kcchongnz blog

Author: kcchongnz   |   Latest post: Thu, 19 Jul 2018, 11:21 PM


Valuation Matters kcchongnz

Author: kcchongnz   |  Publish date: Thu, 19 Jul 2018, 11:21 PM

I have been emphasizing that as an ordinary investor who wishes to build long-term wealth in a more predictable manner should treat investing in a stock as investing in part of a business. Hence, before buying a stock, one must look at the business,

  1. What business it is in? How does it make money?
  2. Is the business durable?
  3. Does it provide stability in earnings and cash flows?
  4. Does it earn return higher than its costs of capital?
  5. Does it have financial health to withstand any crisis?
  6. Is there a growth prospect for its business?
  7. Does it have good and credible management?
  8. Etc.

I have deliberated the above in the link below,


However, you could purchase the best stock in the world, but if you buy it at a lofty premium, it may not be a good investment.

Vice versa, the stock could be the worst company in the world, but if bought it cheap enough, it could work out to be an excellent and profitable investment.

Hence valuation matters. It determines your return on the investment.


Valuation is an Art

Most important of all is to remember that valuation is an art.

Anything that involves assumptions will be difficult to formulate, but provided you understand the assumptions and the disadvantages of each, you will be able to utilize each tool to great effect.


Relative valuation

The common method used for valuation by retail investors, professional analysts and investment bankers alike is what we term as relative valuation. Metrics used are as blow,

  1. Price-earnings ratio
  2. Price-to-book ratio
  3. Dividend yield
  4. Price-to-cash flows
  5. Price-to-sales
  6. Enterprise value to Ebit or ebitda

Many investors, including professional analysts and investment bankers use only the first 3 relative ratios. Most just use the first one, i.e. the PE ratio. Hardly anyone uses the rest.

I have deliberated the use of each and their limitations and advantages in the link below,


In fact, the above are merely pricing of a company or stock, rather than valuation of a business. There is nothing wrong with pricing of a stock, and many investors are successful by just doing that. But just be aware that it is pricing, rather than valuation, and price process can be driven by mood and momentum and can be significantly different from value for extended periods.


Absolute valuation

In 1991, Seth A. Klarman published “Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor.” This book outlined his thoughts and approach to investing.

“To be a value investor, you must buy at a discount from underlying value. Analyzing each potential value investment opportunity therefore begins with an assessment of business value…. While a great many methods of business valuation exist, there are only three that I find useful.” (Margin of Safety, page 121).

The table below contains these three business valuation methods that Seth Klarman finds useful. This table also contains definitions for these valuation methods, some thoughts as to when it might be appropriate to use each valuation method, and some notes related to each valuation method. Following this table, I have also included some of Klarman’s related thoughts on business valuation and investing.


Valuation Methods


When to Use it


1. Net Present Value (NPV) Analysis

"NPV is the discounted value of all future cash flows that a business is expected to generate." (Margin of Safety, pg. 121)

Going concern value. "Net present value would be most applicable, for example, in valuing a high-return business with stable cash flows such as a consumer-products company; its liquidation value would be far too low. Similarly, a business with regulated rates of return on assets such as a utility might best be valued using NPV analysis." (Margin of Safety, pg. 135)

"A frequently used but flawed shortcut method of valuing a going concern is known as private-market value. This is an investor's assessment of the price that a sophisticated businessperson would be willing to pay for a business. Investors using this shortcut, in effect, value businesses using the multiples paid when comparable businesses were previously bought and sold in their entirety." (Margin of Safety, pgs. 121-122)




2. Liquidation Value

A) Liquidation Value is the "expected proceeds if a company were to be dismantled and the assets sold off" (Margin of Safety, pg. 122). B) "The liquidation value of a business is a conservative assessment of its worth in which only tangible assets are considered and intangibles, such as going-concern value, are not." (Margin of Safety, pg. 131)

"Liquidation analysis is probably the most appropriate method for valuing an unprofitable business whose stock trades well below book value." (Margin of Safety, pg. 135)

"Breakup value, one variant of liquidation analysis, considers each of the components of a business at its highest valuation, whether as part of a going concern or not." (Margin of Safety, pg. 122) "Most announced corporate liquidations are really breakups; ongoing business value is preserved whenever it exceeds liquidation value." (Margin of Safety, pg. 131) "Liquidation value is generally a worst-case assessment." (Margin of Safety, pg. 131)

3. Stock Market Value

Stock Market Value "is an estimate of the price at which a company, or its subsidiaries considered separately, would trade in the stock market." (Margin of Safety, pg. 122)

"A closed-end fund or other company that owns only marketable securities should be valued by the stock market method; no other makes sense." (Margin of Safety, pg. 135)

"Less reliable than the other two, this method is only occasionally useful as a yardstick of value." (Margin of Safety, pg. 122)


Relate thought on business analysis and valuations

  1. "Each of these methods of valuation has strengths and weaknesses. None of them provides accurate values all the time. Unfortunately, no better methods of valuation exist. Investors have no choice but to consider the values generated by each of them; when they appreciably diverge, investors should generally err on the side of conservatism.” Margin of safety Pg 122

2. "Often several valuation methods should be employed simultaneously. To value a complex entity such as a conglomerate operating several distinct businesses, for example, some portion of the assets might be best valued using one method and the rest with another. Frequently investors will want to use several methods to value a single business in order to obtain a range of values. In this case investors should err on the side of conservatism, adopting lower values over higher ones unless there is strong reason to do otherwise." Margin of safety pg 135.

3. The Reflexive Relationship Between Market Price and Underlying Value: "A complicating factor in securities analysis is the reflexive or reciprocal relationship between security prices and the values of the underlying businesses. In The Alchemy of Finance George Soros stated, 'Fundamental analysis seeks to establish how underlying values are reflected in stock prices, whereas the theory of reflexivity shows how stock prices can influence underlying values.' In other words, Soros's theory of reflexivity makes the point that its stock price can at times significantly influence the value of a business. Investors must not lose sight of this possibility.... Reflexivity is a minor factor in the valuation of most securities most of the time, but occasionally it becomes important. This phenomenon is a wild card, a valuation factor not determined by business fundamentals but rather by the financial markets themselves." Margin of safety, Pg 135-136.

4. "Not only is business value imprecisely knowable, it also changes over time, fluctuating with numerous macroeconomic, microeconomic, and market-related factors. So, while investors at any given time cannot determine business value with precision, they must nevertheless almost continuously reassess their estimates of value in order to incorporate all known factors that could influence their appraisal." (Margin of Safety, pg. 118)


KC Chong



  8 people like this.
targetinvest So can tell me wad is KPS value ?
20/07/2018 00:00
Gary Siaw Yet a thoughtful and useful piece from kcchongnz.
20/07/2018 00:32
steeelman nice
20/07/2018 01:35
abang_misai Hevea still
20/07/2018 07:40
BLee Good food for thought, TQ. Happy trading.
20/07/2018 07:54
qqq3 Valuations matter, Really?

I am not about to convince you that valuations do not matter but valuations have a wide acceptable range and whilst a sense of valuations is useful it is no panacea, no guarantee for success in the stock market. A necessary but insufficient condition to justify confidence.

Too many uncertainties, too many unknowns and where to find convictions when prices go against you? How you know your valuations are right and the market valuations are wrong?

Hundreds of full time analysts in Malaysia nowadays. They are paid a salary and a full time job to analyse shares. If they cannot do a good job, what makes you think you can do a good job?

Out of 100 value investors, after one year, two years, three years, five years, ten years.........the end result of the 100 value investors will differ greatly, spanning the whole range of possibilities.

What is the evidence of any co relationship between results and knowledge of valuation methods? Between value investors and throwing of darts anyway?

Valuations matter? Really?

People have lost half their money buying steel counters at PE 8 last year, now trading at PE 3....and people have made 100% gains buying Vitrox at high PE, now PE 30 after making 100% gain.

Valuations matter? Really?

How long do you intend to hold the shares anyway? One week? One month? One year? Five years? Ten years?

Some one should do research and tell us what is the average holding period for retailers in Malaysia?

The truth is that in most cases, speculations gone wrong become long term investments. Long term investments is a result of speculations gone wrong, not an objective for most participants.

Definitely, especially among retailers, holding period in Bursa is much less than in NYSE or LSE. There are huge differences between Bursa and NYSE/ LSE.

Bursa have tried for many years already but without much success to increase participation by millennials . Bursa is still a baby boomer generation activity. Millennials are more attracted by bitcoins, by start ups, crowd fundings and newer and trendier stuffs.

Know what I think?

I think most of what people read and write about is just nonsense. More noise than good advise. I think experience is the best teacher, let them experience it themselves, what don't kill you will benefit you. I think people are smart and they should think for themselves, should be encouraged to think.

I think people should Think Different....that what the majority thinks is usually wrong and literally useless.

Value investors, contrarian investors

20/07/2018 11:12
Karlos Very good and relevant comments qq3. Yes the end of the can u make money, not so much how elegant ur valuation is especially if it is just copy from some one book!
20/07/2018 11:25
qqq3 do u start with the price/ valuation or do u start with what you want / like?

I think misers and losers start with price/ valuations.....and winners start with what they want / like.........
20/07/2018 13:43

The Most Important Thing in Investing: Price versus Value kcchongnz

Author: kcchongnz   |  Publish date: Thu, 21 Jun 2018, 08:24 PM

“Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” Warren Buffett

I have written an article on “Stock Market Investing strategy: Buying good companies” in the link below,


Basically I was advocating that when one invest in a stock, he must treat it as investing in part of a business, rather than taking as as buying a piece of paper (share certificate) and shuffling it around to get a quick buck.

I have discussed in the above article that if one wish to build long-term wealth, he should first buy the stock of a good business.  I have deliberated what a good business is about with the following characteristics,

  1. The business must be durable and be able to last for a long time to come
  2. It has a record of stability of earnings and cash flows
  3. It earns return higher than the cost  of its capitals to be shareholder value enhancing, otherwise why do the business, or buy the stock? Unless it is selling dirt cheap.
  4. It has a good growth prospect, with the business expanding and earning more and more money.
  5. It is not overly geared as to face the bankruptcy risks during economic and financial crisis.
  6. It must have a smart and cabaple, forward looking, credible and honest mangement who would take care of the interest of minority shareholders.
  7. Other attributes of a good business

Isn’t the above common sense? Isn’t it business sense? If not, what is “business sense”?

But is that all about investing to be successful? Just go and buy any good business at any price and you will become rich one day?

No, not yet, not until you compare with the offer price and the value of the business.

A good company is not necessary a good investment and a bad company is not necessary a bad investment. It all depends on the price you pay.

One of the riskiest things to do in investing is to pay for high price for a stock, even for good stocks. The biggest losers-be they nifty-fifty stocks in 1969, internet stocks in 1999, or mortgage vehicle in 2006-had something in common: they were selling at very high prices. We will go on to discuss some simple ways which can provide powerful, quick and dirty ways to compare price versus value to determine if a share is worth buying.

First up is the most widely-used Price-to-earnings ratio, or P/E.


  1. Price-to-Earnings ratio

The P/E ratio is the most widely-used valuation metric among investors analysts and investment bankers alike. It is effectively shorthand for how expensive or cheap a share is compared with its profits. In simple term, the P/E ratio is the number of years an investor gets back his capital he invested in a stock. For many, this probably is the only metric they use when investing. Earnings per share results and estimates about the future are easily available from just about any financial data source imaginable.

Some value investors take on the CAPE or cyclically adjusted P/E ratio. It takes the current price and divides it by the average earnings per share over a cycle of a number of 7-10 years. Sometimes current earnings can be overly inflated due to a business boom, or overly depressed in an economic downturn.

The most useful way to use a P/E ratio is to compare it with a certain benchmark. Good benchmarks are the P/E of another company in the same industry, the P/E of the entire market, or the same company's P/E at a different point in time. Each of these approaches has some value, as long as you know the limitations.

P/E ratio also depends on the growth prospect of the company too. Stocks with high P/Es (exceeding 30) usually have greater future growth prospects, while stocks with low P/Es (below 10) tend to have lesser future growth prospects.

However, keep in mind that using P/E ratios only on a relative basis means that your analysis can be skewed by the benchmark you are using. After all, there will be periods when entire industries will become overvalued. In 2000, an Internet stock with a P/E of 75 might have looked cheap when the rest of its peers had an average P/E of 200. In hindsight, neither the price of the stock nor the benchmark made sense.

When you're looking at a P/E ratio, also make sure that the "E" part of the equation makes sense and is representative of a company's ongoing profits. A few things can distort the P/E ratio. A company may book a big one-time gain from the sale of a division, property plant and equipment, gain in foreign exchange etc. boosting reported earnings, but based on operating earnings, the stock may not be cheap at all.  

Cyclical firms that go through boom and bust cycles--semiconductor companies, plantation and property companies are good examples of companies which distort current earnings.

Also, there are different kinds of P/E, a trailing P/E, which uses the past four quarters' worth of earnings, and forward P/E, which uses analysts' estimates of the next four quarters' earnings to calculate the ratio. Unfortunately, estimates of future earnings by individuals, and even professional analysts were often way off the mark.

Lastly the trouble though with the P/E ratio in general is that it doesn’t take a company’s debt into account and, in a value investing situation, that’s a pretty serious shortcoming which makes comparing differently leveraged companies like-for-like almost impossible. This is where the EBIT Multiple for the whole firm comes in...  



  1. Ebit multiple. Enterprise value/Ebit

Enterprise value multiples are better than equity value multiples because the former allow for direct comparison of different firms, regardless of capital structure.

[Think of enterprise value as the theoretical takeover price. In the event of a buyout, an acquirer would have to take on the company's debt but would pocket its cash. EV differs significantly from simple market capitalization in several ways, and many consider it to be a more accurate representation of a firm's value. The value of a firm's debt, for example, would need to be paid by the buyer when taking over a company, thus EV provides a much more accurate takeover valuation because it includes debt in its value calculation.]

An ebit multiple of 7 may be considered as a reasonable price for a slow or no growth company, whereas an ebit multiple of 15 may be considered as cheap for a very high expected growth company.


  1. Price-to-Book ratio

The book value, or net asset backing (NAB) is the net equity position left over when everything a company owes is taken away from what it owns.

It is worth noting that this book value often includes assets such as goodwill and patents which aren’t really ‘tangible’ like cash, receivables, inventories, plant, property and equipment. Some investors remove such ‘intangible’ assets from calculations of P/B to make the more conservative Price to Net Tangible Asset (P/NTA).

The P/B ratio doesn’t rely on volatile measures like profits as asset-value doesn’t change much year-on-year. It has a hard accounting foundation in the company’s books, and hence often been used as the key barometer of value by academics. Legendary investor Benjamin Graham, one of Warren Buffett's mentors, was a big advocate of book value and P/B in valuing stocks in his early days. Walter Schloss was another one.

Most Value Investors try to buy stocks at a discount to their Book Value – or when the P/B ratio is less than 1. However, this may not be applicable for asset light company which its value is heavily dependent on its earnings power. For this type of companies, a price-to-book value of less than 3 may also be considered as cheap.

The P/B ratio is also tied to return on equity. Taking two companies that are otherwise equal, the one with a higher ROE will be accorded with a higher P/B ratio. This is especially through for banks which the assets and liabilities are mostly marked-to-market.

The reason is clear--a firm that can compound book equity at a much higher rate is worth far more because absolute book value will increase more quickly.


  1. Price-to-EBITDA

Price to EBITDA is the ratio of a company's enterprise value to its Earnings before Interest, Taxes, Depreciation and Amortization - EBITDA.'

This may be a better way to compare the underlying businesses of companies with different amounts of debt, or which require big upfront capital investments.


  1. PEG: Buy earnings growth on the cheap

Price-to-Earnings Growth ratio was popularised by Peter Lynch, an ex-Fidelity star fund manager. It takes into consideration of the growth of the company which the previous earnings-based valuations don’t. By dividing the PE Ratio by the forecast EPS growth rate an investor can compare the relative valuation of each more comfortably.

It is generally accepted that a PEG ratio of under 1.0 signifies growth at a reasonable price.


  1. Price-to Cash Flow

The price-to-cash flow ratio offers investors a somewhat more useful look at a company's value than the P/E ratio, because the price-to-cash flow ratio uses a denominator that focus on cash flows from operations, or free cash flows after capital expenses.

However, cash flows are very lumpy numbers as in certain years, there may be more build-up of inventories, receivables, higher capex, and some years not. Be sure to take an average cash flows over a number of years, say 5 years or so.

As FCF is hard cash, a Price-to-FCF of 20 may be a good benchmark.


  1. No earnings: Price-to-Sales Ratio

During the Dotcom euphoria in the late 1990s, many new technology companies mushroomed. Their share prices were chased sky high but they had no earnings at all. So, the market invested this valuation metric to cater for these new economy stocks.

While earnings can vary from year to year, sales are much more stable and as a result one of the more popular approaches is to look at a stock’s Price to Sales Ratio. It got a bad name when it was misused in the dotcom bubble to justify nosebleed valuations.  But it does remain a key indicator for isolating potential turnaround stocks.

Look out for Stocks with historically reasonable margins trading on P/S ratios of less than 1.0 without much debt.


  1. Dividend Yield

Dividend yield is one of the oldest valuation methods. It was very popular back in the days when dividends were the primary reason people owned stocks, and it is still widely used today, mainly among income-oriented investors.

A dividend yields of 4% would mean the stock is undervalued as it is about the fixed deposit rate now, notwithstanding that most stocks have growth potential, whereas, FD has none.

As with all valuation ratios, dividend yield must be used with caution. Stocks with very high dividend yields might seem like bargains, but these companies are often going through financial problems that have caused their stock price to plunge. It's not unusual for companies in such situations to cut their dividend to save cash, so their actual dividend yield going forward might be lower than the currently reported figure.


Which valuation technique to use?

As you can see, there are various relative valuation methods which investors can use to see if a stock is cheap or expensive. The choice of which of these valuation ratios to use will come down to the situation at hand. Some companies are consistently profitable (use P/E or Earnings Yield), some have more consistent cash flow than profits (use P/FCF), some are losing money on their sales (use P/S), others have no sales to speak of but do have hard assets (use P/B), and others are a bit pricier but are cheap for their growth (use PEG).

By understanding this array of value factors you’ll be far better placed to turn over different stones when circumstances favour it.

Remember, the return of your investment depends solely on the price you pay. This is the second part of the puzzle for you to invest in the stock market to build long-term wealth safely and surely.

Bear in mind the above valuations are mainly relative in nature. You may have heard of the term “intrinsic value” from professional analysts which is based on the absolute valuation technique to obtain a range of intrinsic values of the company or its stock. We will discuss this in the next article.

If you wish to learn more about valuation, you may contact me at



K C Chong

  9 people like this.

Stock Market Investing strategy: Buying good companies kcchongnz

Author: kcchongnz   |  Publish date: Sat, 16 Jun 2018, 06:13 PM

I read an interesting article recently written by a e-friend titled, “How You Can Become A Successful Full Time Investor”. It is a good article as despite that catching title, the writer though confident, yet not over-confident, shared his knowledge and experience. Despite of the “bold” title, the writer did responsibly imply that it is not a “sure thing”. This is definitely a good guidance for the young investors, unlike some unhealthy touting of stocks and encouraging the use of margin finance to the public to get rich quick. The writer has some principles to follow, and those principles are basically following the fundamental approach of investing. That is to me the most important point to become a successful investor.

Why do I consider fundamental investing the “right path” of investing?

A friend of mine who is a very successful investor in the stock market for decades told me he has talked to scores of remisiers to find out how have their retail clients been doing in the stock market. Invariably, everyone told him that more than 90% have under-performed and most of them lost money in the stock market. When asked what kind of stocks they bought, and the answers were the same; most of them speculated in the stock market in buying rubbish stocks touted by the media, their friends and relatives, analysts and investment bankers, individuals they have trusted, all with their own agenda. Hence my article “Never buy any stock by anybody” in the link below,


In my opinion, to be successful in investing in the stock market, “The Most Important Thing” is avoid speculating in the stock market as above but by treating investing in a stock as akin to investing in part of a business, or to become a small partner of the business.

The pertinent question then is; what is a good, or bad business or company?


  1. The Business

“When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.” Warren Buffett

To look from the business angle, or what some term it as “business sense” is consider a few things regarding the business such as the durability of the business, its stability in earnings and cash flows, return on capitals, financial health, growth prospect etc.

  1. Durability of a business

A good business should be one which produces goods and services which are in good demand; food, household products, packaging products, rubber gloves, music, games, data, courier and logistic services, etc. It is even much better if there is a high demand of the products in the markets all over the world. The company has a competitive edge and be able to produce better similar goods and services than its competitors either through quality or cost advantage. More importantly, the demand of the products and services, and the competitive advantage is durable, and will likely to persist in the future. In this case, the company would likely to have a favorable future prospect.

Investing is about the future, not the past. But no one can predict the future of a business or the company. Understanding the business as above will enhance the probability of success in investing in the business.

In this aspect, for example provider of household electrical products, Panasonic Malaysia Berhad, or Panamy, with its established brands and record of quality home electrical products selling locally, in the fast growing Asean and Arab countries, would likely to have a durable business and a competitive edge, some kind of a moat.


  1. Stability of earnings and cash flows

The historical performance of the company is a reasonable proxy for the future of the company. If the company has been able to weather storms in the past and perform consistently well in different operating environments, then it will likely continue to do so in the future and will able to survive no matter how tough the environment. Good cash flows indicate the good quality of earnings, not something just illusional, but real. Without free cash flows, a company will not be able to grow, distribute dividends to its shareholders, but have to continue to borrow money for preservation of its business.

Take Panamy with its past performance as shown in Table 1 in the Appendix as an example. Panamy has a long record of more than 30 years of operating history in Malaysia and in the Asean, Arabian and other countries. It has been making profit and good cash flows for all these years. It still did so during the financial crisis 10 years ago, in fact, even increasing profit during that time as shown in Table 1.


  1. Return on capital

Another major criterion of a good company is one which provides a high return of capital.

A $100 of additional capital created by a business A employing $500 of capital, or 20% return, is undoubtedly more impressive than a business B employing $5000 and returning $250 of additional capital, or just a return of 5%.

One major metric is the return on equity (ROE), the net profit achieved with the equity, or the net asset belonging to the common shareholders. Companies that boast a high ROE with little or no debt are able to grow without large capital expenditures, allowing the owners of the business to withdrawal cash and reinvest it elsewhere.

ROE is often used to compare with the cost of equity, or the required return of the money of the shareholders, Re. A common Re is about 10%, considerably higher than the return of fixed deposit of banks, considering the risks involved investing in a stock.

Panamy’s ROE has been consistently above 15% in the recent years as shown in Table 1, way above the normal required return of shareholders of 10%.


  1. Financial health

A company with solid financial position (and those with good cash flows) can weather through any form of economic and financial crisis with more certainty of survival.

Panamy has zero debt and huge amount of cash of RM650m, or RM10.70 per share in its bank account. It distributes a total of RM2.33 per share of dividend for the current year, or a dividend yield of more than 6% at the present price of RM38.10. With a healthy balance sheet (and excellent cash flows), it is envisaged that good dividend will persist.


In comparison of all the attributes of a business above, Eversendai is involved in a dog-eat-dog highly competitive construction industry. Its operating history as shown in Table 2 in the Appendix is short, with jagged and volatile earnings of a few years completely wiped out by a single year of losses in 2016. ROE has not been good in most years.  In fact, ROE has been way below the required return of rational investors. Cash flows, especially free flows have been poor and in huge negative numbers. Its debts, as a result, has been building up and ballooning to RM1.15 billion now. Certainly, Sendai can’t be defined as a good company.


  1. Growth

What about growth of the company? Is it important? Certainly, as a growing company will earn increasing profits going forward and shareholders will gain more and more from the business in the future.

The revenue of Panamy has been growing at a compounded annual growth rate, CAGR of 5.3% for the last twelve years. Its net profit grew at a much faster pace at CAGR of 11.5%. Last two years, it has spent RM100m, considerable more than it did before in capital expenses, and it has shown the benefit of the capex from the growth in revenue and profit in the last couple of years as shown in Table 1. It is likely that its business will continue to grow for the next few years.

Sendai appears to be having higher order book in the next couple of years too. The question is will it be able to break through the past losing streak and emerge a winner in the future? Increase in revenue and jobs are important but increase in profit, and profit turns to cash flows, and earning higher return than capital employed are more important. Time will tell as future is inherently unpredictable.


Aren’t the above all about so-called “business sense”? If not, what is “business sense” then?

Yet, many investors emphasize on the quality of its management before investing in its stock.


  1. Smart and capable, honest and credible management

“Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you. You think about it; it’s true. If you hire somebody without [integrity], you really want them to be dumb and lazy.” Warren Buffett

A capable management is generally smart and competent in running the business in increasing long-term shareholder value. He has achieved many accomplishments and performed well relative to the company’s status and competitive position in its industry.  A good management is with sufficient quality will take the company forward in the right direction.

The capability of a management can often be gauged from what they have said, what they have accomplished and done through the years as reviewed through the annual reports and the past performance of its business.

A good management keeps in mind the interest of the shareholders who are the owners of the company. He rewards the minority shareholders with good dividend when affordable and carry out own stock repurchases when they are selling cheap. A good management is rationale in allocation of the capital of the company, by reinvesting the free cash flows well to earn return higher than the cost of capital and increasing shareholder value.

Honesty and credibility of the management is more important than smart and capable so that they are unlikely to put their hands in the till and shareholders are not short-changed. On the hand, a smart management is more dangerous to the financial health of the minority shareholders if he is dishonest.

Haven’t you heard of companies which their businesses have been deteriorating, and no dividend has been given for years, and instead, multiple cash calls were made in a short period of time to carry out value destroying projects or acquisitions, and yet the management is living in big house and drive luxurious cars, not only one car, but many sport and luxurious cars? Is that a signal of a good management and good company to invest in?



Now you have read about what a good business or company is, are you ready to invest in some good companies and its stocks to build long-term wealth safely, slowly but surely?

I do not think so, not until you have acquired the language of a business on how to identify a good company.  Moreover, finding a good company is just part of the puzzle. There are other aspects which are prerequisite to be successful in investing such as having an estimate of the value of the companies to compare with the price, the psychology and behavioral aspect of investing etc.

We can discuss about this next time.

Yes, hoping to build long-term wealth is not easy as just following a simple rule, follow the tips of others, leverage up with margin and hope to make it in a short term as propagated in the internet space. There is no such big frog jumping around. कोई नहीं.

To be successful in building long-term wealth (forget about quick road to riches), one must have the knowledge, the general knowledge about business and industries, the specific knowledge about the companies, and confidence (not over-confidence). Confidence can only come with knowledge and experience, and not just a slogan. All these require time and effort. There is really no free lunch in this world.

Meanwhile, if you wish to learn about all these with the aim of building long-term wealth in a more predictable manner, with some effort, you may email me at,


Note: The companies used in this article are merely for illustration purpose. They are not meant as examples in any advice for sale or purchase.

KC Chong



Table 1: Past performance of Panamy


Table 2: Past performance of Eversendai

  2 people like this.
abang_misai Mau cari gaduh kah? Write like a professor but Hevea promoted is dying.
16/06/2018 21:06
Chanteckfai abang_misai still charging subscription fee for poor investment advise while creating many many fake account to attack your own subscriber?
17/06/2018 00:41
3iii Once again, thanks for sharing another excellent article.

My remisier and stockbroker, too shared that the majority (90%) of players lose money in the stock market.

For those not knowledgeable in stocks, please get educated or get a mentor. Do not invest in stocks without a sound philosophy and method.

This article shares a safe philosophy and method, but you need to know a lot more before involving in shares in a big way for the long term.

Good luck.
17/06/2018 02:35
pjseow Buying fundamentally good stocks are very important for consistent returns . Warren Buffet;s first rule is not to lose money in the first place . Good stocks with good records should be the key selections for first timers as the risk is very small. I started investing in 1998 during the once in a life time big crash when the CI index was between 250 to 600 .I started with RM 170 k using my housing overdraft . Stock investment had given me an average of 18 % ( inclusive of dividend ) annually compounded return . I bought Public Finance , Public bank,Malakoff , KMLoong , WCT , MOX , Maybank, Supermax , Elsoft , Inari ,Penta ,Airasia , Superln . I do not keep the stocks forever . I had sold most of them when it hit my targets or when the quarterly result turn negative . Some stocks gave a return of more than 20 % if you had hold it for more than 10 years . Stocks like Elsoft, Inari, Public Bank, Penta ,Top Glove , Supermx, Kossans , Hartalega ,JHM are good examples .
17/06/2018 11:30
3iii pjseow. Thks for sharing.

abang_misai and Chanteckfai do not know what they are missing. They probably will never know, given their denial or ignorance.
17/06/2018 11:44
pjseow 3iii, I do have my fair share of buying wrong stocks like Megan Media and Protasco . I lost more than 60k on Megan media alone . These stocks appear to make huge profits with low PE . When their cash started to go down unreasonably , we need to cut loss quickly. Fortunately ,such stocks are a small percentage of what I bought . THe other stock which was my favourite for the last 15 years was Uchitech which has consistently deliver good dividend .
17/06/2018 19:31
kcchongnz 3iii,

Thanks for the motivation.


You should be doing well in the long-term in investing. I have no doubt about that. Kudos.
17/06/2018 20:13
pjseow Thanks KC Chong .
The young investors tend to underestimate the annual return of 18 % .They want super fast return like those in the money games ( promise of 20 % return per month ). More than 90 % of investors got burned due to unrealistic promise of such returns . Many are inpatient and can't see the power of compounding . USing the rule of 72 , it takes 4 years ( 4x18 = 72) for the initial capital to double . Take RM 170k as initial capital , 4 years later the RM 170k becomes RM 340 k. A 20 years of consistent 18% return per year compounding will yield 32 x ( 2 to the power of 5 ) of original capital . It is a solid RM 5.44 million after 20 years of investment with RM 170 k initial capital . If you select good stocks ( slim chance of losing money ) to invest with an average 4 % dividend yield , what it takes is for you to make a 14 % capital gain only to get a cumulative 18 % . If you study the records of last 15 to 20 years for Dutch Lady , Nestle , Panamy , Public Banks , the top 4 gloves companies and the few electronic and semiconductor companies , they had such returns . The key words are "dont lose money "and be patience . The Malay saying " Sedikit sedikit , lama lama jadi bukit " is the best proverb to describe such investment .
17/06/2018 21:01
lengleng legend sendai would always be used as an example in your article when its share price surge on a sudden... what a strange coincidence... by the way, still agree with what it is written in the article..
17/06/2018 21:14
qqq3 DickyMe "Eversendai Corp Bhd's first completed liftboat Vahana Aryan will be delivered by the first week of June, and will be fully commissioned by mid-June."
This means they will get payment for that delivery and

"Nathan said its second liftboat is at 35% completion but currently put on hold. We expect to restart the work by next three to six months," he added,"
With payment coming in, no need to source for funding.

Currently, the group is tendering for about RM20 billion worth of contracts, split equally between structure steel and oil and gas segments. The group foresees a more sizeable contracts going forward. Year to date, the group has secured about RM716 million worth of job wins."

TENDERING FOR RM20 Billion worth of contracts. Dapat 10%, sudah RM2 Billion. Apa lagi mau?
06/06/2018 09:51

what did I tell you? That this kcchong got lousy sense of timing.

sendai up 2 sen to $ 1.07...and this is only the beginning.
18/06/2018 10:08
Henly KYY said to KC "comes polish my shoe, I give u 1 millions rupee"
KC replied " Oh brother, no need I do for free "
KYY said " very kind of you, but you cannot do for free, I give you one tip, go buy eversendai "
KC " Oh my thousand thank you boss, i will be rich by just polish shoe, next lesson, the effective ways of shoe polish "

Lesson learned/
18/06/2018 12:20
hellbender good article. Thank you.
18/06/2018 16:04
myongcc5 Another good article...not to b missed.
Thanks KC
18/06/2018 16:09
qqq3 Posted by myongcc5 > Jun 18, 2018 04:09 PM | Report Abuse

Another good article...not to b missed.
Thanks KC

write is easy

decision that makes a man

its always the same problem.....

cup half full or half empty?
18/06/2018 17:23
moneykj You love Sendai like one love his young mistress...lol
18/06/2018 17:41
qqq3 Posted by moneykj > Jun 18, 2018 05:41 PM | Report Abuse

You love Sendai like one love his young mistress...lol


write is easy
but have you developed your business sense to improve your timing and to tell whether cup half full or half empty?

since its low in March , Sendai has been a top performer in the KLSE....and the cup is filling up fast......
18/06/2018 19:25
kcchongnz Posted by qqq3 > Jun 18, 2018 07:25 PM | Report Abuse

but have you developed your business sense to improve your timing and to tell whether cup half full or half empty?

since its low in March , Sendai has been a top performer in the KLSE....and the cup is filling up fast......

Me: What does "market timing" has to do with "business sense"?
What kind of "business sense" is yours? Your "business sense" is market timing? OMG!

What does "business sense" have to do about "to tell whether cup half full or half empty?

What is "cup half full or half empty?
18/06/2018 23:47
qqq3 Mahathir has great sense of timing....Think he will do equally well in stock market as in politics.

Mahathir has great sense of timing....wrote his Malay Dilemma just at right time., resigned as PM just at right time, resigned from UMNO just at right time....comes back to politics just at the right time.

Mahathir has great sense of timing......born or cultivated? or just lucky? mathematically it is difficult to tell luck from born and cultivated.
19/06/2018 01:45
qqq3 people says stock market is about FA and TA.

I say BS to that.

I say stock market is about business sense and the ability to tell whether cup is half full or half empty....and the great sense of timing.
19/06/2018 01:54
qqq3 the reason why people say stock market is about FA and TA is because these are teachable skills. But , if that is necessary and sufficient , all the finance professors in the world would be highly successful. But we already know that is not true.

so, there are myths...and there are realities.

business sense and the ability to tell whether cup is half full or half empty....that would be the real necessary and sufficient conditions for success. ...but very difficult to teach.

Everyday, every transaction, sellers are negative and think it is half empty , buyers are positive and think it is half full and only one of the them is correct. The dilemma every one faces everyday, every transaction is ....whether it is really cup half full or half empty?

Wouldn't you want to be the one making the correct decisions?

Two highly trained fund managers , each with full knowledge of the situation and the said invested companies....one can be a seller, the other a buyer. But only one can be right.

Is it an innate skill or a cultivable skill? Nature or nurture?

Difficult questions.

More research is needed. Suffice to say, it is a thinking man's game. A thinking man's game in which luck plays a big and important part, yet a thinking man must try to improve his odds through constant practise and experiments.
19/06/2018 07:20
qqq3 when people says stock market is about FA and TA vs
when people says stock market is about business sense, about cup half full or cup half empty, about the great sense of timing

there is a great difference in the approach, in the thought process, and in the final outcome.

when people says stock market is about FA and TA....the tendency is to be too mathematical, the question becomes what PE or NTA should I sell/buy....the tendency is to take the human out of the equation, the tendency is to be too static and predictable, the tendency is to be inflexible, a portfolio full of shares sharing the same characteristics.

when people says stock market is about business sense....it is placing business sense at the top of the priority. The question then becomes what is the business sense of owning this particular share at this particular point in time. Its a great filter.

when people says stock market is about cup half full or cup half empty...it is recognising the dual nature of the stock market, that there are always pros and cons, the yin yang of the market, and that ultimately stock market is about choices and decisions....and the ability to make decisions based on imperfect information. Some people can make decisions , others cannot.

when people says stock market is about the great sense of timing, it emphasis that the sense of timing can be developed. That it is easier to swim down stream, easier to go with the flow than to swim upstream...that prices go up slowly and can drop quickly. That it is tough to go against the prevailing trend. They call this trend analysis.

In business, in politics and in stock market, some people have highly developed sense of timing.

In stock selection it is business sense first then followed by management quality and finally to review the available records and projections....not the other way round.
19/06/2018 17:50

Technical and Fundamental Analysis kcchongnz

Author: kcchongnz   |  Publish date: Tue, 12 Jun 2018, 06:39 PM

A Picture Is Worth Ten Thousand Words”             An Old Chinese Proverb

Technical analysis (TA) and fundamental analysis (FA) are the two main methods used by market participants when buying or selling shares. Technical analysis studies the behaviour of the price-volume movement of shares and uses it to predict its future price movements. It often uses complex charts and trend lines. Fundamental analysis revolves around analysing the performance and heath of a business and its future prospect by carefully dissecting its annual report, financial statements and broad economic factors.

Fundamental analysis used to be the only investment method since decades ago but that has changed as the advent of high-speed computing has made TA easier and more widely available. Many large investment firms are making their trading decisions based on computer algorithms. There have been a boom for companies that manufacture and distribute stock charts and charting software which can produce any conceivable chart one might want to see, for security firms and individuals. Remisiers are attracting more customers with their charting tools and TA and have been making recommendations of stock trading base on that.

In this article, I will focus on what I have read about the use of TA in stock selection by individuals and market practitioners. But be caveat emptor, I am not an expert of TA, rather, I know little about TA.


Technical Analysis

Technical analysis or charting bases solely on the recent movements of the stock price and volume on the chart to make a buying or selling decision. It suggests to buy if the stock has gone up recently and sell if the price has started to come down. It makes a market timing trading decision basing on the momentum of the stock price and profit form this price movement.  

The rationale of the strategy hinges on the human psychology of crowd behavior, that the past behavior of the market players will be repeated in the future. There are various technical systems, trading rules and technical terms used such as the filter system and “stop loss” orders, Moving Average, the Elliot Wave Theory, Relative Strength, Head and Shoulders, flags and pennants, tea-cups, Oscillators, Double or Triple Top Reversal, Channels, Wedges, Diamonds, Doji, Shooting Star, Support and Resistance and numerous other bombastic and hard-to-understand terms.

Chartists are oblivious about earnings, dividends, cash flows, and no worry about the health of the companies the stocks are behind, and the overall economy in general. There are certainly many people who have made a lot of money using TA. You do hear them bragging about it in some public forums too, however, many more have lost their fortunes and are left biting the dust.

Critics of technical analysis would say that history of stock price cannot tell you how it will behave in the future. In other words, they claim that the stock price movement is a random walk, that stock price behaves like a drunken soldier, walking aimlessly and unpredictably. In science, it is Brownian motion, the random movement of particles suspended in a fluid resulting from the collisions of molecules.

Malkiel Burton, a finance professor, in his popular book “A Random Walk Down Wall Street” which is a must to read for all investment students and professionals alike, describe TA as “Strategy of building castles in the air”. According to him, a weak form of random walk theory goes like this:

The history of stock price movements contains no useful information that will enable an investor consistently to out-perform a buy-and-hold strategy in managing a portfolio.”

According to Malkiel’s research, all of these charting techniques of searching for correlations of past price movements are spurious at best, that charting and stock price movement have no direct causal connection, yet it may be wrongly inferred that they do, due to either coincidence or the presence of a certain third, unseen factor.

In this advance technology age, it is actually very easy to simulate all those trading rules from the past and back test them if following those rules will result in consistent profitable trades. However, it appears that no academic research, nor any rigorous back testing with the huge machine power have shown that there is statistical and economic (when transaction costs are included) significance that any of those rules yield positive results. The stock market has little memory, if any.

Malkiel presented his intuitive arguments that why TA might not work. Firstly, it should be noted that the chartist buys in only after price trends have been established and sell only after they have been broken. Because the sharp reversals in the market can occur suddenly, which we often see, the chartist often misses the boat. Secondly, such techniques, even if they work initially, must ultimately be self-defeating. As more and more people use them, and some traders even tend to anticipate technical signals before they appear to make buy and sell decisions, the value of any technique depreciates. No buy or sell signal can be worthwhile if everyone tries to act on it simultaneously.

However, in the market place, it seems that most participants and especially remisiers are using TA, I believe. My remisiers friends are all using TA as far as I know and few of them knew what FA is about. My remisier, two of them are accounting and finance graduates, asked me what compounded annual growth rate (CAGR), Margin of safety (MOS), etc. are, to my surprise, which I use it so often in my FA stock analysis. Many of the largest market players, institutional investors, investment bankers, syndicates, etc. are making their trading decisions based on computer algorithms, i.e. TA. TA could be the major decision maker now.

My experience (if any) in using TA

I first used TA, or should I say the only time was during the Bull Run in 1993 and 1994 when a friend taught me how to interpret those funny charts. That time we used hand drawn charts, imagine how much time was wasted doing so while I was having a career in engineering. I remember a few of the stocks even after more than 20 years, Sriwani-w, Midf-w, etc. which I have lost considerable amount of money. I have never made any money basing on charts. I select my stocks with FA but was never successful following the trading rules such as cut-loss at 5%, and then buy back when it has gone up by 5%. Often once I cut loss, the stoc