https://www.youtube.com/watch?v=tSj7cWEyQBA

"I always knew I was going to be rich. I don't think I ever doubted it for a minute.”

Warren Buffett

In the following article which I wrote and posted in i3investor 6 months ago, I have put forward the reasons why value investing works. I also showed the convincing evidence that value investing is extremely profitable as provided by Buffett in his paper titled “The Super Investors of Graham and Doddsville”.

http://klse.i3investor.com/blogs/kcchongnz/50988.jsp

Value investing works in a mature market in the United States, does it necessary work in Bursa? Certainly, if it works in a more efficient market like that of US, it should work better in a less efficient market here, don’t you think so?

My experience investing in Bursa is nowhere near to the time horizon Buffett was referring to those super value investors who obtained consistent extra-ordinary returns from the stock market over long periods of time spanning decades. Nevertheless I will show value investing even works in the short term in Bursa.

My personal experience

Avoidance of lemons

[Posted by stockoperator > Oct 25, 2014 04:28 PM | Report Abuse

Lots of investors like to invest in hype, turnaround, transformation, or next big things, or high tech stocks that sometimes we don't even understand the Business. So you see sometimes we are looking for high rate of failure ourselves if not betting our lucks.]

Yes, most retail players behave as speculators like what is mentioned by the comment above. Few read and speak the language of business as they don’t bother about the financial statements and annual reports produced by the company conveying the performance of the business and its financial health. Why is it important to know how to read financial statements?

I have been kaypoing (busy body) in i3investor for about 3-4 years already. There were occasions forumers asked me about investing in those rotten stocks (besides many good ones) which I have summarized in my first posting on them here.

http://klse.i3investor.com/blogs/kcchongnz/45373.jsp

All I did was to hear (read) what the management said, inspect their annual reports and financial statements; income statement, balance sheet and cash flow statement and attempted to spot financial shenanigans, did some analysis, and came to the conclusions that they were to be avoided with all the reasoning given. My latest post below summarizes their share price performance since the days I commented on them. All the comments are available in i3investor.

http://klse.i3investor.com/blogs/kcchongnz/62293.jsp

Up till to date, a portfolio of those nine stocks suffered heavy losses with a median loss of 40% compared to the positive return of 7.9%. Seven of them have negative return. What a disaster!

Hence if you understand the language of business, ie the interpretation and analysis of financial statements, and practice value investing, you would have avoided all these lemons and their hypes. It is just as simple as that. I would like to emphasize again that avoiding losing money in investing in lemons by doing risk analysis, is as important if not more important than trying to make big kill in the market. Half of your battle is won.

However, few retail investors talk about avoiding lemons and they are only interested in winners. We will examine value investing, which one of the principles is avoid the downside and let the upside takes care of itself.

My Value Investing Strategies and Their Returns

It may be appropriate to review the return of my “officially” portfolios put up in i3investor after the recent market “turbulence”, one on 22^nd January 2013 and the other 1^st August 2013.

http://klse.i3investor.com/blogs/kcchongnz/56926.jsp

http://klse.i3investor.com/blogs/kcchongnz/56937.jsp

The first two portfolios above follows the investment strategy of the Magic Formula by Joel Greenblatt. For those who are interested about this magic formula can read from the link below:

http://klse.i3investor.com/blogs/kcchongnz/51631.jsp

Of course to understand the principles, you must know what Joel is talking about enterprise value, Ebit, Earnings yield, return on invested capital etc which you can only do that if you know the language of business.

As at 24^th October 2014, the first one of ten stocks put up in 22^nd January 2013 has returned an average of 90% against the broad market of 16.5% of the same period, or an alpha of 73.5% as shown in Table 1 in the Appendix. The second of eleven stocks (Table 2) put up on 1^st August 2013 after the General Election has returned an average return of 76.2% against the mere 2.6% of the broad market, or an alpha of 73.6%. Out of a total of 21 stocks, there is only one loser, ie Tien Wah at -6.4%.   This is what I am talking about “taking care of the downside and let the upside takes care of itself” in value investing.

I also applied value investing in asset based investing, namely the Graham net net, net current asset valuation and negative enterprise value investing for some of the unloved stocks which most investors would shun away. They are boring, unsexy, so they think.

http://klse.i3investor.com/blogs/kcchongnz/45296.jsp

The results of this boring value investing strategy is summarized in Table 3 in the Appendix.

The 10 stocks returned an average of 40%, 2.7 times better than the return of the broad market of 15% during the same period. There is no loser, just one underperformer in FACB at +3.2%.

However you must understand what Graham net current asset valuation or negative enterprise value investing is and how to do the analysis in order to embark on this strategy.

Conclusions

Yes, the principle of value investing works in the long term as shown by heaps of research in the United States, and surprisingly it also works very well in the short term for me, whether I use the earnings based or asset based investing strategy.

Value investing have shown that it always works. It is intuitive too. Why wouldn’t a strategy of buying good companies at cheap price, buying good quality assets at beaten down price, and avoiding rumours and hypes generally spread by interested parties, works? So why not embark on the journey to value investing?

However, you must be fully equipped with the necessary tools, together with some right psychological mind-set in order to be able to carry out value investing in the right way.

For online course enquiry on value investing, please email me at

ckc14training2@gmail.com.

K C Chong (25^th October 2014)

Appendix

Table 1

Table 2

Table 3