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Author: kcchongnz   |   Latest post: Thu, 13 Aug 2020, 7:43 PM

 

Stock Picking: The Hunter and the Farmer kcchongnz

Author: kcchongnz   |  Publish date: Thu, 13 Aug 2020, 7:43 PM


For active investors using fundamental approach for stock investing, there are two species of them: the hunter and the farmer. Both the Hunter and Farmer attempt to obtain extra-ordinary return from the market, each using his own method.

The Hunter

The hunter tends to fall into the ‘focus portfolio’ camp believing that he should put all his eggs in just a few baskets and watch them like a hawk. He gets deeply entrenched in the story of the company, analysing, and performing in-depth study its business, the sector it is in, its peers, its management, moat and competitive advantage, prospects, financial performance, and position etc. He then carries out various valuations, relative as well as absolute and then invest in them if it is a great business selling at a fair or cheap price. He then holds them for long-term of more than 10 years, or even for a lifetime, with the hope to strike some multi-Baggers stocks and becomes very rich.

It is such a wonderful experience of being right and knowing that he is so skilful and knows all along that he is such a successful stock picker, and as a result, makes a great fortune. In this, such luminaries as Philip Fisher, Bill Miller, Seth Klarmen, Warren Buffett, Chares Munger etc. have become legends in our time as the long-term greats of the art.

How to become a skilful Hunter?

Christopher Mayer, in his book, “100-BAGGERS, STOCKS THAT RETURNS 100-TO-1 AND HOW TO FIND THEM” found 365 100-baggers over a 52 years period from 1962 to 2014 in the US Stock Exchange. A 100-baggers in the stock market is a stock which becomes 100 times its initial value. The return of a 100-baggers is not 100%, or even 1000%. It is 9900%!

The average number of years a stock became a 100-bagger was 26 in Mayer’s research. That was equivalent to an average compounded annual return (CAR) of about 20%, twice the CAR of the broad market over the same 26 years period.

If you have a capital of $100,000 now and wish to become a multi-millionaire, you just need to find ten potential 100-baggers stocks and invest $10,000 into each of them. If some of the bets turn out right, you will fulfil your wish to become a multi-millionaire some years down the road. Is that doable?

First, one must have the ability to identify the 100-Baggers, or even 10-Baggers will be great; what are their characteristics, and then how to go about finding them, and invest in them for the long-term.

In our local market, there have been a few 100-Baggers stocks in the last twenty years. Are you interested to know which are the few?

Are you also keen to find out the characteristics of those 100-Baggers in order to provide you with soe guides on how to go about searching for them?

The next group of active fundamental investors are the farmers. Who are they?

 

The Farmer

The other approach of fundamental investing is that espoused by the farmers who seek to ‘harvest’ the systematic mispricing from the rough of the stock market through quantitative techniques.

Ben Graham, the original guru of value investing and his close disciple, Walter Schloss, can be regarded as successful farmers in those early days. They bought up a large portfolio of excessively beaten down assets selling at less than their liquidation values which successively re-rated and they made huge amount of money over a long period of time, repeatedly doing the same thing.

In recent time, one well know successful farmer, Joel Greenblatt uses his incredibly successful technique of the ‘Magic Formula’ of buying a basket of about 30 good companies at cheap prices, using the two metrics of high return on capital and high earning yields with the highest ranks, and rebalance it annually. Greenblatt beat the return of the broad market by a wide margin with CAGR of 23.8% over 22 years, beating the return of 9.6% of the broad S&P500.

Which approach is a better one, the Hunter, or the Farmer approach?

The irony and evidence are that many retail investors like you and me with limited time and resources are not able to perform the kind of deep analysis; visiting the factories, interviewing the management and employees, the suppliers and customers etc., that is required by a successful Hunter to turn stock picking into a highly profitable activity in this changing market environment.

May be a better approach is a combination of hunter and farmer. It is by doing some detailed-enough-but-not-not-deep qualitative analysis and applying some proven quantitative criteria to invest in a diversified-but-not-overdiversified portfolio of stocks. Those quantitative metrics include return on capital, cash flows, and relative and absolute valuation techniques. That is what I have been doing in investing for the past years.

My personal experience in investing

My strategy in fundamental investing is to buy a basket of 10-15 stocks of good companies selling at cheap prices, with a margin of safety high enough above their estimated intrinsic values.

I would like to summarize all the portfolios of stocks which I shared in i3investor over the years and their returns after the portfolios were formed. They were all published records since 7-8 years ago.

In my article, “Investing in Bursa for 5 years: 5 年的等待in the link below,

https://klse.i3investor.com/blogs/kcchongnz/138098.jsp

I have shown that the portfolio of 10 ordinary stocks named “GE13 Watch” established in i3investor on 21st January 2013 returned 146%, more than seven times the return of the broad market of just 20% in the same period of about 5 years.

My second portfolio of 11 stocks named “2013 2H Stock Pick Challenge” established in i3investor on 1st August 2013 and as shown in the link below, “Search for The Holy Grail in Investing: The Magic Formula” returned 175% in about four years against the return of the broad market of just 10% during the same period.

https://klse.i3investor.com/blogs/kcchongnz/127825.jsp

The excess return of the portfolios of stocks was huge.

The stocks in the two portfolios were chosen following the principle of the Magic Formula of Joel Greenblatt; buying quality companies with high return of capital of the firm when they are selling cheap as valued at the enterprise level.

My third established portfolio in i3investor was done at the end of year 2015 for investing for year 2016. This was using a different quantitative investing strategy; the high dividend yield investing strategy as documented in the link “Tips for Dividends Investing: A sure cash flow for investors” below,

 https://klse.i3investor.com/blogs/kcchongnz/122285.jsp

This portfolio of 5 high dividend stocks has gained an average of 67.4% for the one-and-a-half-year period as on 5th April 2017, compared to the gain of the broad market of just 3.8% during the same period, again with huge excess return.

My fourth established record in i3investor was in the stock pick challenge for 2017. I did not do that well in this portfolio of stock, but it is still a positive return of 5% at the end of the year.

My latest portfolio published in i3investor was for the year 2019 Stock Pick Challenge as shown in the link below, using a combination of qualitative and quantitative analysis.

https://klse.i3investor.com/servlets/pfs/116402.jsp

The portfolio of seven stocks returned 25% for the year, outperformed the return of the broad market of a loss of 3% during the same period. Seven months later as on to date on 13 August 2020, the portfolio was up by 118%, beating the flattish market of KLSE by a wide margin during the same period. Just a couple of weeks ago, the return was more than 180%.

 

Conclusions

There are different paths in value investing. One could invest following the Hunter’s method, buying a focus portfolio of excellent companies after thorough qualitative and quantitative analysis and hold it for the long-term (unless situation changes). This can potentially unearth some multi-Baggers. The other path is to follow the Farmer’s approach using quantitative investing strategies in buying a basket of good companies at cheap prices and reviewing it periodically.

All roads in investing lead to Rome. Both strategies will yield good results. The later Farmer’s strategy may yield better return, but it requires more monitoring and rebalancing. For most investors, especially those with a busy career or business of their own, the earlier strategy of buy-and-hold excellent companies for the long-term may be better. However, both strategies require the knowledge, experience, and hard work.

If you wish to acquire some knowledge and experience in either of the above strategies, you may contact me at the following email address,

ckc15training2@gmail.com

There is no free lunch in the stock market. Success depends on knowledge, experience, a proper investing mindset and most of all hard work.

KC Chong

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

  Be the first to like this.
 
puting very simple, just leech. how to leech? go FSM or Morningstar, see the top performance funds, check their Top 5 holdings

see how many of these top 5 holdings being popular among the top performer funds, just follow lor

why susah susah buat kerja susah, buat kerja senang-senang mah

make money no need to be most panlai. most important, copy what the panlai ppl do & just copy & paste. Ctrl C , Ctrl V, settle liao.
13/08/2020 8:08 PM
abang_misai Kc, are you a leech?
13/08/2020 11:18 PM
puting Historical small caps who managed to make it big & stay:-

Healthcare:-

TopGlove
Harta
Kossan

Tech:-

Inari
Frontken
Penta
Vitrox
JHM
Gtronic

Industrial :-

Skpres
VS

Your next big thing will come from these 3 sectors. Other sectors are for cyclical play, it won't go big.

This year favorite candidate - FP Group
14/08/2020 8:52 AM

The Twin Engine for success in stock investing kcchongnz

Author: kcchongnz   |  Publish date: Wed, 22 Jul 2020, 8:20 PM


BangShift.com Watch This Model V-Twin Engine Go Together Daimler

 

What kind of investing strategy a young person must follow in order to achieve financial freedom?

Growth investing, buying shares of companies that are positioned to rapidly increase their profits, or earnings, is probably the most popular investing strategy. There are good reasons for that.

Most companies' stocks are valued as a multiple of their earnings; therefore, when a company's earnings grow, its stock value tends to follow suit.

A high growth firm will grow its earnings at an accelerated rate compared with others. Assuming Firm A earns 10 sen a share a year and it pays no dividend. Further assume that it can reinvest all its earnings into the business with the same rate of return. Assuming its earnings grows at CAGR of 10% a year. In 5 years, its earnings per share (EPS) will grow to 16.1 sen.

EPS (year 5) for Firm A =10 sen * (1+10%) ^5 = 16.1 sen

Assuming there is another company, Firm B with the same initial EPS of 10 sen but an compounded annual growth rate, CAGR, in earning of 30%. After 5 years, EPS of Firm B will be 37.1 sen,

EPS (year 5) for Firm B =10 sen * (1+30%) ^5 = 37.1 sen

Figure 1 below depicts the expected growth of earnings for Firm A and B in the next 5 years.

 

This EPS after 5 years for Firm B is more than double that of firm A. Hence, should not the present share price of Firm B worth more than that of Firm A? Of course.

 

Growth, the prime engine of stock price appreciation

Assuming one is willing to pay a price of 12 times the earnings of a company with expected growth rate of 10%, he will be willing to pay RM1.20 to invest in Firm A today.

Price A = PE ratio * earnings = 12 * 10 sen = RM1.20

And another investor may be willing to pay RM2.00, or 20 times earnings for a high growth company, Firm B with 30% CAGR,

Price B = 20 * 10 sen = RM2.00

Now assuming that in 5 years’ time, both Firm A and B will be selling at the same valuation multiples of 12 and 20 times respectively, their fair prices in 5 years are computed as below,

Fair price of Firm A = 12 * 16.1 = RM1.93

Fair price for Firm B = 20 * 37.1 = RM7.43

Return for investing in Firm A in 5 years = 1.93 - 1.20 = RM0.73

Or = 0.73 / 1.20 = 61%

Return for investing in Firm B in 5 years = 7.43 - 2.00 = RM5.43

Or = 5.43 / 2.00 = 271%

Paying a higher price for a higher growth company (CAGR 30%), Firm B yields 4.5 times return than a lower growth company, Firm A (CAGR 10%) in the next 5 years.

 

Expansion of PE valuation, the twin engine

If the earnings of Firm B can grow by 30% for the next 5 years, its PE ratio valuation is likely to expand. Let us assume that the terminal PE ratio after 5 years expands to 50.

Fair price of Firm B = 60 * 37.1 = RM22.28

Return for investing in Firm B in 5 years = 22.28 – 2.00 = 20.28

Or = 20.28 / 2.00 = 1014%

That is a 10-Baggers stock in 5 years, a stock which becomes 10 times its initial value!

Isn’t that fantastic, achieving a return of more than 1000% investing in a stock in just 5 years?

What about catching a 100-Baggers? Is that possible?

 

The case of Top Glove

Top Glove was first public listed sometime in March 2001 in the Second Board of KLSE. The adjusted price then was just 4 sen. At the closing price of RM24.70 today on 23 July 2020, and with a span of about 20 years, it is a 617-Baggers! Thanks to the Covid-19 debacle. Below is the share price movement of Top Glove in the last 20 years.

 

In fact, Top Glove became a 100-Baggers way before this Covid-19 thingy. It was already a 100-Baggers at the end of year 2017.

There are and had been a few other 100-Baggers in KLSE, besides Glove companies. Which are those companies, and what are their characteristics?

If you are interested to know, you may email me at,

ckc15training2@gmail.com

You may use the framework and guidelines to search for the next 100-Baggers to invest in to build long-term wealth.

KC

  supersaiyan3 likes this.
 
supersaiyan3 Pharma and duopharma. Kekeke
23/07/2020 12:09 AM
katappa aiyo, so secrective meh?
23/07/2020 12:13 AM
Philip ( buy what you understand) I'm surprised. No longer selling books on how to invest like Warren buffet, Mr Dan Lok? Maybe we are getting somewhere.
27/07/2020 8:00 AM
Philip ( buy what you understand) Funnily enough, I held topglove in my portfolio since 2010 and in all that time I had never once seen any comment on buying topglove. Even in your WhatsApp group there was no mention on buying topglove.

I wonder why? How does one miss this 100 bagger and yet can write such beautiful books on investing in bursa stocks?
27/07/2020 8:03 AM

Stock Market Investing: Avoid losing money kcchongnz

Author: kcchongnz   |  Publish date: Thu, 18 Jun 2020, 8:20 PM


Please note some of the things said here are in tongue in cheek.

In March 2020 when the first phase of Movement Control Order (MCO) was implemented due to the threat of Coronavirus, Online broker Rakuten had more than 11,000 new accounts activated, a 100% increase from the previous month. On 18 May 2020, Bursa posted a record 11.2 billion shares worth RM4.4 billion traded. During this period, we have heard a lot of successful and inspiring stories through various of our WhatsApp groups on how many people had made so much money in the stock market, just by doing day trading through the internet.

Have you heard anybody losing money? No, I have not.

Let us look at a stock, Green Packet (GP). It is a hot stock in one of my WhatsApp group, a very matured group of intellectual and successful individuals.

I have written a piece on this in the link below,

https://klse.i3investor.com/blogs/kcchongnz/2020-05-30-story-h1507920188-Green_Packet_warrants_is_there_really_such_a_big_frog_hopping_around_th.jsp

GP’s share price rose from 42 sen on 23 March to RM1.44 on 18 May 2020, for a gain of RM1.04, or 244% in less than 3 months, on some hot news. Weren’t there a lot of people making a lot of money? I am sure.

But what about when the share price dropped from RM1.44 to 70 sen at the close today on 18 June 2020, for a loss of more than 50%, in a month?

It is okay. Nobody lost any money. It is good that those who made so much money from the previous rise of stock price have avoided losing big in this drop of share price in exactly one month. Really?

Yes, making big gain like the above is the ticket to financial freedom. But avoiding big losses, also like the above is more important. Why?

Let us assume we have a portfolio of two stocks equally weighted with weights W1 and W2, one good stock and one bad stock. Over a period of say 5 years we made a profit R of 200% for the good stock but we lose 100% on the bad stock. Our portfolio return would be 50%.

Portfolio return = W1 * R1 + W2 * R2

=50% * 200% + 50% * (-100%) = 100% - 50% = 50%

If we have two good stocks, one makes 150% and the other 50%. Our portfolio return would be 100%.

Portfolio return = 50% * 150% + 50% * 50% = 75% + 25% = 100%.

This later portfolio return is twice better than the first one. That is because although the positive return is lower for each stock, we have no loser.

With the above, I always wary about trying to avoid big loss in the stock market. My basic principle in investing is always to be prudent. Losses will happen in the stock market, but we should try to minimize the losses by following the tips below.

If you can avoid losing money in stock investment, or at least minimize the chance of losing big money, half of your battle in investing is won.

What are some of the things to look for to minimize or avoid this downside?

  1. Do not listen to stock tips, rumours, and hypes

Do not buy stocks purely based on tips, rumours and hypes”.

https://klse.i3investor.com/blogs/kcchongnz/2020-04-13-story-h1505955007-Don_t_listen_to_stock_tips_kcchongnz.jsp

Many people speculated in the stock market based on rumours and tips and had lost money. That is the normal herd mentality. Most of them had lost so much that they just refused to talk about the stock market anymore. Most of them know many of their friends and relatives who had lost a lot of money doing the same thing in the stock market. None of them know anyone who had become rich.

History has shown the expected outcome, again and again.

The logic is simple. People who follow stock tips and rumours are mostly short-term traders and speculators. Trading and speculating are a zero-sum gain; you gain will be from the loss of others. If everyone, or the majority can make money from the stock market following stock tips and rumours, who are the generous people, the syndicates, insiders, investment bankers? Or is it the other way?

  1. Do your own homework

Always do your own homework when investing is a stock. Do some analysis yourselves is especially important before investing in stock tips and rumours. It is a must. Check if the stock is of a good company. Then do some valuation if it is worthwhile to invest in. Only after doing your homework, you will then have a better chance of success.

https://klse.i3investor.com/blogs/kcchongnz/2020-05-11-story-h1506997567-A_stock_investment_tip_Always_do_your_homework_kcchongnz.jsp

You, only you, are the one you can depend on. There ain’t no tooth fairy in investing.

But how to go about doing your own homework?

  1. Acquire the right knowledge in investment

Read, watch, practice, experience, review, continuous learning, come out with your niche and circle of competence in investing. Spend some time, effort as well as some money too to learn and acquire knowledge of something which is particularly important in your personal finance.

Treat investing in a stock as investing in part of a business. Then you must understand the business; how it makes money, is it making good money, is it a risky business etc. All this information is conveyed through the annual report and financial statements. Hence, first learn about some basic accounting, which I think is the most important in stock investing. There are a lot of resources out there, some are free in the internet, some are paid services of many of them are useful too, which I have seen. There are also some investment books available in the book shops. One of them is the below,

Please write to me if you are interested to purchase one posted free to your address at,

ckc15training2@gmail.com

Never stop learning. Business in this world is fast paced, always evolving and ever-changing. The best way to stay on top of it is to never stop learning and always be in the know.

  1. Respect valuation