I have written an article about “Why value investing works” with all evidences from academic research, and all the plausible reasons why it works here:

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

A couple of days ago, I have also provided my little experience investing in Bursa that value investing also works for me in this article of mine, “What have worked in Bursa” in the following link.

http://klse.i3investor.com/blogs/kcchongnz/83320.jsp

Yes, what have worked above are all based on what we can see and analyse from the financial reports. I bet you that there are some who would say again, that there is no use looking financial statements.  So what do they base on in their investing decision? What do most retail investors in Bursa base on when investing? First let us look at the performance of individual investors from some research.

Brad M. Barber and Terrance Odean  in their paper “The behaviour of individual investors” in the link below shows that most individual investors under-performed the market due to information asymmetry, overconfidence, sensation seeking and action chasing, failure to diversify, easily influenced by rumours, tips, media and internet forums etc.

http://faculty.haas.berkeley.edu/odean/Papers%20current%20versions/behavior%20of%20individual%20investors.pdf

Another study by a Boston based consulting firm, Dalbar Financial Services in its 2005 report, “Quantitative Analysis of Investor Behaviour” shows that an average equity investor earned over 9% less annually than the S&P over the last twenty years. This huge chasm was attributed to investors’ trying to time the market and thus failing to keep their money in stocks for the entire time period.

Below shows a chart in JP Morgan’s 1Q 2014 Guide to the markets.

Based on their analysis, the “average investor” had a 2.3% annualized return over the 20 years from 1993 to 2012, way underperformed the market return of 8.4% during the same period. The real return of an average investor, after adjusted for inflation, is in fact negative.

How do individual investors in Bursa make investing decision and how have they performed? There do have investors using value investing and momentum investing and some of them have done extremely well as we read from i3investors, but they seem to be a minority. Most retail investors follow the Greater Fool’s Theory, chasing share price when they are jacked up by insiders and syndicates, hoping to buy high and sell higher. Many are drawn to investing in hot stocks, hypes and fads, rumours and tips, with a soul full of hope but ended up with a hole full of soap.

Knowing what have worked in Bursa is certainly important, but knowing what have not worked in Bursa is equally, if not more important, so that we can have better investing outcome.

What have not worked in Bursa

I first wrote about the pitfalls in investing in Bursa based on hopes, hypes and fads, rumours and tips about two years ago in the link below:

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

Those stocks listed in Table 1 in the Appendix were some of the stocks some forumers in i3investors asked me about them about three years ago, and I compiled them and listed as shown with their share prices recorded then. Hence there is an established records of what have been discussed before.

The portfolio of 9 stocks has lost about 50% since we discussed about avoiding investing in them a few years ago, compared to the gain of 5% of the broad market during the same period. That was a huge underperformance of the portfolio. There are only two gainers, just a shade better than the broad market. They are London Biscuits, +8%, and KNM of +7% since the time of discussions. We should not forget that both had loss heavily from their peaks a few years ago. KNM has in fact lost about 95% from its peak of adjusted price of RM8.50 about 8 years ago, and London Biscuits have lost more than 70% from its peak of RM2.50. The broad market, after a steep correction during the US subprime housing crisis, has recovered and gone substantially above the previous level.

Let us look at the individual stocks in the portfolio and discussed why investing in them would not work to see if lessons can be learned from them.

The Red Chips

Chinese Stationery Limited, CSL, a red chip was listed in Bursa at 90 sen in April 2012. It opened at a high of RM1.66 on listing. When I was asked to comment about it, it was traded at 75 sen apiece. It closed at 11 sen on 23^rd September 2015, for a loss of 85% since then. Its annual reports showed the company was making tons of money with plenty of cash flows and cash in bank. And yet the major shareholders dumped the share, millions of them. There are many other China companies in Bursa with similar good earnings and cash flows, plus plenty of cash in their balance sheets; Xingguan, HB Global, XDL, K-Star, China Ouhua Winery etc. There appears to have no exception with all their share prices remain in doldrums. Nobody trust their financial accounts, and they have not shown they can be trusted. Investing in the red chips in Bursa won’t work, without exception. For retail investors, just avoid investing in them.

The rumours, hopes and hypes

Investing in Hibiscus is an investing strategy of hope and hype, the hope of the opportunity to strike oil big. Hibiscus share price was chased up by 80% from RM1.50 to RM2.70 in just four months from August to December 2013. This was just because of the hype that it has acquired a stake in a drilling company that would strike oil all over the world. Its share price just jumped because they were given some licenses to explore oil in some countries. Its share price can also jumped just because of rumours of when the drilling machine would reach the destination, and when it starts drilling, as if oil would definitely ooze out as soon as the drill rig is lowered. Well, we still have not heard of a single drop of oil has been harvest yet. Its share price has dropped to 68.5 sen on 23^rd September, for a loss of 64% since we discussed about it, or 75% from its peak of RM2.70 just two years ago.

Investing in Smartag is also based on hypes and hope; Smartag has been hoping that the Royal Customs Department would give them the ultra-lucrative contracts of RFID tracking the containers because they have the political connection which would provide them with all the non-stop future cash flows. In the meantime, it has no business, and burning cash from the IPO money every year. There is no more cash to burn any more. Its share price has dropped by 76% from a peak of 40 sen 3 years ago to less than 10 sen now.  Recently there seems be rumours again that they are going to strike big soon and speculators are excited again.

Asia Media was also a hope and hype stock. It was banging on the expected highly lucrative advertising contracts in buses and trains a few years ago which ended up not to be. AMedia’s share price has since fell from the adjusted price of 13.5 sen 2 year ago to just 2.5 sen now. Wow, what a fall! It was even much higher than 13.5sen before that. There appeared to be a lot of share price manipulation, pumped and dumped, by insiders too.

MP Corp is another company which investors invest with hope; hope that the management sells their land, which they valued the same high value as the neighbouring one which was transacted, and distribute the cash to them. The company is doing nothing at the moment except paying for the costs of holding some land and an investment property estimate to worth a lot of money, if sold. MPCorp’s share price was more than RM10 a piece once upon a time. It closes at just 16 sen on 23^rd September 2015. What a drop, unimaginable, incredible, unbelievable!

Investing basing on rumours, hopes and hypes doesn’t work in Bursa, does it?

Companies with flamboyant CEOs

KNM is a typical company with a flamboyant talking head who always appear in the media, telling investors the big growth plans he always have for the company, foraying and making its foot prints all over the world with big acquisitions, the hundreds of millions contracts it is going to get, and how undervalue are its stocks, that he would privatise the company because of the gross undervaluation, and all the deceits and spinning. Even EPF and institutional investors were drawn to the stories and many of them have invested in it. Operation wise, KNM has been losing money almost every year in his operations. Cash ran out and many cash calls were made. Debts balloon sky high. KNM’s share price dropped from its peak of about RM10.00 to just 48.5 sen now. Yet many punters are still hoping that the insiders will fry (push up) the shares for them to make money, and even analysts and investment bankers are writing reports with hope that it will turnaround with the new projects it had secured, not realizing that most of their projects were won with little or none margin. Recently, some professional analysts and investment bankers are writing and recommending to buy KNM again. But has anything major changed?

If you watch Singapore TVs, you would often see the young and flamboyant CEO of London Biscuits mingling with the pretty Singapore actresses advertising its biscuits. They also made analysts conference, telling the attendees about their plan of great future profitability, and cash would eventually come in for its plan in reduction of their capital expenses. Yet, the performance of their business keeps on deteriorating, with no improvement in their business and incredibly high capital expenses. London biscuit’s share price went up to RM2.50 in 2005 with good reported “earnings”. After 10 years, it is now traded at 73.5 sen, while the market has gone up substantially.

Investing in companies with loud talking heads or socialites doesn’t seem to work, does it?

Follow the super investors

This “Follow the super investor” investing strategy does often work in the US. It has also worked in Bursa if you have followed the right and proven super investor, buying a diversified portfolio of stocks, such as that of the ColdEye, or some other super investors in Malaysia. But it doesn’t necessary work all the time. In fact it can be fatal sometimes if retail investors just follow blindly.

Guan Chong Berhad (GCB) and Ivory Properties were recommended by a famous investor, Coldeye 冷眼 a year ago. I have great respect for this famous investor, as he has been making all his wealth from investing in Bursa. I believe if a retail investor has been following his calls, he will make handsome profit as a result. But everybody can make mistakes, with no exception. GCB appears to be making increasing profit year in year out. It paid good dividends too. It was traded at very attractive single digit PE ratio. I guess those were the reasons Coldeye was attracted to it. However, few people looked a little deeper; why is it the total debts have been increasing at such a fast pace, and that there is hardly any cash flows from operations, not to mention about free cash flows. Finally the straw broke the camel’s back. It started to make losses about a year ago. Its share price dropped by 54% from RM1.80 to 83.5 sen since then.

Ivory property was also recommended by Coldeye a couple of years ago, apparently based on its huge unbilled sales then. Earnings appears to be good relative to price. However since listing, I see no money from its operations, but more and more debts. Financial report is doggy with one-time revenue as gain and even recorded as cash flow from ordinary business. Its share price has risen from 49 sen at the beginning of the year to 77 sen in May, which I guess was due to Coldeye’s recommendation, but dropped back by more than 50% to 37.5 sen now. It was down by 32% when I commented on it. For sure there were people making money from the rise, but I think more people, especially retail investors losing money when the share price was on the downward side.

The above are just two cases that the investing strategy of following the super investors doesn’t seem to work all the time. There are a lot more cases that follow them doesn’t work if you have been reading the recommendations in i3investor and some talks by them in some seminars. So be caveat emptor.

Cash sucking companies

Many companies in Bursa consumes cash every year, instead of producing cash for investors. Some of them even made accounting profit every year. London Biscuits made seemingly good profit every year, but over the last 10 years, huge amount of cash were consumed buying huge amount of plant and equipment, much more than the after-tax earnings they have made.

http://klse.i3investor.com/blogs/kcchongnz/60180.jsp

Guan Chong is another good example.

http://klse.i3investor.com/blogs/kcchongnz/78262.jsp

Another one in Success Transformers

http://klse.i3investor.com/blogs/kcchongnz/82565.jsp

KNM has been another one. In fact all the rest of the stocks in Table one, except for the Chinese stock of CSL, all have poor cash flows.

In my opinion, it is highly likely that buying stocks without taking into consideration of their poor cash flows would not work in Bursa.

Politically connected stocks

I won’t touch political stocks such as FGVB, or any other because of its corporate governance. Those at the helm appear to be all political appointments. These people were so used to handling the money and affair of the corporation as if it is their own. They talked about their quest of empire building all over the world. They want FGVB to be the biggest growth story in corporate Malaysia. It has shown that very rarely a company can be successful in enhancing shareholder value by acquisition trails. They will acquire businesses very different from their core business and beyond their competence level, often with high costs and associated leakages.

http://klse.i3investor.com/blogs/kcchongnz/66355.jsp

The story in the link above is not a made-up case, but a true case. The share price of FGVB has dropped by 64% from RM4.14 to RM1.48 now in less than a year when a friend of mine asked me if he should invest big in FGVB because it is the biggest palm oil producing company in the world, and palm oil price was going to rocket from its already high level then.

Investing in political stocks have not worked in Bursa. Avoid doing so at all costs.

Cyclical stocks at their peak prices

Three to four years ago, palm oil was traded at more than USD1000 a ton. A friend of mine has put the bulk of his money in plantation stocks. In fact most of his money was in one particular plantation stock, i.e. JayaTiasa, because from his calculations based on the market price of each hectare of plantation, it was relatively damn cheap, without realizing that the yield of the plantation is relatively low, and there were huge claims by the debt holders, and probably minority interest too. Palm oil price has dropped by more than 50% since then and Its share price has dropped by more than 60% from its peak of RM3.14 three years ago to RM1.23 at the close on 23^rd September 2015.

Those investors who have placed most of their bets in oil and gas stocks the last couple of years when their share prices were high suffered the same faith, albeit more quickly. Oil and gas stocks have dropped by more than 50% in less than a year when oil price plunged last year.

In life, most things are cyclic. Buying commodities or commodity kind of business when they are cheap often provides excellent returns of investment, such as those furniture stocks two three years ago. Buying them at their peak prices would eventually suffer. Trees don’t grow to the sky.

Risk arbitrage

Risk arbitrage, again generally works in the matured market in the US. It sometimes work in Bursa too; one of them was KHSB as I have commented two years ago.

[Posted by kcchongnz > Mar 1, 2013 04:14 AM | Report Abuse X

At the closing price of 53 sen yesterday and the takeover offer price at 76 sen, it does seem that there is a good arbitrage opportunity for KHSB. It may not be risk-less though as circumstances may change, change of mind may occur, regulation requirement may be voided etc. Hence it may not be wise to bet all your money on that. But again if KHSB is so undervalued in the first place as claimed (I have no idea if it is true), there is really not much risk then.]

KHSB was eventually privatized by the Selangor government and investors made very handsome gain, some even for more than 50%.

However, not all risk arbitrage opportunities in Bursa work. One particular one is Asdion warrants which someone asked me about it here regarding its big discount with respect to the underlying share.

http://klse.i3investor.com/blogs/kcchongnz/80930.jsp

The underlying share price dropped by more than 50% in less than two weeks before the arbitrage opportunity could be executed, rendering a big loss in the bet. The warrant price also retreated by approximately the same amount during the same period.

There are other examples I believe which show that risk arbitrage haven’t worked (most of the time) in Bursa such as Perak Corp. because of the insider action and manipulative nature of the market. Even for those which worked, retail investors generally didn’t have the chance to make huge extra-ordinary profit as when the news were announced, the share prices have already gone up.

Structured warrants

Although I call myself a value investor, I do gamble a little in Bursa, more for fun, in particularly the call warrants listed in Bursa, but with small money. I had made some money before, long before actually. I have written about punting in Maybank call warrant before in i3investor here:

http://klse.i3investor.com/blogs/kcchongnz/58905.jsp

It was a total loss for me punting in this call warrants. Not only this, there were a few more such as call warrants of Mudajaya, AirAsia etc. Overall punting call warrants was not a good experience for me. It doesn’t matter how good the gearing, the premium, and how undervalued the warrants were basing on option pricing model, punting on the European style call warrants simple doesn’t work in Bursa for me. This is because there is no liquidity, and the playing field is uneven and a huge disadvantage of retail traders. I have stayed away from structured warrants in Bursa a long time ago.

“Derivatives are weapons of mass destruction” Warren Buffett.

Conclusions

There are investment strategies which have worked well in Bursa as described in this link.

http://klse.i3investor.com/blogs/kcchongnz/83320.jsp

Similarly there are also some investing strategies which have not worked in Bursa such as investing in hot tips, rumours, hopes, hypes and fads, follow the super investors blindly, and invest in cyclical stocks at their peaks, the political stocks, risk arbitrage and structured warrants as detailed above. Many retail investors, including some super investors, fell into the trap of investing in stocks which have lost money big time. What chance do you have as a retail investor if you do not possess the investment skills and experience? Undoubtedly, knowing and understanding what have worked and what have not worked in bursa will enhance the outcome of your investing experience.

For those who wish to learn this skill and art of investing for a small fee, please contact me at

ckc14training@gmail.com

The course is scheduled to start at the beginning of next month of October.

K C Chong

Table 1: Return of some stocks in Bursa