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Thursday, November 20, 2014

How to lead a comfortable retirement life through investing in the stock market? Part 3 kcchongnz


What, another “How to lead a comfortable retirement life through investing in the stock market?

Yes, I am very happy to write under this title as the two previous articles written by me with the same title have received more than ten thousand reads each. You know any writer would be happy when his articles have good readership. Thanks i3investor again for providing me this opportunity.

The first article I wrote described how some well-known super investors in the US and here have accumulate enormous amount of wealth through their long-term investment in the equity markets following the fundamental value investing principles.

I also presented my own experience in the last few years and provided facts and figures that value investing is the way to go for long-term wealth building.

Part 2 of the series I described in detail that the most important thing an investor who aims to build long-term wealth must avoid the lemons.

“If one doesn’t invest the right way but by simply listening to rumours and punt on hot stocks, instead of building wealth for retirement, can end up as a pauper.”

I used one stock, KNM, as example how you can look at its financial statements and annual reports, and everything was crystal clear and the signs were written everywhere how a lemon is like and must be avoided at all costs. Here is another article of mine for you to check if a stock is a lemon, what to look out for.

Notice that none of the nine stocks I mentioned in the above article failed me. While KLCI went up about 10% in the past one year, the average and median return of those stocks is -29% and -40% respectively within the same period. That means the hot stocks had a negative alpha of 50%!

So can you see why I am so concern about avoiding lemons if you intend to build long-term wealth?

In this Part 3 of “How to lead a comfortable retirement life through investing in the stock market?”, I am going to share with some more exciting part of investing, what kind of investing strategy you can utilize to earn extra-ordinary return from the market.

Value Investing Strategies

Identifying lemons as I have mentioned is very easy. You just need to know the language of business, that is analyzing and interpretation financial statements. This part of making extra-ordinary return I can tell you is not easy. I would rather say you have a higher probability to earn extra-ordinary return from the market in the long run using these value investing strategies. There are numerous academic research especially in the United States showing these value investing strategies had worked well and it is still working well. In our case, I will show some non-academic evidences that these strategies also work well in Bursa.

Value Investing Strategy No. 1: Buy Earnings on the Cheap

This strategy is described in the following article here:

The article shows that the total return of a portfolio of 104 low P/E stocks in Bursa held over a period of 5 years since 2009 until to date is an average of 181%, or 3.5 times that of KLCI of 51%. However, there were some bad losers and a number of companies disappeared from the screen. In another words, there is this survival bias. It is still a viable strategy if you can hold a diversified portfolio of low price-to-earnings stocks in Bursa.

Value Investing Strategy No. 2: But a Buck for 66 sen

Isn’t this strategy of buying stocks with net asset much more than its share price intuitive?

Walter Schloss, a not-so-well known disciple of Benjamun Graham is one of the most influential investors based on his 5 decade long performance from 1955, returning 20% per year, almost three times the 7% return of the S&P during the same period, using purely this balance sheet investing strategy as shown in this link below.

We can actually refine this method by using more stringent criteria, the Graham net net asset value and the negative enterprise value investing strategy as described here:

Some of my results investing in Bursa stocks using this strategy is described here:

“The average portfolio return of a portfolio of 10 stocks is 43.1%, close to three times the return of the broad market of 15.1% during the same period. None of them had a return of less than 10%.”

This strategy of buying a buck for 66 sen involves very little downside but plenty of upside.

Both the above strategies, although as a diversified portfolio yields satisfactory return, they do have some shortcomings. Many of them are cheap for some reasons. It is good to be aware of them and use some metrics to check and ensure one doesn’t buy some of the stocks which would go bankrupt as described in the links.

Investing strategy No. 3: Buying good companies Cheap

The above strategies involve buying cheap companies. Here, I have introduced the use of Magic Formula by Joel Greenblatt as shown in this link below:

Here, Greenblatt did away with the manipulative E, and the deceptive P in the P/E ratio, and replaced it with EV/Ebit. Moreover he recommended only good companies, and not any company as in the first strategy above. Buying good companies cheap. How not to make good extra-ordinary return? Yes, Greenblatt has actually shown that the Magic Formula, not only worked, but still works well.

I have also described my experience investing in Bursa and it has also worked very well.

Investing strategy No. 4: High dividend yield strategy

Another value investing strategy is the high dividend yield strategy which also worked very well in Bursa for the past 5 years as described in the article here.

It shows that high dividend yield is a viable strategy for a diversified portfolio but it is not necessary a sure win strategy and one has to separate the chaff from the wheat with some health checks as described.

Investing strategy No. 5: Super investor strategy, buying high growth companies

What about growth stock investing strategy? Sure it works as shown in this company, Scientex Berhad, below but make sure your projection of its growth is not far off, and you don’t pay a hefty price for a growth expectation.

And also be aware that not all growth stories are good stories. Many are dreadful as shown in the link below. Avoid them at all costs.

Investment strategy No. 6: Buying companies with a margin of safety

Many value investors chose to invest in good stocks without considering their price. I do admit that many of them were successful. However, I opine that not only good companies, knowing the price-value relationship is also very important. Hence it is my habit to make some estimation on the intrinsic value of stocks using discount cash flow analysis and compare with their prices. We must a sense of what is the margin of safety investing in a stock.


Share prices don't exist in a vacuum. Instead, they represent what it costs, at one point in time, to buy a tiny proportion of a company listed on the stock exchange. It is not difficult to see that the value investing strategies described above; buying earnings on the cheap, buying a buck for 66 sen, buying good companies cheap, buying companies at a large margin of safety etc would logically work, work well I would say.

Hence in my opinion, value investing is the most dependable way to build long term wealth.

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