Icon8888 Gossips About Stocks
(Icon) My Observation & Assessment of KC Chong's Investment Philosophy
1. Introduction
KC Chong has published many articles in i3. However, in my opinion, many people don't understand his investment philosophy, including myself. I guess the main reason is because his articles covered a wide range of topics : ROIC, Earnings Yield, Enterprise Value, Free Cash Flow, Moat, Mean Reversion, Margin of Safety, etc. Many people are not sure what exactly is the key message and how the various components fit together.
To try to figure out how KC invests, I undertook a study of his various articles. The following are some of my observations and assessments. I am quite sure KC will read this article. I look forward to his comments on whether I have got him right and whether he agrees with the way I look at various issues.
2. The KC Chong Template ?
Step I - Identify The Stock
My study of KC's articles led me to conclusion that KC are attracted to stocks that did well in recent one to two quarters (very similar to my practice). The conclusion was arrived at after comparing the timing of his Buy calls with the timing of quarterly results. There is a strong correlation between Buy calls and strong quarterly results for Tasco, Scientex, Magni-Tech, Jobstreet, Prestariang, Pintaras Jaya (non exhaustive). I believe this is sufficient as proof.
Step II - Evaluate The Stock
After identifying the stocks, KC will conduct financial analysis on the stocks. His favorite tools are ROIC and Earnings Yield. He will only buy a stock if its ROIC and EY is high enough. High ROIC is an indication of durability while high Earning Yield shows that the stock is attractively priced.
Step III - Calculate Intrinsic Value
KC will come up with a long term free cash flow projection and then perform a discounted cash flow analysis. The Net Present Value he gets will become the stock's intrinsic value. Based on that Intrinsic Value and existing market price, he will be able to determine the Margin of Safety. That will allow him to determine whether the stock is a good buy.
Step IV - Buy and Hold
My survey of the various articles showed that KC very seldom sells his holdings. Come to think about it, it is not surprising at all :
(a) KC bought a stock with the Intrinsic Value in mind. As long as it is still trading below Intrinsic Value, there is still potential upside. If that is the case, logically, he should hold on.
(b) KC is a big fan of Warren Buffett. Buffett holds really long term.
(c) Mean Reversion is something KC talked about very often. This concept is particularly relevant when the investee company's profitability has declined due to unfavorable operating environment. For Traders like Icon8888, when a company's profitability declined, it is time to flee. But for somebody who has Mean Reversion in mind, he doesn't mind holding on as given some time, profit will eventually revert to the norm - there is no need to cut loss.
3. Portfolio Performance
KC's portfolio did very well in 2013. Prestariang, Jobstreet and Pintaras shines, delivering more than 100% return. The interesting thing is that all these three superstars' profit did not grow much after he bought into them. The re-rating was caused by Valuation Multiples Expansion (for example, Jobstreet's PE Multiple was 10 times when he bought the stock, but it expanded to 30 times within two years). I am still scratching my head why there is such coincidence (three stocks) ? Was his ROIC and EY concept so powerful that it can allow him to predict those stocks are cheap and will experience second stage re-rating through Multiples expansion ? I wonder whether KC has the answer ?
It is impossible to tell how Jobstreet will perform over the long run as it subsequently sold its business. But Prestariang and Pintaras' profitability declined substantially in the subsequent years. Is this proof that high ROIC is not good predictor of a company's durability (Moat) ? Or is it proof that KC is right that there is no point analyzing a business in detailed as it is impossible to predict future earnings ? I will leave it to you to ponder.
Anyway, I do not want to leave you with the impression that KC only pick stocks with no growth. His picks such as Homeritz, Scientex, Magni-Tech, etc all turned out well, growing their profit by leaps and bounds over the years.
4. Concluding Remarks
I studied KC's investment philosophy not for the purpose of criticising or attacking him. What do I gain from doing that ? I have better things to do in life.
I undertook the study to find out whether his method is different from mine, and if different, in what way. I want to find out whether there is anything I can borrow or adopt, if not the entire package, at least some useful parts that can augment my own strategy.
The study revealed one similarity - very often it is a stock's strong recent performance (profitability) that attracts us to look at the stock.
The study revealed certain differences :-
(a) Financial ratios such as ROIC and EY play an almost "predictive role" for KC (indication of moat, and hence ability to grow earnings over long run). For me, those ratios play an "analysis role". I use them mostly to identify lemons such as London Biscuits and Engtex;
(b) Intrinsic Value is an important component of KC's stock picking decision. I very seldom bother about Intrinsic Value. Instead I prefer to play by ears - buying when stock is trading at low PER and sell when stock has achieved my targeted return; and
(c) KC holds real long term while I don't. I hate to go through down cycles (for a particular industry, not market. I very seldom time market). I try to ride upcycle and quit when there is risk that down cycle is approaching (whether can get it right is a different thing).
Come to think about it, I am not surprised that there are all these differences between KC and me. KC is a long term investor. I am more of a trader (Value Trader, I have discussed this before in my previous articles). There is no need to debate whose method is more superior. I guess as long as your method works well for you, irregardless of whether it is FA or TA, it should be ok.
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Discussions
9 people like this. Showing 50 of 65 comments
Rest well Duit .
So, that your focus will sharp .
Can kill dragon & lion next morning.
2016-06-27 23:26
As I have thought and now confirmed by Icon8888 the difference between KC Chong and Icon8888 is that KC is a long term value investor whereas Icon8888 is a short term value trader. Both see value in potential stocks and do their respective analysis Only difference is one holds for longer (more) gain while the other is happy with quick (less) gain.
One is a tortoise, the other is a hare. You know who the eventual winner is.
2016-06-27 23:50
both are good method but the most important we all here want to know which ones are the next coming superstocks........wouldnt you all agree on that?the next coming multibagger super growth stock
2016-06-28 00:22
Quote "I undertook the study to find out whether his method is different from mine, and if different, in what way. I want to find out whether there is anything I can borrow or adopt, if not the entire package, at least some useful parts that can augment my own strategy." Unquote.
The above is what I meant by "flexible" in our investment strategy. We should stick to our winning strategy and fine tune our skills from time to time by learning from other successful people. It would be a waste of time if we just boost our own strategy and criticise on others. We gain nothing if we do so. As what Icon8888 mentioned before, our ultimate aim is to make money from the market and improve our family life financially.
2016-06-28 08:55
Ultimately, I suppose the difference is how much time you have and how much effort you are willing to put into maximizing return. KC Chong's method is fairly passive, he rides on his investment long term assuming that the companies he invest can continue to utilise capital as efficiently as in the past. It is well suited to full time employees who don't have the luxury of time to scour bursa announcements every night, follow up on industry news every day, or monitor competitor's performance etc. You and I on the other hand, are active investors who uses every second to push our annual return beyond those of passive investors. We try to find unpolished gem, and take on higher risks in doing so, which is probably unwise for the general population who needs to be more concerned about keeping his/her job first and foremost before worrying about investment. So there's no which method is more superior. While your value trader method may generate higher return, you paid the price through time and effort. KC Chong may generate lower return, but he can go on cruise for years without a care in the world and still have money left over after funding his cruise from the money he made from his investments haha.
2016-06-28 10:14
I see ... KC went on cruise... So that is what he does when he is not blogging... Good life ah... New Zealand has such pristine environment, it must be a pleasure to be outdoor...
2016-06-28 10:27
you had said it very clearly soojinhou...on what I meant as stress free.
This 'active' investing method , currently do seems to show the potential benefits clearly.....due to its short term nature unlike the passive strategy which even requires lots of patience to feel convinced...but again that is where its advantage is hidden.
Perhaps with guys like Icon...one need not be too 'active' to benefit out of it...or be overly 'passive' to lose out on that passive strategy...he he
2016-06-28 10:33
There is no one strategy that fits all, but there is a strategy that fit you.
KC is KC
ICON is ICON
me is me
different psychology different mode of play
you believe KC 100% , you can't win
you believe ICON 100%, you also can't win
you believe me 100%, die faster
God is kind,
He want you to prove that you are better than others
so, a lot of debate going on
very very good.
more the big sifu argue , more we learn .
they gain nothing, we gain all
believe me,
there is free lunch in this world
but ,
you will never get any free lunch from OTB
no money no talk ,
anything wrong ?
nothing wrong .
to give or not to give, to argue or not to argue, the decision is yours
I did not force you to believe or to agree with what I said
2016-06-28 10:33
how is Baby Soros ?
soros228 Icon went on air mah. Lagi Siok.
28/06/2016 10:28
2016-06-28 10:59
KC bbq kangaroo in NZ......... itu pasal I marah him until he disappear liao...
I dun like ppl Bbq kangaroo in NZ...................... kalau bbq kena la tapao sikit
2016-06-28 11:08
Icon baby big already.
But my capital getting smaller. Hahahaha.
Kindly enlighten me.
2016-06-28 12:22
Icon8888 did you take a look at CNMC Goldmine? If you have put in a stake instead of Bornoil you would be laughing to the bank by now.
2016-06-28 13:48
Oh I see. I didn't buy. Thanks for sharing the info. You are one of the many sifus for me here in i3
2016-06-28 13:52
Eh don't say like dat, we are colleagues and we share notes. Anyway, thanks for spending so much time to make the community more positive and productive. I don't know how you get my notes because I don't post my notes in public, but your notes are meticulous and well researched. Appreciate that.
2016-06-28 14:01
You see why I don't post my notes in public? Haha. I don't want to benefit assholes like the person who just insulted you.
2016-06-28 14:03
Posted by soros228 > Jun 27, 2016 10:28 PM | Report Abuse
Well written.
Icon 1-0 KC.
Agreed. Thanks icon8888 for this article.
2016-06-28 15:28
Its all rather tiring kcchong. Everyday its about harping the same old stories, "im better, backed by research" bla bla bla.
Look, we know. FA works. We know
You could have been so much more. Instead you chose a path of mediocrity.
Spouting useless articles 'defending' your methods, 'answering' all the detractors when we all know its just a pitiful attempt to drum up interest in your course.
Do you see any of the value investing guru's touting their courses? Nay.
So much more, yet you chose the path of mediocrity. Wisdom is wasted on the old. You would think the old would want to leave a legacy, but nay, they want your small fees. A pity, really.
2016-06-28 17:27
just to poke and stimulate debate here.. i would say:
'TA has highest vulnerability for erosion of its competitive advantage with time'....
'BA....without any concrete data is the 'master of speculation' '
'Believing in prominent investors with lots of money made from stock market ....is like trying to cheat devil'
2016-06-28 17:33
valuelurker and soros228..u all make people very sad already now...karma will be after u!
2016-06-28 17:38
this is what I can say after watching Kung Fu Panda:
Tai Lung had back stabbed Master Shifu.... :(
2016-06-28 17:48
Posted by valuelurker > Jun 28, 2016 05:27 PM | Report Abuse
Its all rather tiring kcchong. Everyday its about harping the same old stories, "im better, backed by research" bla bla bla.
Look, we know. FA works. We know
You could have been so much more. Instead you chose a path of mediocrity.
Spouting useless articles 'defending' your methods, 'answering' all the detractors when we all know its just a pitiful attempt to drum up interest in your course.
Do you see any of the value investing guru's touting their courses? Nay.
So much more, yet you chose the path of mediocrity. Wisdom is wasted on the old. You would think the old would want to leave a legacy, but nay, they want your small fees. A pity, really.
Sounds like some kind of advice for me. Seldom get any advice nowadays. But what is it? Shoot!
2016-06-28 17:58
I personally like soojinhau and Yistock analysis style.
Another guy is RicheHo....
2016-06-28 18:31
icon8888 'gossip about stocks' is my all time fav .. easy to understand .. simple format .. just a hint of humor that does not make reading boring .. commendable english ! he actually makes financial figures / ratios look less terrifying :)
2016-06-28 21:11
I like itsjustaboutprofit too....full of colors...and he is one of those early spotters..
2016-06-28 21:16
Anyway using TA or FA is alright if u r making a decent profit from it, right? I am a pure technical person and find it satisfying.Good return annually.Good luck to all.
2016-06-29 00:30
I have amended the final sentence of the article to endorse both FA and TA and not take side
2016-06-29 07:23
A lot of investing concepts written by Kcchong and ICON8888 are really wrongful and give people confusion. I like to mention one of them ( of the many): Example 1.
Long term investing is not buying a stock and keep for long term. Warren Buffett evaluates his stocks every year. Change them when he sees the necessary. Long term investing is buying the stocks that you are very confident with because you already know the stock for a long term. (Sell them and buy them back later on is what he means by buying the stock over a long period of time: sometimes you sell out sometimes you buy back but always buy the stocks that you are very familiar with because you have been dealing with the stock for a long time).
You don't buy a stock through mathematics calculation and keep the stock for long term hoping god come one day and help you out.
This is one of warren buffett quote (think about it yourself):
On knowing what you don’t know:
All investing is laying out cash now to get some more back in the future. The concept of “a bird in the hand” came from Aesop in about 600 BC. He knew a lot, but not that [he lived in] 600 BC. He couldn’t know everything. ... If you need to use a computer or calculator to figure it out, you shouldn’t [buy the investment]. Those types of [situations] fall into the “too-hard” bucket. It should be obvious. It should shout at you, without all the spreadsheets. We see something better.
Source: BRK Annual Meeting 2009
2016-06-29 10:37
Intrisic value: You don't have to count the intrinsic value, you have to read a lot or be very knowledgeable.
Intrinsic value is what you know that other people don't know, that gives you an advantage when you are buying stocks. Have your own reasons to buy any stocks you like, it must be your own reasons.
To make money, of course, you must know something that other people don't know, and that piece of knowledge or information is known as intrinsic value.
You can not predict future share price using time-value of money, that is why warren buffett uses the easier way, predict earning power instead of future share price. If a stock has no business competitors, if you bought the shares when it was trading at the lower price range, then the opportunity for you to make money is very high.
You don't need mathematics course, all you need is to be hardworking and read the annual report yourself and learn a few tricks by yourself over the years.
You are good to go any time, you don't need to use mathematics to predict how long you are going to live samething also you can not use mathematics to predict whether share price will go up or not. Investing is invest in yourself not invest in the companies. You need to develop your own skills by understanding the stocks that you are like better before you make a kill.
Warren Buffet quote: Investing on paper is like reading a romance novel vs. doing something else. You’ll soon find out whether you like it. The earlier you start, the better.
Source: BRK Annual Meeting 2007
2016-06-29 10:47
Stop the argument please..... none make it to the TOP 50 richest list.... so TRY HARDER
2016-06-29 10:48
"The earlier you start, the better." That is because enlightenment can only come after you have committed a terrible mistake.
2016-06-29 10:59
There's one huge problem in KC Chong strategy, or I shall term it as financial analysis. It is just a component of a thorough analysis but he seems to make it as though financial analysis is everything else in investment. As much technical as his articles sound, you can easily learn all this by going through CFA books, Joel Greenblatt, Howard Marks, Seth Klarman, Walter Schloss and of course Buffett & B Graham. There's no reason to email him to follow his courses. Everything you can learn from him, you can learn from the few investors and CFA books that I've suggested. BUT, the underlying problem is his failure in finding great business moats and sustainable business models. Or that he lacks analysis in this area. This, coupled with local economic understanding, will prove to be greater key to investment. Regardless of KYY's personality, his golden rule of "higher earning in the coming QRs" seems legit. Just that behind this rule, are all the tedious research that one has to go through.
2016-06-29 16:01
u dun need to find "great business moat" to be successful in investing. Likewise u dun need to sell second hand mercedes or BMW to be successful second hand car dealers.
2016-06-29 16:06
No people can accuracy predict future EPS, only thing to do is find out long term-competitive/ well management companies by analysis their pass financial figures and ratios.
2016-06-29 19:05
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I mean really keen on read your next counter from Duit bro ,too .
2016-06-27 23:25