah well? Is the management going to steer clear from the non-subsidized mortgages (which is known to be taking a hit nowadays due to recent layoffs)?

• Has the COVID asset quality deterioration been handled well?

• Is the management going to be able to be less reliant on time deposits as source of funds? It is heading towards that direction with the running events, Bale, and corporate initiatives but we need to see a stronger signal while there are other banks are already showing more sexy CASA numbers.

If you are an investor, how would you value this kind of company? Do you think it has enough margin of safety? Multiples wise its cheap but it feels less firm because a number of things could go wrong although the tailwind is right in front of our eyes. Especially given the fact that we are seeing signs that management has been doing the right thing. Do they deserve to be appreciated better? Or no? But regardless, we haven’t made ourselves comfortable in building a position.

I used to think Howard Marks was being a bit too simple, maybe even a little naive.

In his famous memos and talks, he often hammers home points like:

• “Macro-forecasting is not critical to good investing”

• “Disavowal of market timing”.

I thought:

Really? In a market as volatile as Indonesia, you’re just going to ignore the macro and not try to time the entry / exits?

Then, the last week of January 2026 happened.

The 2026 MSCI Fiasco: A Reality Check

The recent IHSG crash was a brutal wake-up call for many.

After the election of Thomas Djiwandono as Deputy Governor of BI, the market didn’t just stumble—it went into a full-blown “trading halt” as over-inflated “Konglo” narrative stocks melted down. The fear was real: rumors swirled that Indonesia could be downgraded to a Frontier Market, a move that would have a catastrophic domino effect on our fixed-income & currency markets as well.

Many social media influencers were still shouting “Bull Cycle!” just days before the crash.

Their logic? Indonesia’s weighting in the MSCI is only about 1.25%, so global institutions wouldn’t bother being dumped by us.

They were dead wrong. The institutions did care. The bubble didn’t just leak; it popped. Overnight, reforms were swept in, and leadership at the OJK and BEI were replaced as the government scrambled to fix the coordinated trading activities and “gorengan” actions that led to this mess.

The Report That Saw the “Pucuk”

Just six days before the crash, on January 22, we released our Recompound Monthly Report to our clients:

Excerpt of our January 2026 report to clients

Within the report, we said that we didn’t have a crystal ball.

We didn’t know the MSCI fiasco would happen exactly on January 28.

But we did see the “late-cycle” signals that Howard Marks warns about:

• Retail Participation: Share of Average Daily Trading Value (ADTV) was back at the “mania” levels of 2021.

• Narrative Chasing: Money was crowding into “Konglo” stocks where price action was driven by stories and momentum rather than actual earnings power.

• Public Euphoria: Google search interest for “saham” was printing fresh highs—a classic sign that we were super close to the “Pucuk” (peak).

  

Risk Control, Not Market Timing

When the crash hit, the IHSG dropped over 9% in a matter of days. But our portfolio’s drawdown is minimum:

This wasn’t because we “timed the market” and moved to cash at the perfect second.

It’s because we followed the Oaktree philosophy: The primacy of risk control.

We didn’t just buy “good assets” (read: stocks); we bought them well.

1. Earnings-Backed Stocks: Our holdings are positioned as cash-producing assets with high dividend yields (~9% p.a.). Dividends reduce your reliance on price momentum. When the “narrative” dies, the cash flow keeps you afloat.

2. Margin of Safety: We stayed disciplined. Even when names looked attractive, we stayed on the watchlist if the “margin of safety” was too thin.

3. Avoiding the Crowd: While retail was rushing into the trendy tickers (I won’t name names here, but it should be obvious to you), we were researching companies with stabilizing earnings quality in the real economy.

Buying Well is Your Only Protection

Who could have timed this pop beforehand?

Honestly, no idea. But you don’t need to time the pop if you aren’t holding the balloon.

As we wrote in our report: “Be a student of history, not the victim of history”.

If you buy assets with a wide Margin of Safety and strong cash flows, a broad market correction becomes an opportunity, not a thesis break.

Success in investing isn’t about being the smartest person in the room who predicts the crash. It’s about being the most disciplined person in the room who buys well enough that the crash doesn’t matter.

If you’ve been watching the IHSG lately, you’ve probably felt the FOMO.

You’ve seen the charts of certain IDX conglomerate stocks defying gravity, moving in vertical lines that make physics blush.

The common chatter in Jakarta coffee shops goes something like this: “Ah, this is just the Indonesian market being shallow. It’s a ‘bandar’ game. This doesn’t happen in sophisticated markets like the US”

To that, we say: Hell no.

If you want to describe the phenomenon into a single flowchart, this is what is essentially happening.

From the flowchart above, it is quite clear that “Konglo stocks” can be replaced with any other stocks such as digital bank stocks, sub-prime mortgages, etc.

Money flow guru can also be replaced by other gurus that pertains to the assets that are pumping. Retail can be replaced by anything that is essentially “dumb money”. People who buy stocks without a rational investment thesis.

So clearly this is not an “Indonesia problem”. It’s a human nature problem. We have seen it again and again in multiple different context that it really gets quite boring. And if you are reading this blogpost, hopefully you would “get” it and take the necessary caution.

As one investor Tiho Brkan noted, successful long term investing is the intersection of three disciplines: Philosophy, History, and Psychology.

If you want to understand why Recompound is sitting this one out, we have to look at all three.

1. HISTORY: The “Base Rates” of the 1960s

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AI, Commodities, and Why We’re (Still) Betting on Indonesia

2025 rewarded narrative stocks. We think 2026 and beyond will reward real earnings, real assets, and investors who are okay looking wrong for a while in order to be right for a decade.

Before we get into that, hi there! We help busy working adults with their long term investments in IDX with time tested value investing strategy. If you are curious, click here to find out more.

Disclaimer: This is not investment advice. It’s a reflection of how we at Recompound currently think about the world. We can be wrong. Please do your own research or consult your advisor before making decisions.

2025: the year of narratives

If you only look at index levels, 2025 looks simple: “markets are at all-time highs.”

On the ground, it didn’t feel simple at all.

• Early 2025 was full of pessimism, currency worries, and gloomy headlines.

• By the second half of the year, the mood had flipped. Social media was full of green screenshots and questions from potential clients: “Should we be more aggressive? If not now, when?”

Under the surface, one type of stock dominated: narrative stocks.

By “narrative stocks” we mean businesses where:

• the story and share price have already taken off,

• but earnings (actual net profit) are still far behind.

We saw a similar movie in 2021 with digital banks. Prices went up 10–100x, the story was everywhere, earnings did not follow at the same pace, and eventually prices had to come back down.

2025 was generous to people who timed these waves perfectly.

We don’t think 2026 will be the same game.

We think the next phase will be kinder to something less glamorous but far more durable:

Earnings-based stocks – businesses where price still mostly follows profits, not just a narrative.

Especially in markets where the real economy is slowly recovering underneath the noise.

The AI revolution is real (and uneven)

Before we go deeper into AI, a quick bit of context on where we’re coming from.

• Toby used to work as a software engineer at Goldman Sachs in Singapore, developing and maintaining mission-critical trading systems for the bank’s markets business. When your code breaks there, real money is at risk.

• Budi used to work as a data scientist at GoTo Financial, building credit scoring models for their “Paylater” product. Machine learning models were literally his day job long before the current AI hype cycle.

So when we talk about AI, we’re coming at it as people who have actually shipped and maintained production systems—not just as AI tourists reading news headlines & watching podcasts.

And the simple reality is: the AI boom is no longer just a buzzword phase. You can already see it in the data.

In the chart above:

• The red line is the S&P 500, steadily grinding to new highs.

• The white line is total US job openings, which have rolled over and trended down since the launch of ChatGPT.

We’re not saying AI is the only driver of this divergence, but the pattern fits the story: corporate profits and index levels keep rising, while the demand for additional workers is flattening or falling.

That’s exactly what you’d expect if AI lets companies:

• do more with the same number of people, or

• do the same amount of work with fewer people.

In other words, AI is already showing up as a productivity boost for capital, not as a jobs boom for knowledge workers.

Who feels that pressure most? White collars !

• Consultants and other professional services

• Junior lawyers and paralegals

• Auditors, analysts, and back-office knowledge workers

• Software engineers whose work is mostly maintenance rather than system design

A lot of what used to require 100 knowledge workers can now be done by 10 very good people plus AI.

Who is less threatened in the next few years? Blue collars !

• Construction workers

• Miners

• Technicians, field engineers and operators

• Logistics, warehouse, and field staff

AI (LLMs) today mostly live in laptops, phones, and data centers — not in excavators and brick-laying robots.

And here is the twist that matters for us as investors:

AI is a great leveller for emerging markets.

A capable analyst or operator in Jakarta with access to AI tools can process information like a small team in New York and produce “global-tier” output—without Silicon Valley payroll.

So while AI is a direct threat to some white-collar jobs in rich countries, it is a productivity amplifier for capable people and companies in emerging markets.

Why we are cautious on application-layer AI, AI SaaS, and (most of) the Magnificent 7

Before we get into that, hi there! We help busy working adults with their long term investments in IDX with time tested value investing strategy. If you are curious, click here to find out more.

If AI is so powerful, why aren’t we simply putting all our money into AI software, LLM platforms, and the Magnificent 7?

Because where you stand in the value chain matters.

Read more

After reading the short editorial on the AI bubble, perhaps this video about our client handling market panic like a pro is going to pique your interest.

TL;DR

• Is AI revolutionary? Hell yeah !

• Will investors be disappointed a few years from now? Likely.

Why everyone’s excited

AI can read, write, talk, see, and code. It already helps in search, ads, customer service, medicine, software and self driving cars.

That is real, and it is big world-changing.

I mean personally as I used to be a data scientist, data exploration, analysis, visualization used to be a big chore. Now I am seeing how an AI can perform those tasks much better than me within a much shorter timeframe. Yes, without the lunch breaks.

The money firehose

The biggest tech companies are spending CapEx of hundreds of billions on AI data centers (chips, buildings, power).

Venture capital is also pouring money into AI startups.

Why this matters: Cash goes out now (to build). Profits show up later (if things work). That gap is where investors can get hurt.

What we are hearing on the field

A friend of ours who manages money in the U.S. says AI startup valuations in Silicon Valley are nuts.

Example he’s seeing: a startup with $1 million ARR getting valued at $200 million.

Amazing if the company grows into it; painful if growth slows.

What could go wrong (even if AI wins)

1. Big build, slow payback

   If customers don’t show up fast enough, those GPU farms sit under-used.

2. Accounting drag

   New hardware gets expensed over time as depreciation. If equipment wears out faster or earns less, profits fall.

3. Thin early margins

   Running giant models is expensive. If prices fall faster than costs, cloud profits get squeezed.

4. Return on capital math

   If profits grow slower than the asset base, ROIC (Return on Invested Capital) drops—even when revenue is rising.

Where earnings really come (as of today)

For Mag 7, most profits still come from the old cash engines:

• Microsoft: Office/Windows + Azure

• Alphabet (Google): Search + YouTube ads

• Amazon: AWS + Retail/Ads

• Meta: Ads (Family of Apps)

• Apple: iPhone + Services

• Tesla: Cars

These fund the AI CapEx.

If AI pays quickly → great.

If it pays slowly → free cash flow gets squeezed, depreciation rises, buybacks slow, and valuations compress.

No bust required—just meh returns.

The Mag 7 entered a mega build-out phase. Annual spend is set to more than double in just a couple of years.

Even these giants are using a sizeable chunk of their cash flow (peaking ~60%+) to fund AI. That means less leftover for buybacks, dividends, and non-AI projects—unless AI starts paying for itself quickly.

Think of this as building a nationwide highway system before the toll booths are earning much. If traffic (AI demand and pricing) arrives fast, it’s a great investment.

If it arrives slowly, profits and free cash flow might be squeezed—investors can be disappointed even while the technology changes the world.

Rough guesses: how much is AI directly contributing to Mag 7 Revenue (exc. NVDA)?

Two buckets:

• Direct AI = things customers pay for as AI (Copilot, AWS/Google AI services, FSD).

• AI-enabled = AI that quietly boosts existing lines (better ad targeting, stickier devices).

These are directional guesses based on public commentary; they’ll change as disclosures improve.

Capex booms: a caution from history

CapEx booms have almost always led to eventual collapses and a lack of returns for shareholders. This is despite benefiting consumers and the world in general.

Some of the more famous historical references include:

• The US Canal Boom of the early 1800s

• British Railway Mania of the 1840s

• The Dot com boom in the late 1990s

Maybe this time is truly different. But those are some very dangerous words…

Even a world-changing tech can deliver so-so investor returns if spending runs far ahead of profits.

This might be mind numbing. Because saying fundamental is dead and fundamental is not dead appears contradictory. Yet I think there’s merit to be accustomed with paradoxes in the real world. The examples are everywhere and I can’t help but notice it.

In physical sciences

The most fundamental theory on light presents that light exists as a duality. Light behaves as a wave and it behaves as a particle.

A German Physicist, Max Planck, showed that light energy is not released continuously, but rather, it is released in a tiny discrete packets he called quanta. This led to the concept of Planck Constant (h), which is a number that relates a light’s frequency (f) to the amount of energy that is being carried by a single unit of light (E).

But at the same time, light also exhibits in wave like property in the double slit experiment. Because as light travels through a double slit (imagine below)

Light source shining → | | → creates an interference pattern

Note: | | illustrates double slit that light passes

This experiment showcases that light behaves as a wave as it forms an interference pattern after passing a double slit. Therefore, light exhibits a contradictory nature by being a particle and a wave at the same time.

How do we reconcile the contradictory nature of being a wave and a particle at the same time? Well, it is (or at least attempted to be) reconciled by doing quantum physics, which is beyond my pay grade. But the point is, saying that light only acts as a particle or light only behaves as a wave is now accepted to be incorrect.

In running a startup

Dalton Caldwell, in the video about How Impatient should Founders be in the Pre-AGI era describes the seemingly contradicting advice: As a startup founder, you have to be both impatient and patient.

Impatient in getting the work done and making sure that progress is made. But also patient in understanding that hard problems requires time to solve. A skill requires time to be acquired and crafted. Michael even mentioned

“Look at the 20 software companies that you respect the most. Tell me which one of those blew up super fast. Which one was like they made it in a year?”

So day to day, founders should be impatient to get the ball going. But long term, founders ought to be patient because hard problems take time to solve. Sound piece of advice.

There are many more examples of truths that appear to be contradicting each other. In Islamic studies, in Al-Ghazali’s work Tahāfut al-falāsifa (incoherence of philosopher), he appears to be against Avicennian metaphysics. While later on he relied heavily on Avicennian philosophical tools in his work. Which seems contradictory.

But later on Frank Griffel argued for a resolution by distinguishing philosophy as method vs. doctrine. So Al-Ghazali rejects metaphysical conclusions that went against the revelation of the Qur’an but accepts the philosophical methods (logic, demonstration, classification of sciences) to serve the truth when properly used.

In investing

It really becomes apparent to me, at the very least, that fundamental is dead. But it is also not dead. Let’s discuss fundamental is dead first.

Fundamental is dead

We refer to the experiment that is run in UC Berkeley experimental social lab, presented by Dr Greg La Blanc. The experiment was originally designed by Prof Vernon Smith who won the Nobel prize in economics. And it was an eye-opening one in trying to discern how a bubble is formed. By definition, a bubble is formed when

The price of an asset continues to rise up far beyond its true fundamental value (or intrinsic value).

Famous bubbles in recent memory include the Dot Com bubble in 2000 and the housing bubble in 2008.

But one can argue that the existence of bubbles themselves is not a strong enough reason to say that fundamental is dead. Because the information that is available to market participants about the true fundamentals of the asset that is being traded can be different. Beauty is in the eye of the beholder.

For example, if a MacBook Pro is traded at $5,000 in the market, Toby might think that this MacBook Pro is worth $10,000. That’s why he buys at $5,000. But Budi might think that this MacBook Pro is worth $20,000. That’s why despite the price rise to $10,000, we still have a buyer, Budi, who expects the price to be traded at $20,000.

Now this experiment eliminates the uncertainty in terms of the fundamental value of the asset that is being traded. So the fundamental value of the asset is known to all market participants. No shocks, no nothing.

My dear reader, how do you think the market participants behaved?

Experiment setup

The experiment setup is as follows:

1. The fictional asset has 15 trading periods. So 15 trading days in the stock exchange if you will.

2. The fictional asset has a known fundamental value which is time period in the market multiplied by 24 lab dollars. So for example:

   1. Period 1 → value of the asset is 15 * 24 = 360 dollars

   2. Period 2 → value of the asset is 14 * 24 = 336 dollars

   3. and so on.

   4. …until the final period when value drops to 0.

3. Some participant received cash to buy assets. Some participant received asset to sell assets. This creates variation.

4. During a trading period, participants are free to input bids or offers (buy or sell) of the asset that is being traded.

5. At the end of the period, participant with the asset will get dividends ($24) that’s why the value drops all the way to 0 in day 15 . The distribution of the dividends is also known.

   

In the image above, you could see the flat line at each time period displaying the fundamental value of the asset. At the end of day 1 and 2. People are still generally timid. Only wanting to buy the asset far below its fundamental value (See price is only about $70 while the intrinsic value is at $300++). As more trading days have passed, we see that there is an increase of the asset price nearing its fundamental value as shown in the image below.

As the price now is almost equal to the fundamental value, we should be seeing that people would start to sell their assets and be more cautious of purchasing the assets beyond its fundamental value. But nope, it keeps going up.

The price starts to come down as people start to notice that the game is about to end. So they quickly sell their assets to lock in their profits as the price of the asset converges back to its fundamental value.

The best thing is, they repeat the same experiment to the same set of participants and they see similar bubble charts forming.

What does this tell me

It simply tells me that fundamentals of the asset doesn’t matter to market participants even when the fundamentals is non-contentious. They are still willing to sell assets below its fundamental value. And they are still willing to buy assets way above its fundamental value.

But when we zoom out

We know that fundamental is not dead. This is 10 year price vs earning chart of ITMG

This is 10 year price vs earning chart of BBCA (biggest non SOE bank in Indonesia)

This one is ARTO (a digital bank in Indonesia). Its price was far beyond its fundamental value and it ended up reverting back.

We also have an example of a price catching up to company earnings (TAPG). Examples are plenty.

After seeing these pictures and plenty of evidence, we can see that price tends to gravitate towards the fundamentals of the company in the long term.

Howard Marks in his recent memo Calculus of Value, mentioned that the price of an asset reflects the consensus of opinion of market participants surrounding the present and future value of the asset. But in the moment, the opinion does not has to be correct. If market participants are generally pessimistic, assets can be priced much lower compared to its intrinsic value. If market participants are generally optimistic, assets can be priced much higher compared to its intrinsic value. In the short run, price can move in any direction relative to its value.

But in the long run, he said that “value should be thought of as exerting a magnetic influence on price”. Exactly how it is illustrated in the charts I shared with you above.

Closing Remarks

If you are investing with a short time frame, it is likely that you will not consider company fundamentals (it is dead to you). But if you intend to invest with a much longer time frame, you might want to stick to the fundamentals. We happen to want to be in this game for a long, long time, so we are sticking to the fundamentals.

Now that you are aware of this paradox, you are already thinking on a level that 99.9% of investors never will. You are reflecting deeply, while the crowd is reacting emotionally.

But here’s the critical question: Why? Why is the crowd always so emotional? Why are they so obsessed with short-term stuff?

It’s because they are driven by a psychological force that is incredibly powerful. And if you don’t understand this force, you risk being pulled back into the crowd, no matter how smart you are.

So, what is this force? And more importantly, are you immune to it?

Let's find out

This is not another draw more lines post

If you skim the title, you might assume we’re about to mention yet another price-action tool.

I get it. I’ve been in the market since 2019 (~6 years).

For my first two, I traded heavily with technical indicators.

I stacked so many indicators that my screen looked like a NASA command center:

The result? My portfolio didn’t really grow.

Wins on some tickers just papered over losses on others. Frustrating is an understatement.

After a lot of head-scratching (and a few portfolio bruises), a senior mentor shared an uncomfortable truth:

In a shallow-liquidity market like Indonesia, price action can be… pushed around easily.

No, don’t worry it’s not manipulated 😉 (sarcasm mode).

Market makers know exactly which technical indicators retail investors love, precisely because using them is much easier than doing real fundamental work—reading financial statements, public exposes, annual reports, , forecasting earnings, forecasting industry-wide growth, scuttlebutt (a.k.a cek lapangan) and valuing businesses.

That’s how many retail investors end up kena gocek (got Cristiano Ronaldo-ed). You’ve seen it:

• A stock “holds support” for months… until it doesn’t. It breaks for a few days, flushes out the support-and-resistance crowd, then rips back above the box to start moving like a rocket ship up.

• “Okay, then I’ll just buy breakouts.” Not so fast—some breakouts are designed to be fake. Price pops above the range, sucks in momentum chasers, then drops back into the box before the real rally happens.

At some point I realized:

If price is easier to be “pushed around”, then tarik-tarik garis (drawing lines) isn’t the edge, for me at least.

For me what has worked so far is to understand the crowd.

Our favorite TA indicator: psychology

We treat psychology as an indicator—specifically the emotions of the crowd.

The market doesn’t react to news. It reacts to whether the news are better or worse than what everyone already expected (fear and greed). Prices often reflect the extreme before the news catch up.

Legendary investors (Peter Lynch, Howard Marks, Warren Buffett and others) have said this for decades in one form or another: when the crowd’s emotion is peaking, the risk–reward flips. Doing the opposite of the crowd at extremes is often where the best opportunities live.

TL;DR

Our favorite “technical” indicator is not on the chart. It’s in the crowd: fear vs greed.

A recent case study: April 2025 market crash

In early April 2025, a series of headlines hit at once.

Global tariff proposals from Washington met domestic pessimism — Danantara, RUU TNI, Indonesia Gelap movement, and debates around the early Prabowo policy direction. That cocktail created a confidence shock.

Back home, IHSG hit trading halts to stem the decline. Retail sentiment tanked.

Our WhatsApp groups lit up with worried messages from clients.

And then… the rebound. From the low, IHSG jumped ~18% within roughly six weeks.

Interestingly, the bottom coincided with a spike in Google searches for “IHSG”. When everyone starts googling the index, it usually isn’t because they feel zen. It’s because they’re panicking.

What this suggests:

• News lag price. Capitulation shows up on the chart before the news headlines.

• Fear clusters. You see it in client messages, mainstream headlines, and search interest—often right near market bottom.

  • Peak pessimism (market bottom) did not happen on stage 1 - 3. It happens on stage 4.

The other side of the same pendulum: greed

The same logic applies at the top. When target prices get blasted everywhere for public consumption, it often hints at a greedy tape.

One example shows a widely discussed target followed by a deep drawdown. We’re not calling out individuals here; the point is the pattern: public, consensus it can only go up targets often mark late-cycle exuberance.

But don’t use psychology alone

This isn’t a license to bottom-fish every dip or fade every rally.

Psychology helps with timing, but fundamentals drive value.

Our process always goes back to our core framework:

👉 recompound.id/handbook/how-we-invest

We use crowd sentiment to optimize entries and exits—never to replace the real work.

How we actually read the crowd (our checklist)

When fear is peaking (high probability the market / a stock is bottoming):

1. Listen to peers. Are your friends suddenly starting to sell everything ?

2. Scan headlines. Are the news absolutist (end of X, never again Y) ?

3. Watch search interest. Do Google Trends for key tickers or the index spike ?

4. Look for market capitulation signatures. Example: Trading halts !

When greed is peaking (high probability the market/ a stock is peaking):

1. Public target-price parties. When everyone’s sharing sky-high targets on TikTok, Instagram, YouTube, Stockbit forums or WhatsApp group chats, we’d like to be more cautious.

2. Family BBQ indicator. A relative or friend who’s never invested suddenly gives you hot stock tips. Late-cycle FOMO alert.

3. One-way narratives. “This time is different,” “no pullbacks ahead,” “easy money baby !!!”

Tying it together

If price action can be pushed around, your edge likely will not come from drawing ever more perfect lines.

It comes from understanding the humans behind those candles—and then combining that read with disciplined fundamental work.

So yes, our favorite “technical analysis” indicator is… psychology.

• Buy when others are fearful—in quality names, far below its intrinsic value.

• Sell / Trim when others are greedy—especially when targets are on every social media thumbnail.

• Always within the guardrails of our framework

Observing market psychology is one of key learnings at Recompound.

If you are curious and are eager to learn more about investing that really makes money sustainably over the long run,

We have condensed all of our learnings into bite sized lessons for 30 days.

Follow this link to access it for free.

Markets move in cycles. This fundamental insight, eloquently emphasized by Howard Marks in his seminal book "Mastering the Market Cycle," reminds investors that no market remains exceptional indefinitely—not even the seemingly unstoppable U.S. stock market.

Lessons from History: U.S. Exceptionalism Isn't Permanent

Consider these surprising historical insights:

• From 2000 to 2014 (a full 14-year span), the Indonesian equity market (IHSG) astonishingly outperformed major U.S. indices, even when measured in USD terms:

  • IHSG: +435.94%

  • S&P 500 (SPX): +35.78%

  • Nasdaq (NDX): +11.88%

Contrast this with the subsequent period from 2014 to 2025, where U.S. markets reclaimed their dominance:

• IHSG: +21.7%

• SPX: +223.01%

• Nasdaq: +503.08%

Clearly, outperformance shifts over time rather than being permanently fixed.

Unfortunately, many retail investors — particularly in Indonesia — have overly focused on the exceptional U.S. market returns of the past decade, often overlooking the broader historical perspective. This narrow viewpoint could expose them to unexpected risks when the cycle inevitably shifts.

Cycles of Emerging vs. Developed Markets

Historically, the U.S. and Emerging Markets / EM (such as Indonesia) have alternated periods of outperformance:

• 1988 - 1994: EM significantly outperformed the U.S.

• 1995 - 1998: U.S. markets outperformed EM.

• 1999 - 2010: EM once again dominated U.S. stocks.

• 2011 - today: U.S. stocks have notably outperformed EM.

Why Did the U.S. Underperform from 1999-2014?

The major reason behind this extended underperformance was the massive overvaluation from the dot-com bubble era. Sky-high valuations and unrealistic expectations led to a prolonged period of stagnation, often referred to as the "lost decade."

Additionally, the 2008 Financial Crisis played a major role in exacerbating U.S. market underperformance, creating widespread economic uncertainty, significant asset price declines, and leading to a sluggish recovery that extended for several years. This crisis itself was largely fueled by greed and unrealistic expectations in the U.S. housing market, highlighting how unchecked speculative behavior can severely disrupt markets.

Key Factors Influencing Market Cycles

At Recompound, we emphasize using data-driven insights to understand where we stand in the market cycle:

1. Valuation & Retail Ownership:

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Hi 👋 welcome to Recompound Blog - The Investment Mindshift. We help you better your mindset on investment and economics one article at a time. More: Our Values | Advisory | Get to know us | Picks

Although we are not macroeconomics experts, we do take a look at macro once in a while as a pulse check to see how the economy is doing at a glance. We don’t attempt to predict what is Indonesia’s growth rate going to be. And we don’t attempt to predict if Indonesia is going to be entering a recession. Our questions tend to be more contextual and less broad:

“Can Indonesia pay her debt?”

Let’s take a look!

Following Jokowi’s expansive administration, we saw that there is an increase in debt levels all around. Interest payment ratio to government revenue stands at 17.9% as of 2024. This has an 8% compounded annual growth rate for the past 10 years covered in more details in this article. Now the bigger issue is the following:

Rp 800T of is due around 2025 - 2027

That is a massive massive amount of money. To put it into perspective, that is around 30% of our state revenue excluding interest payments that are supposed to be paid per year. To give it another perspective, this is a debt level that is due with a ratio to state revenue that is highest since year 2000. To give a little bit of numbers (rounded off and massaged to keep it simple):

Per the table above we see that on average, the ratio between debt that is due to state revenue is less than 20%. Now in 2025, it stands at 28% which is considerably higher. This is note worthy because:

• Investors need some level of assurance that a country is not going to default on their debt

• But there is a pattern that this country keeps on increasing its debt levels, and interest payment as a consequence

For example, let’s say we have Alex who’s job is a consultant. His income rises steadily for example at a 5% annual rate. However, his debt rises even faster than his income, let’s say 8% per year. If you are Alex, how would you be able to justify your lender next time that you will be able to repay your debt if:

your increase income is less than your increase in debt levels

Chances are, you might be the debtor would want a higher interest rate overtime as Alex is deemed riskier and riskier. These risk are:

• Default

• Refinancing the loan (gali lubang tutup lubang), but with a much higher and more unsustainable interest rates. Therefore, more proportion of budget will be allocated to non-productive matters such as interest payment in future.

So let’s take a look at why the debt was huge at the first place

We think that simple answer is because of COVID. Yes, although activities nowadays have resumed to normal and we have seen corporate earnings of public companies in Indonesia recovering or even producing all time high earnings, government still needs time to deal with financial decisions that was made during the COVID era. Particularly surrounding increased loans through issuance of Rp 449 trillion worth of pandemic bonds.

Why that much loans? We could see that budget deficit in 2020 was at 58% and in 2021 was at 39%. At that time, it is very much understandable that the government was forced to take on a loan to cover its state expenses to support economic recovery.

Debt is huge, what is the plan now?

Refinancing through bilateral debt switch. The name might sound confusing but here’s how the mechanism works. Bear in mind that there are 2 entities involved in the operation namely Bank Indonesia and Indonesian Government.

Also note that we might be glossing over some details and the purpose is just to get a big picture of the plan and strategy to manage the short term maturing debt situation.

1. Bank Indonesia (BI) purchases bonds maturing in 2025 from investors.

2. Then BI swaps the bonds maturing in 2025 with bonds, maturing at a longer term period, from the Indonesian government

This is a neat solution so that Indonesian government does not have to come up with huge expenditure to service piling debt in 2025.

To illustrate it even more simply, consider the table below:

In a nutshell, the government refinances the old debt with a longer term debt. This causes the sudden outflow of money from the government to be more manageable in the short term. This operation is actually not new and has been done before in the past.

So are we out of the woods?

Although this is an important mechanism to manage maturing short term debt, we view it more of a tactical approach. What we believe that is important for us be able to analyse micro peacefully is a conducive macro environment. Therefore, metrics that we see are:

• debt to state revenue

• interest rates to state revenue

• level of foreign reserves

• GDP growth

We covered this quite extensively in the previous blogpost article offering a cautiously optimistic stance on the fundamentals of the country at large.

Closing Remarks

Therefore, while the fundamentals of the country is admittedly not as great as that before the pandemic, we’d rather not take an alarmist view on the matter regarding debt payments. Ok, now back to focusing on micro 🙂

References for further read

• https://www.djppr.kemenkeu.go.id/

• https://monitorindonesia.com/ekonomi/read/2025/02/602952/utang-jatuh-tempo-meledak-di-era-prabowo-2025-2028-sentuh-rp-3-125-triliun

• https://www.reuters.com/markets/asia/indonesia-cenbank-buy-more-govt-debt-2025-deal-over-maturing-covid-bonds-2024-12-18

• https://www.thestar.com.my/aseanplus/aseanplus-news/2024/12/29/indonesia-central-bank-finance-ministry-agree-debt-switch-for-covid-19-bonds

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The polls in the previous week requested a stock deep dive. But we are writing a deep dive for paid subscribers as there is no free lunch. So don’t forget to upgrade your subscription plan if you have not already *wink*. As a disclaimer, the deep dive is by no means to be interpreted as investment advice. It is written solely for educational purposes and you should do your own research or consult your investment advisor before making any investment decisions.

You don’t need to be a professional investor to sense where the market might be heading—sometimes, it’s as simple as listening.

The Cocktail Party Theory: What People Say Matters

Peter Lynch, one of the most successful investors of all time, managed the Magellan Fund at Fidelity from 1977 to 1990, delivering an astounding average return of 29% per year. Under his leadership, the fund grew from $18 million to $14 billion, making him a legend in the investment world.

But Lynch’s greatest insights weren’t just for Wall Street. He believed that everyday observations and conversations could offer powerful clues about market trends. One of his most famous ideas is what he called the “cocktail party theory.”

In his book One Up on Wall Street, Lynch explains:

*“If the professional economists can’t predict economies and professional forecasters can’t predict markets, then what chance does the amateur investor have? You know the answer already, which brings me to my own ‘cocktail party’ theory of market forecasting, developed over the years of standing in the middle of living rooms, near punch bowls, listening to what the nearest ten people said about stocks.”

Beating the Street - 1993*

He describes four stages:

• Stage 1: No one wants to talk about stocks. If you mention you manage a mutual fund, they quickly change the subject.

• Stage 2: People acknowledge your profession but caution you about the risks of investing.

• Stage 3: Attendees seek your advice on what stocks to buy.

• Stage 4: Everyone, including the dentist, is giving you stock tips.

This progression reflects how market sentiment shifts from skepticism to euphoria, often signaling where we are in the market cycle.

Why News Headlines Often Mislead

Howard Marks, co-founder of Oaktree Capital Management, a firm managing over $170 billion, shares a similar perspective. Marks is known for his sharp insights on risk and market cycles. His investor memos are so respected that even Warren Buffett reads them carefully.

In his book Mastering the Market Cycle, Marks argues that many investors try (and fail) to navigate markets by reacting to economic news headlines.

Marks writes:

“The future isn’t knowable, and macro forecasts are rarely useful.”

The Most Important Thing: Uncommon Sense for the Thoughtful Investor - 2011

News reports often describe what just happened, not what’s about to happen. But markets are forward-looking. Investors don’t wait for the news—they try to price it in early.

Think about it: if headlines were a reliable signal, wouldn’t it be easy to make money in markets? In reality, waiting for “good news” often means you miss the opportunity that came when everyone was fearful.

That’s why both Marks and Lynch recommend watching crowd behavior—not just reacting to what’s in the news.

Market moves on emotions

Here’s something beginners often miss: the market doesn’t just move on facts—it moves on emotions. Why? Because decision to buy and sell always use emotions.

That’s precisely why understanding crowd behavior is important. When everyone is excited and rushing to buy, prices might already be too high. When everyone is scared and selling, prices might already be low.

In investing, sometimes the best opportunities come from doing the opposite of the crowd—buying when others are fearful, and being cautious when others are euphoric.

But it’s not just about buying “cheap stocks.” It’s about recognizing that when prices fall because of fear, you might be able to buy a great business at a bargain. Think of it like getting your favorite iPhone 16 Pro Max — but on a massive sale.

When prices are low, you have the chance to own profitable, high-quality companies at a fraction of their real value. But when prices are high, driven by hype and excitement, you might end up paying too much for the same business, reducing or even damaging your potential returns.

That’s why watching the crowd matters:

• When everyone is fearful and selling, they might be pushing prices lower than what a company is truly worth.

• When everyone is excited and buying, they might be driving prices higher than what the company is realistically worth.

By observing the mood and being aware of these patterns, you can avoid buying into hype—and instead position yourself to buy strong companies when they’re undervalued, not overpriced.

Just recently in April 2025, we saw a textbook example in Indonesia:

On April 8, markets were rattled when former U.S. President Donald Trump announced new tariffs on Asian imports, sparking fears of a renewed trade war. The news triggered panic across emerging markets—Indonesia’s IHSG dropped sharply and even experienced a trading halt.

But here’s what’s remarkable: that day of extreme fear marked the bottom.

From that low point, the Indonesian market went on to rebound 18% in the following weeks.

It was a classic case of a headline-induced panic bottom—proving once again that emotions often peak just as opportunity reappears.

Thought exercise: What are people around you saying now?

In the past year, Indonesia has faced plenty of challenges: global economic slowdowns, falling commodity prices, political uncertainties, layoffs, distrust towards the government, and investor outflows. The headlines have been overwhelmingly negative.

But Lynch and Marks would both ask: beyond the news, what are people around you saying?

• Are your friends staying dead silent or excitedly swapping stock tips ?

• At work, are colleagues “waiting for things to get better” or actively talking about new investment opportunities ?

• Is the stock market barely mentioned — or a hot topic in WhatsApp group chats ?

If Peter Lynch were standing next to you, listening in, what would he hear?

And how might Howard Marks interpret those conversations?

I’ll leave you with this question:

Based on the mood you’re observing—whether in Indonesian stocks, U.S. markets, or even Crypto—what stage of the cycle do you think we’re in? What kind of behavior or sentiment are you noticing around you?

Stop reacting to news headlines.

Understanding the market cycle through the crowd might not only save you money… it could make you a LOT of it.

But here’s the catch. How do I know if a company is undervalued?

I am quite sure after reading the above, you would have the following conclusion:

• Watching people is easy, I can do that

• Knowing that there are plenty of opportunities in the market is easy, I can also do that

• But how on earth do I know the fair value of the company? And how do I know that the company is sold at a discount akin to a 10.10, 11.11 or 12.12 at Shopee?

Let’s start with a toy example, which aims to be really simple illustration.

First of all, a company is of any value, because it makes money from its sales activities. Let’s say, a company sells IPhones to consumers and is making 100 every year in net profits. Meaning that considering all costs, taxes, depreciation, etc, the company makes 100.

That company who’s making 100 every year is valuable to its shareholders. Let’s say Toby owns 55% of that company and Budi owns 45% of that company. That 100, can be distributed to Toby and Budi every year, them getting 55 and 45 each respectively.

Now let’s say Wilson enters the picture and he wants to purchase the entire company from Toby and Budi. If Wilson agrees to pay 1,000 do you think he is overpaying?

On the other hand, if Toby and Budi agrees to sell at 100, do you think that Toby and Budi are underselling?

Well, if Wilson thinks that the company is super likely to be able to sell iPhones in 5 years to come, making 100 each year, he would be overpaying if he buys the company for 1,000. For 100, he would be getting the company at a bargain. How much bargain? 80% (500 - 100 / 500).

So from this example, you could already get the drift.

Let’s map this toy example into a real publicly listed company that people could buy

Is Blue Bird Tbk undervalued or overvalued?

Blue Bird is the largest taxi company in Indonesia with about 24,000 units and it is distributing healthy amounts of dividends (yield is roughly 5%).

Yet if you take a cursory look of its share price, it has dropped rather significantly (-76.28%) from it’s IPO price.

Does that mean that you get a 76.28% discount from its fair value? Let’s dive right in.

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Warning: disturbing content is shown in this article. Reader’s discretion is advised.

In case you missed it, head over to slippery slope article which is a common logical error that usually fuels erroneous and fearful arguments on people’s dinner table. Also trying something new this week, which is polls.

Fear sells. Browse social media or tune into market chatter today, and you’ll find no shortage of commentators warning that “another 1998” is around the corner. These fear-based influencers draw parallels between the late-90s Asian Financial Crisis and current events, stoking anxiety that Indonesia might relive that nightmare.

It’s true that volatile currency moves or economic dips can evoke flashbacks of 1998’s turmoil. And to be fair, the 1998 crisis was multi-causal and incredibly complex – a perfect storm of economic and political factors.

This article won’t cover every nuance, but will focus on the key contributing factors behind the 1998 meltdown, and examine whether those conditions exist today. In doing so, we’ll separate grounded facts from fear-driven fiction.

The goal of this writeup is a thoughtful, confident (but never arrogant) look at whether history is set to repeat – or if Indonesia is better prepared this time.

The 1998 Crisis: A Perfect Storm

In 1998, Indonesia experienced one of its darkest economic episodes. The Asian Financial Crisis brought the nation to its knees: the currency collapsed, banks failed, and the streets erupted in unrest. Shops were looted and fires burned in Jakarta as ordinary people panicked.

What made this crisis so severe? It turns out it was the result of several factors coming together – a “perfect storm” of policy missteps and vulnerabilities feeding on each other.

Let’s break down the key triggers that led to the meltdown.

The Collapse of a Currency Peg

One major trigger was the free-fall of the rupiah. For years before the crisis, Indonesia had effectively pegged its currency to the US dollar, keeping the rupiah in a tight trading band.

This fostered a false sense of security. Businesses gorged on U.S. dollar loans, confident the rupiah’s value would remain rock-solid. In the early 1990s, with the rupiah stable and domestic returns high, Indonesian companies racked up huge foreign debts – much of it short-term and unhedged against currency risk.

By end of 1997, Indonesia’s external debt had ballooned to around $140 billion (about two-thirds of GDP), a significant chunk of it due within a year. This was a ticking time bomb. When Thailand’s baht devaluation in July 1997 sparked regional contagion, Indonesia’s overvalued rupiah became a prime target. Foreign investors pulled out en masse, and confidence evaporated. The rupiah plunged over 80% against the dollar within months – tumbling from roughly 2,400 per USD to around 14,000 at the peak of the panic. Such a drastic collapse meant any company with dollar-denominated debt saw its debt burden skyrocket in rupiah terms, pushing many toward insolvency.

To make matters worse, Bank Indonesia hiked interest rates sharply in a desperate attempt to defend the currency and stem capital flight. At one point, interest rates soared into the high double-digits, even above 50% – a move that crushed local businesses and banks by making domestic loans prohibitively expensive. In short, a brittle currency peg, once broken, wreaked havoc: the rupiah’s crash inflated debts, strangled credit, and set off a wave of corporate failures. (sources: imf.org factsanddetails.com)

Fragile Banks and Insider Lending (Pakto 88)

Even before the currency crisis hit, Indonesia’s banking sector was dangerously fragile. A decade of loose regulation had sowed the seeds of disaster.

In October 1988, the government introduced a deregulation package known as Pakto 88 (Paket Oktober 88) that made it absurdly easy to start new private banks. The required minimum capital was set at just Rp 10 billion (around USD $5 million at the time) – effectively an open invitation for anyone with means to open a bank. And open banks they did: by the mid-1990s, Indonesia had around 240 commercial banks, nearly double the number from a few years prior.

Many of these were owned by politically connected businessmen (the Southeast Asian “godfathers” that writer Joe Studwell chronicles), who often treated the banks as their personal piggy banks. Credit was dished out recklessly, frequently to the banks’ own shareholders and their pet projects.

This insider lending boom led to a veneer of rapid growth – but beneath the surface were piles of bad loans waiting to go bust.

By 1997, cracks were already showing: some banks were technically insolvent, carrying non-performing loans that they tried to hide with creative accounting. The banking system was undercapitalized, poorly supervised, and ripe for trouble.

When the rupiah collapsed and borrowers could no longer repay their dollar loans, these weak banks were the first dominoes to fall. Liquidity dried up and bank runs began as depositors lost trust. The government initially closed 16 small banks in November 1997, hoping to stem the bleeding, but that actually spooked the public into thinking all banks might be unsafe.

By early 1998, the banking crisis was in full swing – a multitude of banks failing or being bailed out. In essence, Pakto 88’s well-intended deregulation had backfired disastrously: too many banks, too little oversight. The party of easy credit ended with a massive hangover, and taxpayers later footed the bill for a ~$50 billion bank bailout. (sources: kabar24.bisnis.com idntimes.com imf.org).

The Snowball into Socio-Political Crisis

What began as an economic collapse quickly spiraled into something much bigger. The crisis was complex and self-perpetuating: a collapsing rupiah revealed deep banking vulnerabilities; financial panic was amplified by poor policy decisions; panic gave way to widespread unrest; and political instability, in turn, worsened the economic free fall. It was a full-system failure.

By the close of 1998, the economy had contracted by a staggering 13–15%. The rupiah, once trading at Rp2,500 per dollar, had devalued to between Rp8,000 and Rp10,000. Inflation reached nearly 70%, and millions were pushed into poverty. By every metric, it was the most devastating economic crisis in Indonesia’s modern history

As inflation surged and unemployment soared, the financial crisis morphed into a socio-political breakdown.

Public frustration reached a breaking point. After more than 30 years under Suharto’s rule, trust in the government had completely eroded. Nationwide, mass protests and riots broke out—fueled in part by racial scapegoating.

In May 1998, following days of unrest and the tragic killing of student demonstrators, Suharto stepped down, marking the end of an era — and for those who lived through it, the scars remain, along with a deep sensitivity to any signs of history repeating itself.

2025: Why It’s (Hopefully) Different This Time

Given that grim history, it’s only natural to ask: Could it happen again?

The honest answer is that today’s conditions are dramatically different from 1998’s. Indonesia spent the past two decades learning hard lessons and building defenses.

Let’s compare some fundamentals from then versus now, with a data-driven approach:

Healthier Foreign Exchange Reserves & Exchange Rate Regime

In 1997, Bank Indonesia’s war chest of forex reserves was about $20 billion – not nearly enough to withstand sustained speculative attacks.

Today, reserves hover around $150 billion , a level that provides a massive buffer against external shocks. This alone is a game-changer. It means the central bank can smooth out volatility in the rupiah without quickly running out of ammo.

And speaking of the rupiah, Indonesia no longer maintains a rigid peg like it effectively did in the 90s. Since the early 2000s, the rupiah has been on a free float system.

Yes, Bank Indonesia still intervenes to prevent extreme swings, but there’s no unsustainable promise to hold a fixed value. The currency is allowed to find an equilibrium that reflects market reality.

The result? Recent episodes of rupiah weakness have been nowhere near the chaos of 1998. For instance, during global volatility in 2024, the rupiah did depreciate – even hitting ~Rp16,600 per USD at one point – but policymakers calmly managed it and the rupiah gradually.

Officials have been quick to point out that the nature of the pressure is different: today’s rupiah moves are largely driven by temporary global sentiment (stronger US dollar, etc.), not a reflection of Indonesia’s own economic health.

Indeed, compared to many peers, the rupiah’s depreciation has been relatively moderate and orderly. In 1998, by contrast, the rupiah’s collapse was a sudden free-fall fueled by a loss of confidence in the country’s fundamentals.

Bottom line: a speculative attack on the currency would face a much stronger defense today, and a floating exchange rate acts as a safety valve that didn’t exist in the 90s. (source: jombangnews.co.id)

Healthier Banking System

Perhaps the biggest improvement since 1998 is the strength of the banking sector. Post-crisis, Indonesia undertook major financial reforms. Dozens of weak banks were merged or closed, and surviving banks were recapitalized.

An independent regulator (OJK – Otoritas Jasa Keuangan) now oversees banks, and Bank Indonesia itself was made more independent and focused on safeguarding stability. The difference is stark: Back then, many banks were essentially walking zombies – undercapitalized, drowning in bad loans, and kept alive only by opaque support.

Today, Indonesian banks are much better capitalized and regulated. As of early 2024, the average Capital Adequacy Ratio (CAR) of banks stood around 26% – a very comfortable buffer above minimum requirements. (By comparison, global Basel standards often require about 8-10% minimum, so 26% is robust.) This capital cushion means banks can absorb losses far more easily without collapsing. Non-performing loans (NPLs) are also low (around 2-3% of total loans in recent years), reflecting more prudent lending.

Crucially, the era of wild insider lending is largely over – regulators enforce limits on lending to related parties and big debtors, to prevent a repeat of the 90s cronyism. Indonesia also set up a deposit insurance scheme (LPS, established in 2005) to protect depositors up to a certain amount, replacing the blanket guarantees of 1998 with a more sustainable system.

This reduces the risk of bank runs, as small depositors know their money is safe even if a bank fails. All told, the banking sector in 2025 is on far sturdier footing. It’s not immune to stress, of course – banks are exposed to economic cycles – but the likelihood of a systemic banking meltdown like in 1998 is much lower. Even in a severe scenario, authorities now have established frameworks for dealing with troubled banks (from capital injections to orderly resolution) so that confidence can be maintained.

The phrase “too big to fail” was not even in the Indonesian vocabulary in 1998; now, there’s clarity on how to handle such situations if they arise. (source: ojk.go.id)

Healthier Debt Profiles

Another big difference lies in debt profiles. In the late 90s, Indonesia’s external debt (government + private) was huge relative to the economy – as mentioned, about 2/3 of GDP in 1997. Much of that was corporate short-term debt that evaporated when the crisis hit.

Today, external debt in absolute terms is higher (around $400 billion in 2022), but Indonesia’s economy is also much larger now. That external debt is roughly one-third of GDP – about half the relative level of 1997.

Moreover, the composition has improved: a larger share of today’s external debt is long-term (such as 10-year government bonds held by foreign investors, or long-term project loans), as opposed to the hot-money short-term loans that dominated in the 90s. Corporations, having learned from 1998, are also more careful – many have hedging strategies or borrow in local currency when possible.

On the government side, debt is very much under control. Indonesia’s government debt-to-GDP is around 39% as of 2024, which is considered quite prudent (for context, many developed countries are over 60-100%). In fact, Indonesia has a self-imposed fiscal rule (temporarily suspended during COVID, but now reinstated) capping the budget deficit at 3% of GDP, precisely to prevent debt from getting out of hand.

Back in the 90s, the government’s debt was relatively low before the crisis, but exploded afterward due to bank bailouts. Now, with healthy debt levels and better tax revenues, the government has fiscal room to maneuver if a crisis hits – they can spend to stimulate or support banks without immediately wrecking the national balance sheet. Another aspect is the current account balance – in the 90s, Indonesia often ran a current account deficit (meaning it relied on foreign capital inflows to finance growth). These days the current account is much closer to balance (small deficit or surplus in recent years), reducing reliance on volatile foreign funding.

All these factors make the country much less vulnerable to a sudden stop of capital. It’s like the difference between someone with high-interest credit card debt and no savings (1998 Indonesia) versus someone with a reasonable mortgage and a solid emergency fund (2025 Indonesia). One is far more likely to get into a debt spiral if income falters. (sources: imf.org macrotrends.net ceicdata.com)

Better Monetary Policy Tools and Crisis Management

In 1997-98, policymakers were caught wrong-footed, partly because they lacked the tools or institutional framework to respond effectively. That has changed. Bank Indonesia now has a clear mandate to maintain stability (inflation targeting is in place) and a more flexible toolkit. The bank can adjust interest rates proactively (not just defensively) and use macroprudential measures (like reserve requirements for banks) to cool or stimulate the economy as needed.

Importantly, the central bank and government have established protocols for crisis mitigation. For example, Bank Indonesia routinely states that it will intervene in currency and bond markets to smooth volatility, and it coordinates closely with the Ministry of Finance on maintaining market confidence. In late 2022 and 2023, when global rate hikes put pressure on emerging markets, Indonesia was able to proactively raise its interest rates, use its reserves to stabilize the rupiah, and even deploy bilateral currency swap lines – all without panic.

Contrast that with 1997, when policy responses were often delayed, reactive, and undermined by political interference. Another vital improvement: transparency. Indonesia’s economic data is now more transparent and timely, and the government openly communicates its policies, which helps prevent the rumor mill from spiraling out of control (unlike in 1998, when misinformation and lack of data fueled fear). Finally, institutions have been strengthened – for instance, an independent Financial System Stability Committee now exists to coordinate responses if financial stability is threatened, a mechanism born directly out of the lessons of 1998.

In sum, the pillars that held up the 1998 crisis (a rigid currency peg, rampant unhedged foreign debt, flimsy banks, and a governance vacuum) have either been removed or vastly reinforced. Indonesia in 2025 is certainly not perfect – it still has areas to improve (for example, boosting exports to reduce reliance on certain capital flows, or improving tax collection for more fiscal space). But it’s a far cry from the precarious position of the late 90s. A repeat of 1998 would require a similar constellation of vulnerabilities, and those just aren’t present to the same degree.

Investing in the Panic: How Lo Keng Hong made 6,000% returns from the 1998 crisis

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This is an article for all subscribers. It seems like uncertain time is just right ahead of us because of the recently announced tariffs. Market crash, panicky investors pulling out from capital markets around the globe might very well happen. Toby wrote an article earlier on what to do during a market crash. This article is more event specific that briefly touches upon the key differences in behaviour between common investors and legendary investors during a market crash.

Disclaimer: this article is not an investment advice and shall not be construed out of context. You remain responsible of your own investing decisions.

On 2nd of April 2025, Trump announced a reciprocal tariff, shaking financial markets worldwide. In just two days, major US indices such as Nasdaq and S&P 500 plunged by -11.33% and -10.6%, respectively.

We understand it’s natural to feel anxious and worried seeing your investments might drop significantly in value overnight. You're not alone—many investors are experiencing similar feelings of uncertainty.

This article won’t delve into tariff specifics—excellent resources already cover that.

Instead, we will focus on what this means for long-term investors, particularly in Indonesia.

At the time when the article was written, the Indonesian stock market has been temporarily shielded due to the extended Idul Fitri holiday (March 28 - April 7, 2025). This unusual timing has prompted many investors, including our clients, to wonder:

• What will happen when markets reopen on April 8, 2025?

• Will Indonesian stock market mirror the US markets’ downturn, potentially dropping by around 12%?

• Should investors panic and sell all their holdings, hoping to re-enter at the "bottom"?

Historical Perspective on Indonesian Stock Market Crises

Historically, the Indonesian stock market has faced multiple crises and consistently recovered and grown stronger over time. Here’s how the Indonesian stock market performed during significant past crises:

This historical data clearly illustrates that Indonesian stock market rebounds following crises typically surpass the magnitude of the drawdowns.

But why is this the case?

1. Decision making is always emotional

Every active decision you make is always emotional. Yes, even when you want to take a shower after you finished exercising earlier; you don’t do it because bacterial build up got multiplied by two folds on your skin that increases likelihood of acne by 21.3%.

You take a shower because likely an unpleasant odour comes out from your body and you become rather uncomfortable to be around other people with that odour.

Same as selling stock during a perceived crisis. You sell your investments because of the emotional impulse that the stock market crash will jeopardise your investments forever. Therefore, you derive a sense of safety by pulling out from your investments momentarily.

2. Crisis feels like forever, but is not forever

When there is a crisis, we feel like there is a need for us to sell as we are in a rush to safeguard our capital momentarily. This is because our primal instincts tell us to pull out from our investments, first regardless of however cheap we sell our assets at.

It is akin to a person having a burning house. You probably want to sell it to another person don’t you? So that you could just cash out quickly and let the other fella deal with the burning house?

Maybe that is rational, but what if you sold the burning house at a super tiny fraction of the cost of the land? Well that can become a good deal to the buyer. Once the fire stops, they can rebuild the house and sell it at a super premium. Or even, just sell the land because you sold the property at a super cheap price.

Therefore, when you are experiencing a crisis, it feels like forever. But time and time has shown us again that we don’t really have a crisis with a forever duration. Therefore when the crisis ends, prices tend to get reevaluated to the up side.

We also know that biggest fortunes aren’t made in times of optimism - but by staying invested in moments of maximum fear

When quality assets are underestimated and abandoned, generating very high margin of safety for investments.

Consider the inspiring examples of Lo Kheng Hong, who invested in United Tractors (UNTR) amid the turmoil of the 1998 Asian Financial Crisis, and Multibreeder Adirama Indonesia (MBAI), a chicken feed producer, during the 2005 H5N1 bird flu pandemic in Southeast Asia.

It's safe to say that without these moments of crisis and his bold, contrarian actions,

we might never have known his name today.

I hope it is very clear to readers why investing is hard. Because all sorts of news and information regarding impending doom seems to point to the fact that investing is a “bad activity” in times of massive uncertainty.

However ironically, it usually gives the best opportunity to buy companies at a severely discounted price.

So, What Should Investors Do?

We’ve previously covered this topic extensively here. To summarise the key things clearly:

We would like to re-emphasize on step 3:

1. Think like a business owner. Buying a stock means owning a part of a real business. Over the long term, a stock’s price tends to align with its underlying earnings.

2. Objectively assess whether Trump’s tariffs directly impact your business’ core operations.

   1. For example, if you are a restaurant owner selling nasi padang to blue collared workers in South Jakarta area, will you be afraid of going out of business because of Trump’s tariffs? Maybe not really.

   2. Another example, if you are a wood producer in Cirebon exporting wood to the U.S., will you be anticipating a reduced demand of your produce? Certainly!

If tariffs significantly affect your business’ key revenue streams, reconsider your position. However, if the impact is minimal or non-existent—and provided you purchased your stocks with a robust Margin of Safety —then there is little reason for immediate reaction, especially if you’re still benefiting from consistent dividend cash flows.

To clarify further, here's Indonesia’s top 20 exports to the US (as of 2023):

Ask yourself:

• Do my businesses (stocks) rely heavily on exporting these products to the US?

• If yes, what portion of total revenue does this represent?

If the answer is negative or insignificant:

• Is panic necessary?

Remember, your diversified portfolio was designed precisely for situations like this—to cushion the impact of unexpected downturns.

Focus on What’s Important & Knowable

While second-order effects of tariffs are possible, many investing factors remain beyond our control, such as:

• The exact short-term market reaction when Indonesian stock market reopens on April 8.

• Precisely predicting the stock market bottom.

• Exact long-term effects of tariffs on Indonesia’s 2025 GDP growth.

These uncertainties, though significant, aren't within your control. Instead, focus your energy on aspects you can know and influence:

• The long-term sustainability and growth prospects of your invested businesses.

• Ensuring a strong margin of safety (discount) at the point of purchase.

• Maintaining proper portfolio diversification.

• Evaluating financial prudence and capital allocation effectiveness of management teams.

Successful investors like Warren Buffett and Lo Kheng Hong built their fortunes precisely by resisting the urge to panic sell during market turmoil.

Parting Remarks: does a US crash mean the whole world crashes?

When the US indices declined sharply between April 2-4, 2025, here's how global markets performed:

Contrary to widespread media-driven fear, the substantial US downturn wasn’t uniformly reflected across Asia-Pacific markets. This emphasise a crucial investment lesson:

Predicting short-term market movements is extremely difficult. Investors are better served by focusing exclusively on what's fundamentally important and knowable—the resilience and value of their chosen businesses.

Extra note: if you’re still feeling uneasy, we are happy for you to reach out to us for a personal discussion where we are more than willing to listen to any concerns you have regarding the prevailing situation.