In the appended article below, I have shown you many plausible reasons why they should work. I have provided you with ample evidences that value investing has worked in the most matured market in the world, the US market, in the past, and it continues to work.

http://klse.i3investor.com/blogs/kcchongnz/75910.jsp

More importantly, does value investing work in our Bursa Malaysia? What are the evidences?

Value investing in Bursa

Unlike the US market, there is little research done on the return of stock investing in Bursa which we can rely on to provide evidence. We do know there are some super investors in Malaysia such as Dr Neoh Soon Kean and Mr Fong Si Ling (Cold Eye 冷眼), etc. Dr Neoh, an academician as well as a value investor, emphasized more on earnings and dividend yield.  Mr Fong was a reporter, and basing on some basic principles of value investing, he has built up a sizable wealth.

It is difficult to find evidence of the success of value investing in Bursa. I will use some of my work done in the past to try to provide some evidence on the success of value investing in Bursa Malaysia. I will start off with some principles from Mr Fong, or ColdEye, followed by a couple of other value investing strategies

The Five Principles of ColdEye

In one of his presentations given to the public on 16^th March 2013, Mr Fong listed his 5 principles in investing. Rather he emphasized that investors should look out for this 5 things before he invest in that stock:

1. Return on equity, ROE,

2. Cash flows

3. PE ratio

4. Dividend yield and

5. Net tangible asset backing per share, NTA

Based on that, I wrote an article in i3investors giving my thoughts on what the above mean, and provided some of my own yardsticks for measuring them as shown in the link below.

http://klse.i3investor.com/servlets/forum/900214344.jsp

Return of stocks using the ColdEye 5 yardsticks

Table 1 in the Appendix shows 9 stocks met the criteria above and were chosen as good investing candidates at about the time on 17^th March 2013 basing on the 5 yardsticks. The return of these stocks were computed and compared to the broad KLCI after two years.

As on 30^th April 2015, the average total return of the 9 stocks chosen is 186.4% in about two years, with the median return of 75.3%. This return way out-performed the total return of 18.5% of KLCI over the same period. RM100000 invested in May 2013 becomes RM286000 now, or 142% more than if you invested in the broad market of RM119000.

There are only two stocks, MBL and Johore Tin, making negative return, but with very small single digit negative returns. Together with APM (+12%), there are three under-performers, or one third of them under-performed the market total return of 18.5%.

A number of stocks over-performed the market by wide margins. Latitude returned 664%, Prolexus 493%, Liihen 275%, Willow 156% and ECS ICT 75.3%, during the period.

The characteristics of the return of this portfolio basing on the ColdEye 5 yardsticks strategy in Bursa Malaysia are summarized as below:

1. Most stocks, six out of nine, or two thirds outperformed the broad index.
2. Those stocks which outperformed the broad index outperformed it by a very wide margins; three digit returns against 18.5%.
3. The underperformers underperformed marginally against the market; maximum underperformance is 27%.
4. The average total return outperformed the broad KLCI index by very wide margin; 186% Vs 18.5%. Similarly, the Median return of the portfolio of 75.3% also way above the return of the broad market.

High Dividend Yield Investing Strategy

Dr Neoh Soon Kean’s emphasis on dividend yield is with good reasons. Dividends represent the “real” return provided to investors as they are given out as cash, in oppose to the illusive earnings, or net profit. Dividends are often used as the proxy of future cash flows in a discount cash flow analysis for valuation of stocks.

In my article posted in i3investors on 18^th October 2014 as appended in the link below, the total return of a portfolio of 35 high dividend stocks were examined for a holding period of five years from October 2009 to October 2014.

http://klse.i3investor.com/blogs/kcchongnz/62033.jsp

The total compounded annual return (CAR) of the 35 stocks was 16% a year with a median of 12.2%. Both are substantially higher than the total return of the market of 10.8%. RM100000 invested in October 2009 would turn into RM210000 in October 2014, 26% more than the RM167000 if invested in the broad index. That is not bad at all.

This show that in Bursa Malaysia, the value investing of high dividend investing strategy could produce extra-ordinary return to investors.

Investing in Bursa with low Price-to-earnings ratio

“In investing, the price you pay determines your return”

PE ratio is the most widely used metric by investors as a measure of how expensive or cheap a stock is. A stock which trades at low PE ratio is often characterized as cheap and mispriced. Analysts and investment bankers commonly use this valuation metric in their reports.

P/E ratio is widely used to gauge the attractiveness of a stock with the justifications below:

• It is an intuitively appealing statistic that relates the price paid to current earnings.
• It is simple to compute for most stocks, and is widely available, making comparisons across stocks simple.
• It is a proxy for a number of other characteristics of the firm including risk and growth.

In my article posted in i3investors on 30^th October 2014 as appended in the link below, the total return of a portfolio of 104 low PE ratio stocks were examined for a holding period of five years from October 2009 to October 2014.

http://klse.i3investor.com/blogs/kcchongnz/62822.jsp

The total compounded annual return (CAR) of the 104 stocks was 17.6% a year with a median return of 15.2%. Both are substantially higher than the return of the market of 10.8%. RM100000 invested in October 2009 would turn into RM225000 in October 2014, 35% more than the RM167000 if invested in the broad index.

This low PE ratio investing strategy was better than the high dividend yield strategy above. You would have done very well investing in a basket of boring low PE stocks in Bursa Malaysia for a five-years from October 2009 to October 2014.

Conclusions

The above three value investing strategies worked well in the past in Bursa Malaysia by providing extra-ordinary returns for investors embarking in any of these value investing strategy. Out of the three, a concentrated portfolio of nine stocks using the ColdEye 5 yardsticks investing strategy easily outperformed the more diversified single metric investing strategies in PE ratio and dividend yield. As the reasons why they should work are plausible, there is every reason to believe that they will continue to work in the future.

The beauty is, all the three investing strategies are simple and easy to understand. They are also not difficult to utilize, as long as you know the basics of financial statement analysis. The metrics can be easily extracted from the three important financial statements; income statement, balance sheet and the cash flow statement.

Is there  any better investing strategy in Bursa Malaysia? Yes, there is. That would be the next topic of discussions.

Are you keen to learn this financial statement analysis and interpretations, the language of the business in order to have a higher probability of success investing in Bursa Malaysia?

Please contact me at the following email address

ckc15training2@gmail.com

K C Chong (2^nd May 2015)

Appendix

Table 1: Stock return from the Cold Eye 5 yardsticks at on 30^th April 2015

Note: Price adjusted with corporate exercises and dividends

Price then about the time on 17^th March 2013, or slightly later