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Thursday, July 23, 2015

My comments on some comments on value investing kcchongnz

My article in i3investor below has attracted some good comments.

Thank everyone for your valuable comments. Here I would like to provide my response in this article as there are a number of things to deal with. They are all for discussion and learning purpose, and I appreciate your further comments.

Posted by tc88 > Jul 22, 2015 10:21 PM | Report Abuse

Not all stock can hold long term like your story KC. There is always a cycle for most stocks......up to a peak then will drop back. Those long term stocks like Coca cola, Wells Fargo and etc which Warren buffet own rarely can be duplicated nowadays......What stocks in Bursa Malaysia u think can hold for more than 20 years? Very few i think except Nestle, GAB, Carsberg and etc. I dont think KC can follow his teacher, hold same stock for 10 years, 20 years or more.

Me: I fully agree with the first part of your comment. This was what Howard Marks said.

There are two concepts we can hold to with confidence:

- Rule No. 1: Most things will prove to be cyclical.

– Rule No. 2: Some of the greatest opportunities for gain and loss come when other people forget Rule No. 1.

Great opportunities for gain exist when the market and the stocks in particular are at the low cycle, when valuations are cheap with depressed earnings. During economic boom, earnings are high and hence the valuations accorded by the market will be high too. But trees don’t grow to sky. Stock price also behave the same way. Hence it is best to buy stocks when their share prices are low, for example it would be a no-brainer to buy Homeritz at 43 sen two years ago, but may not be an advisable thing to do to buy stocks when their share prices have gone up historical high basing on the high earnings stage of the cycle.

But that doesn’t mean the stock which is now at high price will not go up further or vice versa.

“That’s because in the world of investing, being correct about something isn’t at all synonymous with being proved correct right away.” Howard Marks

And if you wish to “Leave the forest intact, and not to worry of no wood to burn later”, we should take heed of what Seth Klarman said below:

“In a rising market, everyone makes money and a value philosophy is unnecessary. But because there is no certain way to predict what the market will do, one must follow a value philosophy at all times. By controlling risk and limiting loss through extensive fundamental analysis, strict discipline, and endless patience, value investors can expect good results with limited downside. You may not get rich quick, but you will keep what you have, and if the future of value investing resembles its past, you’re likely to get rich slowly. As investment strategies go, this is the most that any reasonable investor can hope for.”

Value investing doesn’t mean only buy awesome companies and hold forever like what Warren Buffett does. Nobody can be another Warren Buffett by the way, or even get close to him.

Charlie Munger, who has influenced Buffet in purchase of Coca Cola and other seemingly high price acquisitions mentioned it out clearly.

“All intelligent investing is value investing - acquiring more than you are paying for. You must value the business in order to value the stock.”

Munger explained further,

“You’re looking for a mispriced gamble. That’s what investing is. And you have to know enough to know whether the gamble is mispriced. That’s value investing.”

So, value investing is intelligent investing. Value investing is about looking for a mispriced gamble, getting more than you are paying for. It is not just about buying cheap stocks. You must know about the business and hence the value the business. It is still a gamble, not a riskless endeavour, but by knowing the business and its value, and a little diversifications, the probability of winning is higher.

Yes, value investing also must consider diversification, but not overdiversification. That is what Walter Schloss, Joel Greenblatt etc. have been doing. They buy a portfolio of stocks. Imagine if you hold just 5 stocks the last 3 years and all of them tanked, what would happen to the return of your portfolio? Won’t happen? So sure?

Benjamin Graham, the father of value investing, stated in his book Security Analysis…

“An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”

What is “thorough analysis”? Can it be just looking at its profit a quarter or two whether it is growing or not? Not bother about its financial health, nor cash flow? No need to look at its annual report or financial statements?

Value investors buy under-priced stocks when they are selling way below their intrinsic value, or with a wide margin of safety; but sell when the stock price has gone up above its intrinsic value, or overpriced, and then use the proceeds to buy other stocks with wide margin of safety, and repeat as shown in Figure 1 below. This is what all “The Super Investors of Graham and Doddsville” did. By the way, few people can be called super investors in the investing world. They are established and undisputable long-term compounders, with proven and cast-in-stones records, and great principles.

Others who can be considered as super investors are Seth Klarman, Howard Marks, Joel Greenblatt, Monish Pabrai etc. Locally we have super investors like Dr Neoh Soon Kean, Fong Siling (ColeEye), and Tan Teng Boo. Tan Teng Boo was a super investor when he first started and obtained super return for before the US Sublime housing crisis, but strayed into market timing, by keeping huge amount of cash even the market was apparently cheap, when he failed. But I believe he is still a great value investor.

Figure 1: The buy-sell process of value investor

Posted by tc88 > Jul 22, 2015 10:49 PM | Report Abuse

To KC,

Warren Buffet’s value investing principle cannot apply in Malaysia because we do not have well established companies like Coco Cola, McDonalds or Gillette Razor which have the competitive market advantage. As a result, they can produce consistently more profit and give out increasingly more dividend to the shareholders.

Me: What evidence do you have that “Warren Buffet’s value investing principle cannot apply in Malaysia”? Why it can’t be applied in Malaysia? Or is this just a sweeping statement? Or do you really understand Warren Buffett’s value investing principle? I guess it must be the problem of the latest.

In his book, “the Warren Buffett Way”, Robert Hagstrom summarizes the four financial tenets when he does investing:

• Focus on return on equity (ROE), not earnings per share (EPS)
• Calculate "owner earnings" to get a true reflection of value
• Look for companies with high profit margins
• For every dollar retained, has the company created at least a dollar of market value?

In analysing the above, always look at multi-year averages rather than single years. It is much more difficult to manipulate figures over several years than it is for a single year or a quarter or two.

Did he say anything about “produce consistently more profit and give out increasingly more dividend to the shareholders” as mentioned by you?

You agree value investing work in the matured market in US, but won’t work in Bursa?

Let us examine why value investing works in the first place.

My above article in i3investor explains value investing works because:
Human psychology, fear and greed causing the under-priced and overpriced of stocks which value investors can capitalized on.

Human behaviour of emotional bias. Few retail participants in Bursa are interested in dull stocks with not much of trading activities. Most of them just listen to hot tips and rumours to speculate in the market without having any knowledge about investing. Those retail investors with better knowledge and experience will have an advantage.

There is also this institutional imperative. Most institutional investors have no mandate investing in small capitalized firms. Fund managers are more concern about their career risks if following a winning strategy if it involves enduring long stretches of relative underperformance which does happen in the short term, but usually not in the long term. They feel that it is safer to be wrong when everyone else is losing money than to be wrong when everyone else is making money which the formula can do.

So why are those biases above not applicable in Bursa? In fact I would think they apply more aptly in the more inefficient market of Bursa than the matured markets. Don’t you think so?

So still don’t think value investing can work in Bursa? What do you think how ColdEye and Dr Neoh Soon Kean got rich investing in KLSE? Or what about my simple research and little experience investing in Bursa with all the evidences here?

Posted by Icon8888 > Jul 22, 2015 10:32 PM | Report Abuse

kc, stock market not easy. Not easy. If I can border line pass, I contented already
Need to constantly learn and adapt
Thanks for sharing your thoughts with us

Me: Yes, it is definitely not easy, otherwise everyone dabbling in the stock market would be rich. It is not easy for me too. I don’t know why some people think it is so simple, just by looking charts and a quarter or two of the profit statement. I have discuss about the difficulty in the link below:

Posted by NOBY > Jul 22, 2015 11:18 PM | Report Abuse

No catalyst is OK. But buy the stock with sufficient margin of safety. If my target return is 20% p.a and my margin of safety is 100%, I can wait 4-5 years for the value to surface. But if Margin of safety is only 30%, I can at most wait 1-2 years whereby beyond that time frame my annualized returns starts eroding... so in this scenario, catalyst may matter.... or I can only hope that I had been too conservative in my valuation...

Me: You are right. But you may be referring to those stocks which we consider as value traps; company’s cheap sale because of loss making businesses, cash burning companies, untrustworthy management who may squander away all the money etc. But if the company is cheap and it has a profitable going concern, it may not be a problem waiting as the intrinsic value of the company goes up too as time goes by. I know you know this stuff from your previous contributions in i3investor, but I just want to share it here with others.

Posted by ks55 > Jul 22, 2015 11:36 PM | Report Abuse

I wish to make qualification here.
I don't like WC. I don't agree Parkson is a good stock.
I only believe Parkson is oversold for the time being, coupled with the disposal of PRA as "catalyst" as trend reversal. Punting Parkson is just to test my hypothesis what could constitute a trend reversal for a drifting counter.......

Me: Agree. A lousy company can be a good investment if the price is right. You can also capitalize on behavioural finance to profit from it too.

” Price is what you pay, value is what you get”- Warren Buffett

I don’t think Parkson is that lousy too. It has done well before in China. It has good assets too.

Posted by fortunebullz > Jul 23, 2015 01:19 AM | Report Abuse

Warren Buffett is overrated! Behind him is Charles Munger the genius! Anyway US is very different from the rest of the world! US is a nation thriving on innovators! Let me point out a major mistake of Warren Buffett, he completely ignore Tesla, Microsoft, SpaceX even Apple! Warren belong to the old school! To wait and sit for fundamental stocks to go up is common belief of FA! But can you guarantee next year world market won't collapse! That economy won't go into recession! That is why TA can pinpoint timing of entry and exit! That is why OTB is thriving in bursa! And that is why marriage of TA and FA is the way to go!

Me: I don’t agree with you Buffett is overrated as I have explained above.

There are thousands of stocks listed in the US stock market. Buffett stays within his circle of competence, which we should too.

“The stock market is a no-called-strike game. You don't have to swing at everything — you can wait for your pitch.”

Warren Buffet is one of the very few investors who were not burnt by the Dotcom bubbles.

“TA can pinpoint timing of entry and exit”?

The more pertinent question is speculating in the stock market is a zero sum game. Why you are the lucky ones, and not the investment bankers, institutional investors, the syndicates, manipulators who have all the financial resources and computer powers?

I have shown you many great compounders of value investing with their proven records. Why not show me you compounders using other techniques of investing?

“But can you guarantee next year world market won't collapse! That economy won't go into recession!”

I can’t, but can you? TA can ah? Can show me some research telling you that?

Once again I am posting this for sharing and discussions purpose. I hope I haven’t antagonized anyone.

“Sharing (without hidden agenda) is caring”

K C Chong (23rd July 2015)

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