kcchongnz blog
My Investment Strategies
My Investment Strategies
“The secret to successful investing is to figure out the value of something and then-pay a lot less” Joel Greenblatt
“An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operation not meeting these requirements are speculative” Benjamin Graham
I have been asked numerous time on how do I make investment decisions. Here I would like to share with you my investment strategies.
My philosophy of investing follows that of Warren Buffet, i.e. to observe his two important investing rules;
Rule No. 1, Don’t lose money (at least try),
Rule no. 2, Don’t forget Rule No. 1.
With those rules, I generally have two major investment strategies which I have been harping on all this while;
- the Magic Formula of Greenblatt and
- the Graham Net Current Asset Value (NCAV)
Buying companies on the cheap
The first one is about buying good companies on the cheap, or with reasonable price. Good companies are those having excellent performance in term of return on capitals. In this respect, besides the return on equity, I also use the return on invested capital to avoid buying company earning high return by the use of excessive leverage, and the manipulation of accounting practice with one-time-off gain on non-operating activities.
Cheapness means the share price of the company is way below its intrinsic value and hence there is a wide margin of safety. It is determined from the earnings with respect to its price by capitalizing on the market inefficiency. In Greenblatt’s Magic Formula, the earnings of the firm is used with respect to its enterprise value by taking into considerations of the debt level and the excess cash the firm has. This is again done with the purpose mentioned in the above paragraph to avoid the pitfalls of the commonly used price-earnings ratio.
I augment the Greenblatt’s Magic Formula with other additional criteria in order to enhance the probability of success. The companies to invest must also have good quality of earnings as evidenced from its cash flows over a number of years, and healthy balance sheets without excessive borrowings. I also try to avoid companies with questionable management.
In my opinion, buying good companies on the cheap by capitalising on the market inefficiency has a higher chance of achieving extra-ordinary return. Most of the stocks were and will be selected based on this investment strategy. For those stocks which I have bought based on this strategy, I have done thorough analysis on most of them before which you can find my reports in i3investor website if you wish.
Buying Quality Assets on the Cheap
In this investment environment now where the market is no longer considered cheap, I also tend to use my second investment strategy, the Graham net current asset valuation (NCAV). This strategy focus on buying companies with good quality assets on the cheap. With the quality asset way above its share price, the downside is taken care of, and the upside will take care of itself. This fits in Buffet’s rules perfectly well.
I also augment this strategy with addition criteria as safety nets. First I ensure that the company generally has positive operating income. More importantly the company doesn’t burn cash, i.e. it generally has positive cash flow from operations. In here, the credibility of the management becomes more important such that cash is not wasted in their shareholder value destruction activities.
Insas which I just bought fits in this investment strategy perfectly. Its NCAV is substantially higher than the share price if you just consider its holding in cash and cash equivalent and book value of its investments, less off all its liabilities. However, if you take into consideration of the market values of its sum of parts of its subsidiaries and associate companies, the price-value discrepancy becomes more glaring and the investment thesis becomes more appealing.
Besides Insas has just announced the corporate exercise of five for 1 redeemable preference share at 4% interest rate and two free warrants for 5 shares held, which I think if we go through the whole exercise, there should be some good returns.
When to sell
As you can see I am following a fundamental approach in investing, the share will be sold if its share price has risen close to its intrinsic value as shown in the graph below:
The share will also be sold if the fundamentals of the company has deteriorated and its share price is no longer justify the declining intrinsic value, or when fund is needed to invest in better investments.
K C Chong in Auckland (1st August 2014)
More articles on kcchongnz blog
Insas Warrants WC and Its Valuation kcchongnz
Created by kcchongnz | Jan 22, 2024
Which to buy, Insas or Insas WC?
Isn’t this the most undervalued stock in Bursa?: Insas Berhad by Kcchongnz
Created by kcchongnz | Jan 15, 2024
2024 New Year Reflection Investing in the Stock Market: Timing the Market
Created by kcchongnz | Jan 01, 2024
2023 Christmas reflection on pitfalls of investing in the Malaysian stock market kcchongnz
Created by kcchongnz | Dec 25, 2023
Introduction: The Complete Dividend Investing Guide That Works by K C Chong
Created by kcchongnz | Oct 02, 2022
Discussions
14 people like this. Showing 18 of 18 comments
Thanks Mr Chong.
One thing that always confusing me is when should I sell my stock?
Should we sell our stock when the stock price is above the intrinsic value? If I am not mistaken, the said intrinsic value should belong to it minimum company value right? Please advise. Thank you.
Regards,
Chua
2014-08-02 15:16
CCs999,
Intrinsic value is the estimated value of a company or its stock. It is not the "minimum" but a fair value.
Please note that this "intrinsic value" is just our estimate and it changes as time goes by depending on the business of the company. It may go up if the business improves more, or down if the business deteriorates.
I will definite sell if the price exceeds the intrinsic value as I can use the proceeds to buy other undervalued stocks.
2014-08-02 15:37
Ha, Looks like KC wants to sapu the market in good times and bad times.
Beware of stocks turnover ya.
2014-08-02 16:15
Peter Lynch sapu over 2,000 companies by his Magellan Fund. Market is not static. It goes from undervaluation to overvaluation and then back from overvaluation to undervaluation again.
For some stocks Peter Lynch bought and sold 3 - 4 rounds.
2014-08-02 16:19
Calvin, nothing is good nor bad. If you are good, then do it 10-20 rounds.
Stock turnover can also be different companies due to different strategies.
Ultimately, It might lead to trading and bad market timing.
2014-08-02 16:30
Why not the best of both world?
An balanced approach in between, Company which is cash rich and asset rich, Good Business Value and business earning prospect, at fair value preferably slight discount.
Having said this, I thought of Keck Seng again.
2014-08-02 16:53
This is the second time you mentioned about Keck Seng.
I hope I got time to do it one day. Actually I hope one of my students can do it for you.
Yes, a number of them can do it now.
2014-08-02 17:02
TQ KC. I think it can be a good case study.
I sold off earlier as not agreeing with their management style. You know stupid egoistic people like me always think that we have higher value than others.
But after converse in this forum and reflecting, I think i can accept so many different style of management, opinion, investment style and so on. At least respect the way they do business and other people opinion.
2014-08-02 20:32
TQ KC. I bought some Pmetal 2 year plus ago at around Rm 1.70. Lately the price shoot up very fast from Rm 2.2 and when it came to Rm3.50, I fear that the price will turn around and my profit will erase. So, my decision to start selling from Rm 3.50 to 3.72 for 50% of the share to lock in the profit. However, the share keep going up and when it touch Rm 4.50, my feeling told me that I have enough profit and start to liquidate another 50% from Rm 4.51 to 4.80. The share continue to go up to Rm 5.80 yesterday. I am please to make good profit from the share. KC, is my investment strategy ok? If you are in my position, what is your strategy? TQ
2014-08-02 21:22
KC, I also made quite a lot during year 2010 and the market turn around after then, what I made was eroded. This time, I try not to go into same situation, to reduce impact on my investment in case of market turn, I started to buy YTLREIT from my liquidation of Pmetal shares at average price of Rm 0.92. I had received first dividend of 2.08 cents a month plus ago and going to get the second dividend of 2.4848 cents by end of the month. I intended not to go into buying any shares from now onward until market corrected significantly and keep Ytlreit for dividend. KC, am I in the right strategy? Or what is your advise? Thank you.
2014-08-02 22:02
tonywong8,
I really don't know what is happening in PMetal. About a year ago when it was trading at about RM2.00, somebody asked me about it and I looked at its performance and financial position, I got scared and I didn't even think of buying it even at RM1.00.
It had low return of capitals, extremely poor cash flow and a terrible balance sheet. Everything is against my principles to invest in such a stock.
There must be something I don't know about its recent or future development. What is so good?
What I don't know i don't touch. That is my strategy.
2014-08-02 22:50
Posted by tonywong8 > Aug 2, 2014 11:05 PM | Report Abuse
KC, thank you. May be I am lucky.
tonywong8,
That statement of yours above will determine the success of your investment in the future. You have great future in your investment.
How many people who have made some money in the stock market say that they are lucky? Most of them will brag about how savvy they are in investing, a classic case of cognitive bias of overconfidence.
I like people read and provide me with feedback on this article below:
http://klse.i3investor.com/blogs/kcchongnz/45226.jsp
2014-08-03 07:13
I would say High share price would boost company profile and ease investor concerns and boost bankers'confidence and thus company have easier access to financing needs and can also leverage further on financing needs.
it is seen as last resort of company to turnaround their fundamentals. I remember Mr Koon has written the importance of share price in the capital market in relates to its fundamental and investors' confidence and further financing needs not too long ago.
2014-08-03 14:02
It is not surprising this company goes on financing again or share issuance or placement based on High share prices again.
2014-08-03 15:11
Should we pay a Billion in market value for a Billion in valuation? Some are very very happy to pay a Billion for a Billion.
Better still when they know the value is Rm 1 billion and market is selling them at half price.
What happens if you know that the company is Only earning Rm 10 million and most asset are in receivable?
Do we even want to know why a Billion asset is only earning Rm 10 million a year?
I think before we think of paying a Billion in market value for A Billion in valuation, we should examine the followings:
1) Quality of asset such as Balance sheet;
2) Quality of earning power and cash flow;
3) Quality of management such as operational margin;
Not Doubt. Some of them will perform very well thereafter.Some of them will not.
Just be more Conscious of knowing what happens.
2014-08-07 22:42
Post a Comment
Featured Posts
Open a Moomoo Account Today and Win an Apple iPad Air*!
Apps
Top Articles
1
2
博傻理论
3
Good Articles to Share
5
6
M+ Online Research Articles
7
THE INVESTMENT APPROACH OF CALVIN TAN
MKHOP (5139) What Is Its Current Forward P/E and Intrinsic Value, Calvin Tan
#
Stock
Score
Daily Stocks
Stock Name
Last
Change
Volume
Stock Name
Last
Change
Volume
Stock Name
Last
Change
Volume
MQ Trading Signals
Stock
Time
Signal
Duration
Stock
Time
Signal
Duration
Featured Advertisers / Partners
Ride The Bull Short The Bear
CS Tan
4.9 / 5.0
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....
Christine Goh
:D
2014-08-02 15:05