kcchongnz blog
What to rely on when doing fundamental investing? kcchongnz
[Posted by sunztzhe > Nov 24, 2015 12:43 AM | Report Abuse
Assets of any company will generate a return n postive returns will contribute to retained earnings n pay dividends or give bonus issue ...so earnings growth will drive share price up..likewise earnings decrease will drive share price down..so focus on Earnings per share..and simple PE multiple...of course others may choose IV, EV/EBITA etc etc..but i keep it simple ..just EPS, What PE multiple..what is forward EPS n forward PE multiple based on current price.]
The author of the above commented in my post “Discount cash flow analysis of V.S Industries” here:
http://klse.i3investor.com/blogs/kcchongnz/86545.jsp
He was trying to tell me that the strategy of looking at earnings growth from the quarterly reports I presumed, is a superior strategy compared to others. I must say his remark is commendable as he at least still use some kind of valuation, i.e. a PE ratio, for I have read numerous times the advice that just close your eyes and buy stocks with increased profit each quarter, without even bother about its share price is the right way to go.
I don't dispute with you for that is the strategy you think is the best for you. That is fine with me. I acknowledge that many investors have made good money using the above strategy, i.e. buying stocks when seeing growth in profit in the quarterly reports.
But should I follow your strategy?
- Shall I discard my principles in investing in companies with high return on equity?
- Shall I forget about my valuation of companies using enterprise value?
- Shall I focus, instead of cash flows and free cash flows and follow your profit, and profit growth?
- Shall I throw away the discount cash flows analysis and use just the PE ratio?
- Shall I throw away all the fundamental investing knowledge I learned from the true super investors?
My investment principles, philosophies and methodologies were shaped by many well-known proven investment gurus mostly in the US. I follow the investing strategies of some true super investors in the local market too, notably Dr. Neoh Soon Kean and Fong Si Ling (冷眼 Coldeye).
Let’s go through what I have learned from some of them.
Warren Buffett
Warren Buffett requires no introduction from anyone. In his book, “the Warren Buffett Way”, Robert Hagstrom wrote about what Buffett thought:
“Customarily, most investors measure annual company performance by looking at earnings per share (EPS). Did they increase over last year? Are they high enough to brag about? For his part, Buffett considers EPS a smokescreen. Most companies retain a portion of their previous year's earnings as a way of increasing their equity base, so he sees no reason to get excited about record EPS. There is nothing spectacular about a company that increases EPS by 10%, if at the same time, it is growing its equity base by 10%. That's no different, he explains, from putting money in a savings account and letting the interest accumulate and compound. Worse still, there are many companies borrow huge amount of money to improve EPS, but the marginal return is way below its borrowing costs.
The test of economic performance, he believes, is whether a company achieves a high earnings rate on equity capital ("without undue leverage, accounting gimmickry, etc."), not whether it has consistent gains in EPS. To measure a company's annual performance, Buffett prefers return on equity or ROE. -- The ratio of operating earnings to shareholders' equity.”
I have in an article of mine published in i3investor showing numerical examples how return on capital is the driver of value. I have also shared with you academic research about it.
http://klse.i3investor.com/blogs/kcchongnz/80420.jsp
I have even provided the return of my two portfolios which were published in i3investor three years ago basing on this strategy which turn out to be extremely good.
I have also written an article why I do not favour using PE ratios as a valuation technique because of its numerous flaws in the “E” as shown in the link here:
http://klse.i3investor.com/blogs/kcchongnz/63417.jsp
The above article not only elaborate the flaws of the “E”, and hence the PE ratio, it also provide a solution to it, i.e. using the private market, or takeover value using the enterprise value as shown here:
http://klse.i3investor.com/blogs/kcchongnz/49016.jsp
There were in-depth discussions about it in the articles above.
Joel Greenblatt
Joel Greenblatt, the super investors, fund managers as well as an academician, has been extremely successful using the return on capital to choose good companies, and invest in them when they are selling cheap with his enterprise valuation as shown in the article here:
http://klse.i3investor.com/blogs/kcchongnz/51631.jsp
The Magic formula outperformed S&P 17 out of the 22 years and achieved a compounded annual growth of 23.8% as compared to the 9.6% of S&P. $10000 invested 22 years ago in 1988 has grown to 1.09m by the end of 2009, even after the US sublime crisis in 2008-2009, compared to the $75000 investing in the broad index. This is by no means a small feat.
Joel Greenblatt never talk about profit growth and PE ratio because there are simply too many flaws in the accounting earnings used.
I have used Joel Greenblatt's magic Formula way back in 2013 to assess the "goodness" of three furniture companies, Homeritz, Latitude and Lii Hen, and found that besides :goodness", they were selling at extremely cheap price then as shown in the link here:
http://klse.i3investor.com/blogs/stock_pick_challenge_2013_2h/40360.jsp
I have also shown from my own experience that this buying good companies with high return on capital, and cheap price using enterprise value yield extremely good results in a number of articles in i3investor. The latest article is here:
http://klse.i3investor.com/blogs/kcchongnz/84923.jsp
Seth Klarman on Valuation
In 1991, Seth A. Klarman published “Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor.” This book was sold at more than ten thousands USD each initially. It outlined his thoughts and approach to investing. All participants of my online course are given this eBook for free.
“To be a value investor, you must buy at a discount from underlying value. Analyzing each potential value investment opportunity therefore begins with an assessment of business value…. While a great many methods of business valuation exist, there are only three that I find useful.”
“For a going concern, the Net present value would be most applicable. A frequently used but flawed shortcut method of valuing a going concern is known as private-market value”.
The net present value is what we do to discount all future expected cash flows to the present to obtain the intrinsic value of the company, and hence its stock, or what we call the discount cash flows analysis (DCFA).
Again nothing is mentioned about profit growth, nor PE ratio.
I have used this DCFA to value companies such as Pintaras, Magni-Tech, Latitude, Elsoft, MFCB, Scientex, Tasco, Homeritz, Kumpulan Fima, Fibon, Tien Wah, Haio, Tongher, Costal Contracts, Willow, Prestariang, Uchitech, Padini, Perstima, etc.
This DCFA has been very useful for me. Many of them have exceeded my intrinsic values since the first time I valued them and found to have very wide margin of safety. Of course not all have gained as I have expected. These articles and valuations using DCFA are published and can be found in i3investor.
http://klse.i3investor.com/blogs/kcchongnz/
Howard Marks
All those who attended my online investment course were given this eBook, “The Most Important Thing” by Howard Marks. For me, this is the most important non-technical book each fundamental investor must read. There are many great philosophies there which investors should follow. They are some of them here:
- The relationship between price and value
- Second level thinking, instead of following some simplistic metrics
- Understand, recognize and control risks, instead of chasing stars
- Knowing what you don’t know
- Appreciating the role of luck
- Reasonable expectation
- Avoiding pitfalls
- etc.
One of the most important lessons I have learned from Howard Marks is his thought about the process versus outcome in investing. He said,
“That’s because in the world of investing, being correct about something isn’t at all synonymous with being proved correct right away.” Howard Marks
Other super investors around the world
I have this book in hard copy, "The Art of Value Investing; How the World's Best Investors Beat the Market" by John Heins and Whitney Tilson with me now. This is also one of the most popular books in investing. Yes, from the world's best super investors, and fund managers. I have read it at least a couple of times.
All the super investors there are talking about cash flows, free cash flows, discount cash flows analysis, enterprise value, multiple angles, margin of safety, return on capitals, independent thoughts, second level thinking, Business first, what quality means, sound minds etc.
However, none mentions about profit growth and PE ratio.
So, do you think it is easy to change my philosophies, principles and methodologies in investing following your profit, profit growth and PR ratio?
No way. Instead I would like to propagate my investing principles, philosophies and methodologies. Oop, not really mine, but what I have learned from the true super investors in the world.
If you are also interested to learn for a small fees, please contact me at
I am very sure this knowledge is very good for your investing process and outcome in the long-term. Yes, very sure.
Oh yeah, I am teaching you how to fish and to survive in the jungle out there with no personal interest or agenda, except for the small fee for my hard work. I am not peddling any stock.
And no, I am just sharing my principles in investing, not criticizing yours. And I am not forcing them on you too. If you don’t want to follow, don’t worry, I am not going to call you names.
K C Chong
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Discussions
3 people like this. Showing 25 of 25 comments
Thank you Mr Chong for all the articles, I enjoy reading all the good articles in the i3investor which contribute by different experts. I found that different guru are using different techniques for their investment. Some people are able to make more money and some less. However all the guru have the same intention, there is to help everyone to make more money.
As a reader, I will make use of the techniques which i feel more comfortable and can make more money.
However I feel that it is too bad to put down other people for the sick of self promotion. In order to get more "students".
2015-11-24 21:54
RonnieKimLondon VS keep going up despite KC condemned it. Ronnie how about your Pantech?
2015-11-25 00:17
Agree with WinnieFoong. KC like to put down other people. KYY is one example and many others(Cold Eye, etc).
2015-11-25 00:19
Before I begin, please find my comment below which you may have accidentally omitted as it brings some balance to the overall issue at hand
Posted by sunztzhe > Nov 24, 2015 12:48 AM | Report Abuse X
Of course for a highly leverage company one must also use Return on Total assets as another benchmark on performance besides EPS and PE multiple
--------------------------------------------------------------------------
First and foremost ...Thank you for highlighting a narrow portion of what I had written yesterday which by the way was my response to one of the forumers then but I do feel honoured that you had taken the opportunity , the liberty and decision to advertise what I had espoused on the narrow portion on EPS, PE multiple, forward EPS n forward PE multiple based on current price.
I think there were other wider issues on DCF method of determining the Intrinsic Value which I did raised yesterday which you had chosen not to discuss and had omitted in the above article. I believe that in life, one must have a balanced view and keep things as simple as possibly can.
First and foremost as an investor I look at the company's biz model, the management and how the management of any company manages its total assets to generate returns for the company and to its shareholders. I place high importance on the qualitative statements from the chairman/MD in the annual report, the biz strategy going forward and whether the chairman or MD really knows the biz. I will visit its website to have a fuller understanding of its biz, the industry it competes in. This is very important to me as an investor.
Next ..I would focus on ROE(return on Equity) and ROA (return on total assets) as performance metrics concurrently as you too is also aware that for highly leverage companies, ROE will overstate the performance due to the gearing factor. To bring it to some form of balance, I will use ROA for highly leverage companies. Notwithstanding the above I would always look at net cash backing per share as well.
Your topic yesterday was on the usage of Discounted Cash Flow Model(DCF) to determine the Intrinsic value(IV) of a company such as VS. The DCF model is a good financial tool to determine the Intrinsic Value of any company. However it has its drawbacks.
First in todays world, companies may not be privileged to live for a long time due to management/competition /technological obsolescence etc
Second, The DCF financial model requires a fair forecast of future cash flows which has to be discounted back to Net Present Value by the weighted average cost of capital(WACC). Herein lies two challenges on
- a fair but subjective estimate of future cash flows with its attendant assumptions
- a fair but subjective estimate of the weighted average cost of capital which in most cases is comprised of Cost of Equity(Re) + Cost of Debt(Rd)
The estimation of a fair value of Re being the Cost of Equity Capital is very subjective and thus vary even among different financial experts.
The objective of DCF Model company is to determine the Intrinsic Value of a listed company and to enable the investor to ascertain whether the market price is at a premium or discount to its Intrinsic value(IV) which may then assist the Value Investor to decide. Since the estimation of a fair value of Re in particular may vary, the IV number thus computed will also vary. A high Re will result in a lower IV whereas a lower Re value will result in a higher IV. In essence there will be a range of fair estimate of IV numbers based on different subjective estimate of the Re factor given the same subjective estimate of future cash flows.
I hope the above brings balance back to the subject matter that was discussed yesterday.
2015-11-25 02:58
Posted by WinnieFoong > Nov 24, 2015 09:54 PM | Report Abuse
Thank you Mr Chong for all the articles, I enjoy reading all the good articles in the i3investor which contribute by different experts. I found that different guru are using different techniques for their investment. Some people are able to make more money and some less. However all the guru have the same intention, there is to help everyone to make more money.
As a reader, I will make use of the techniques which i feel more comfortable and can make more money.
However I feel that it is too bad to put down other people for the sick of self promotion. In order to get more "students".
Kind of agree with you that "self promotion" is kind of "sick". Hence I always try to discuss on subject matter, things, not on person. In this article, I discuss about how true super investors invest using very logical, sound, and intuitive fundamental methods, in my personal opinion.
Of course nothing works all the time and I am also often criticized on my methodologies, which I gladly accept and appreciate. You may read I often defend myself on some of the criticisms which I think is normal for everyone, as long as I don't go about personal attack like saying that the other person is bullshitting, misleading, or stupid.
"In order to get more students"? Of course, my message is very clear, to get more students. Is that bad?
First thing I get some income for sure if people subscribe to my courses. But that is from quite some hard work of my part.
More so it is a passion of mine now to disseminate some of the knowledge that I acquire from the fundamental value investing. It is quite a waste if I don't. That is what I personally think.
Quite a number in i3investor also said they learn from me without being a student of mine. This is one.
Blog: Do you have any No-Brainer Investment? kcchongnz
May 17, 2015 02:47 PM | Report Abuse
honestly speaking , I do not join Mr KCChong online course, I DO NOT pay Mr KCChong a sen, not a single sen, but these 2 years , I made a few lorries of cash using his recommended valuation techniques.
Don't you think the investing community needs some fundamental knowledge in investing in order to get reasonable and safe return from investing in the stock market?
Many thank me for what do for the small fee of a few hundred Ringgit I charge. This is one of them:
Posted by coolio > Oct 22, 2015 11:58 AM | Report Abuse
KC, please keep doing the good things you are doing now. I know you will just ignore those annoying sound out there, you know your quality.
I just want to take this opportunity to say thank you again because recently I have achieved 7 figure in my investing journey...hehehe.. Thanks for your investing methods, no 8 wonders in the world is really amazing!
2015-11-25 04:07
Sunztzhe, it is the same as guessing someone's age, if someone is old enough to vote etc, you dont have to be precise. IF you feel cost of equity is too subjective, just use your require rate of return, that's another way how most ppl interpret discount rates. How much return are you happy with? 10%, 15%?
If you ask me, i would just throw 10% on everything. Use a very conservative estimation on cash flow growth, 10% discount rate, and a 50% margin of safety, you already have a lot of protection on your side.
2015-11-25 06:55
JT Yeo Yes, valuation is not a precise art. It is better to be approximately right than precisely wrong. Your recommendation is a very practical one.
2015-11-25 08:30
JT Yeo,
You had missed the gist of my message.
The main objective of DCF is to determine a reliable estimate of the Intrinsic Value of a company. There r two subjective elements here in determining the Intrinsic Value (IV) using DCF :
- reliable estimate of future cash flows
- the appropriate discount rate
Being conservative in the estimation of future cash flows and applying the appropriate discount rate does not necessarily imply that the IV that u had derived is a reliable estimate of the intrinsic Value of a company. By being conservative in projecting future cash flows and applying a conservative discount rate may turn out to be totally unreliable and you may err in your decision making and miss out on the potential profit opportunity as an investor. If one is not confident of the input figures in the DCF model , why bother with it in the first place???
The onus is therefore on the person performing the DCF to determine the fair estimate of the IV of the company in order that decisions can subsequently be made.
So lets start the discussion going on in just determining a reliable estimate of the discount rate based on Malaysian situation.
- How would you determine the principles that u will use in determining the Weighted average cost of capital(WACC)of a company
- Having determined the WACC for the company, what are the principles that you will apply in determining the risk premium that you will want as an investor before you decide to consider investing in the company?
2015-11-25 12:25
The whole basis of DCF is build on the assumption that you know the business well enough. If you dont know the business, you can do a 50% discount rates, you will eventually get into trouble.
Conservative is different from 'not confident'. Conservative is knowing you might be wrong but nonetheless being careful from overconfidence. Like you say when you are not confident on something, you wont need to go through DCF anymore, it is a no go.
It is like 2 drivers, one is a race car driver. He wears helmet and seatbelt. Another is an uncle, who wants to be a race driver. He says to compensate for his lack of experience he will install 10 airbags, helmets, steal bar around car seats to reduce his 'risk'. It wont work.
2015-11-25 13:34
The whole basis of DCF is build on the assumption that you know the business well enough.
-----------------------------------------------------------------------
Well said...100% agree with your statement. Now the pertinent job to do is to build on the assumptions as confidently and as realistically as possible in computing a confident but fair IV number based on assumptions of future cash flows and the discount factor
So how would u go about building the assumptions based on the principles at your disposal??
2015-11-25 14:00
Stay within your circle of competence. Only value those businesses that are within your circle; never stray beyond that. Stay with simple businesses, they are definitely easier to value.
2015-11-25 15:27
Already told you, 10%. The only thing that will change is cash flow estimation and growth. Discount rate and margin safety unchanged.
http://25iq.com/2015/11/21/why-and-how-do-munger-and-buffett-discount-the-future-cash-flows-at-the-30-year-u-s-treasury-rate/
If you want to read more
2015-11-25 17:41
Another thing why you want to use the same discount rate is that you can compare across your investment to determine which is the best idea. If you use different rates for each stock, u cant compare which one has the best upside.
2015-11-25 17:48
Read this whole thing
http://25iq.com/2014/05/26/a-dozen-things-ive-learned-about-great-ceos-from-the-outsiders-written-by-william-thorndike/
2015-11-25 17:53
Mr.Chong,Self promotion in a healthy method is not a bad thing, in fact it is a good way to market ourselves. However i personally feel that respect each other is important to the successful of our life.
i am a beginner on investment, i read most of the articles from all the guru. Thank you for sharing a lot of information.
2015-11-26 00:36
winnieFong,
lu cakap macam ini tak patut
When did you see him putting down somebody
he only said VS is not a good buy and he did not demand you must agree.
you are new ID but definitely not a newbie in share market
please be fair to Mr Chong, he is promoting his theory ,not promoting any particular shares he is owning a substantial amount, like the good man KYY. he got the similar right not to agree with others,as you are not to agree with him that VS is not a good buy.
I do not see anything wrong with him generously sharing his knowledge of investing that I believe had already help many to had made ton of money, of course, including me also
he did not and never force you to join his course, if you are hard working and willing to learn you will benefit from his sharing
let me share with you a very brave declaration here,
If I have learnt from him, I would not dare to put almost all my money in gadang when it was selling at 1.20. I have already locked in my profit, enough for me to get a new E250 cash money
I also made some money in VS, not much 5 figures only because I know KYY and his gang are powerful men, they can determine the price. but one must 'know enough'because the 80 years old man and his gang not going to hold on the VS shares forever, I do not want to cry no tear one day. dare you say this won't happen some day?
to me no investment is 'SURE WIN' there is some element of luck.
if you know how to calculate or evaluate your risk, then you win happily and lose willing .
RIGHT?
Posted by WinnieFoong > Nov 24, 2015 09:54 PM | Report Abuse
However I feel that it is too bad to put down other people for the sick of self promotion. In order to get more "students".
2015-11-26 13:24
Hi Kcchong
May I know how you evaluate gadang?
Which valuation model did you use. Income(dcf,ddm), comparables(ev/ebit,p/e,p/cf, etc?) or liquidation (graham net net,nav)
2: What do you think about its quality of earnings ? ROE, ROIC and etc?
2015-11-26 13:42
kcfoe & WinnieFoong
I suggest you join the the online course of KC
If you have the knowledge , you need not have to rely on KYY and his gang to make money
other VS, there are many counter like gadang ,flb, matrix concept,favco,.. so many times better than VS
now I want to 'sailang' on RGB, if you buy below 0.16, MOS not less than 40%, before CNY join me walking smiling quietly to the bank
2015-11-26 13:53
Posted by digiuser016 > Nov 26, 2015 01:42 PM | Report Abuse
Hi Kcchong
May I know how you evaluate gadang?
Which valuation model did you use. Income(dcf,ddm), comparables(ev/ebit,p/e,p/cf, etc?) or liquidation (graham net net,nav)
2: What do you think about its quality of earnings ? ROE, ROIC and etc?
How I wish I know everything. But I don't. I know very little.
But one of my course participants knows much more about Gadang than me. He did a very good analysis, first judging that it is a good company with ROE and ROIC at mid teens and a high growth potential too. He used all the comparables as mentioned by you to value it half a year ago when it was trading at RM1.50.
His valuation then shows that at RM1.50, PE was at 6.6, Ebit/EV at 6.0. It was cheap. He used a discount FCF to value it too with an intrinsic value of RM1.93 then. Intrinsic value is likely have improved since then.
I relied on his analysis, after going through it, and bought quite a bit for myself and some for those whom i managed their fund. After buying it actually dropped quite a bit before rebounding back to RM1.84 now. Not bad in total return in such a short period.
I believe many of my course participants have invested in it too as his article was published in our training blogs.
I will follow this principle here before i sell:
http://klse.i3investor.com/blogs/kcchongnz/86447.jsp
In answering your questions, i would use sum of parts valuation for Gadang, if I have time and information, for its various business sections; property development, construction and its water treatment concession. Various valuation techniques such as discount cash flow which is good for its concession business, enterprise values, simple PE ratio can be used.
2015-11-26 18:53
It is not that you can't learn, it is that you are lazy to learn
If you are learnt , then the whole wide world is your battlefield
You may not win all the battles, you will win most of the battles
KC likes to teach, why we don't like to learn
What benefit do you get to mislead the crowd what he is preaching is wrong? just because of something that can be manipulated. FA is one thing, price movement is another thing
OTB also dare not guarantee you will sure win if you subscribe to his program. He is just doing all the hard work of analysis for you because you are lazy. You are the type expecting and waiting for people to give you fish, and you demand a big fish in the shortest period. That's why you find KC on-line course is uninteresting. Believed market is a weighting machine. The ultimate winner is still the one follow the safe route. Believe me SAFE is not always slow , can be FAST and BIG also.
Reap what you have cultivated . Work for your good KARMA.
2015-11-27 10:59
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2015-11-24 20:54