“What the wise man does in the beginning, the fool does in the end.”

I used to write a couple of articles a week in i3investor to share my thought about investing. Recently I have been travelling quite a bit and didn’t realize that I haven’t been writing for more than a month already. Feel guilty when I read this message from my mail box.

[yo watsup <yowatsup0919@gmail.com>

Dear KC Chong, 

I am Yeoh , one of your admirer. Currently i am just a university student and i found i am interested in investing in stock. Everytime when i read your posts, it inspired me and taught me a lot of new things. However recently i cant find your any new post anymore, is it something wrong with the i3investor , or you have stopped writing? I hope to see your post again soon as everyone loves your writing and it definitely will benefit all of us. Thanks and have a nice day !]

This is the kind of message which motivates me to share my knowledge since four years ago in i3investor, the same as the one below.

[Nicholas Oh

I always considered you my teacher. It was your posts and teachings in i3 4 years back that led me to the path of value investing and I ve never looked back since. I thank you very much for that.]

Sorry for posting these messages here, but they make me feel good. Human being is selfish in nature.

How not for me to feel good when the one who posted the comment above has actually excelled me in his value investing knowledge and capability and nowadays I have actually depended on his sharing for my investments. In fact, besides him, there are a few more of them.

So “Is there something wrong with i3investor”? Hack, definitely not. On the contrary, it gives me the luxury of feeling good when readers, many of them, telling me they like my sharing in the website, and appreciate what I have done, that they have learned useful things from me. Money can’t buy these type of good feeling. Besides, I am also rewarded in other form from the goodwill I have spread in i3investor in the last few years. I must clarify here it is not that i3investor provided me with the platform of pump and dump of shares, but for other mutual beneficial activities. I really have to say a big “thank you” to the owner and moderator of i3investor.

For you, Yeoh, you should continue to read i3investor to learn something useful on investment and scout for some good investment ideas. But be sure to open your eyes, open them big. One maxim you must follow is, “there ain’t no tooth fairy in Bursa”.

Hence I should continue to write more often in i3investor, if I am still welcomed to.  But what shall we discuss about this time?

Power of mean reversion in investing

“The mean reversion is the theory suggesting that prices and returns eventually move back towards the mean or average. This mean or average can be the historical average of the price or return or another relevant average such as the growth in the economy or the average return of an industry.” Investopedia

 “From financial history and from my own experience, I long ago concluded that regression to the mean is the most powerful law in financial physics: Periods of above-average performance are inevitably followed by below-average returns, and bad times inevitably set the stage for surprisingly good performance.” – Jason Zwieg

Mean reversion is simply the fact that investments can trade far above or far below their long-term average returns for periods of time, but in the end they eventually tend to move back towards their average.  Outperformance is followed by underperformance and vice versa.

For the last couple of years, many companies with good export businesses such as glove, furniture, electronics etc. experienced exponential growth in their revenue and earnings, mainly due to the increase in demand of their goods, and partly due to the weakening of Ringgit against the USD. The share prices of most of these illiquid stocks follow in tandem, with many of them have their share prices doubled, or tripled, or even 5 folds, in a matter of two years, or even shorter period. Those who have invested in these stocks, and manage to sell all of them by end of last year, would have made themselves a huge fortune.

There are good reasons why the share prices have gone up so much. Most of them did extremely well with earnings double or better, and hence the quality metrics such as ROE, ROIC went up in tandem. Basing on a simplistic valuation metric of P/E ratio, the share price, P, should logically goes up too as earnings goes up.

The problem is greed eventually creeps in. With the heavy promotion of those stocks in forums, free and paid talks and seminars etc. telling those new comers that Ringgit will continue to weaken, and hence the earnings and share prices will continue to go up, as if trees grow to sky, those late for the parties entice to buy those stocks with the rosy growth stories.

Take for example, Latitude Tree share price was pushed up to above RM8.00 apiece in January 2016. At that price, it was trading at a P/E ratio of about 10 with an EPS of 80 sen then. This P/E ratio doesn’t appear to be high, but it is 43% above its 12-year average P/E ratio of 7. Soon after that, with the “catalyst” of strengthening of Ringgit, the share price of Latitude Tree slide to a low of RM5.16, or a drop of 36%, in just two months, before closing at RM5.46 today on 3^rd May 2016. Those who bought the shares earlier still made tons of money. Those late comers who are mostly small time retail investors, merely follow the crowd and have no ability to evaluate themselves, are left with heavy losses, and would have their capital totally wiped up if they were greedier, attracted by the fairy tales of the ever success of the use of margin finance propagated.

This happens to many other export stocks too. I have seen a heavily promoted and published portfolio of generally good export stocks set up end of last year, has lost a total of 30% within the last 4 months. Mind you, these are also good stocks with good profit growth such as Focus Lumber, Lii Hen, but their share prices have been jacked up way high at end of last year.

I do agree that those who got caught with heavy losses only have themselves to blame for not doing their own homework, but merely following the salesmanship of others before buying.

That is the power of mean reverting; what goes up too much, must come down. It is like after summer, autumn and winter will follow.

What is the next story about Latitude Tree now?

Latitude announced it latest second quarter 2016 results at the end of February 2016. Its EPS is still good at 27.2 sen, but it is about 5% less than the corresponding quarter in 2015 and the preceding quarter. The trailing twelve month EPS is 93 sen, 13 sen more than the previous year. Cash and cash equivalent has increased by 40% to RM246m, or RM2.53 per share. ROE and ROIC have improved by leaps and bounds to 18% and 24% respectively. At RM5.46 now, it is trading at a PE ratio of just 5.5, which is substantially below its average historical PE ratio, and an enterprise value of just 3.8 times its earnings before interest and tax?

But why is that with so much better performance, it is selling so much cheaper compared to 4 months ago? The answer seems to be that investors believe that Ringgit will continue to strengthened to may be RM3 to one USD?

Will that happen? I really don’t know. I more believe on what this super investor Howard Marks says,

“Of course, it's desirable to be able to forecast the macro to improve your investment results, but the big question is can you do it? Can it be done? I personally don't believe that you can be consistently superior in macro judgements.”

“If you do a good job valuing a stock, I guarantee that the market will agree with you. It is just a matter of time. But don’t expect immediate success. Oh yes, you have to be right.” Howard Marks

In my opinion, there are many stocks exhibit the same behaviour as Latitude Tree recently. If we can separate the wheat from the chaff and hold a diversified portfolio of these stocks, and capitalize on the power of mean reversion in investing, I believe the long-term return of our investment will be satisfactory.

Below is a comment from a smart forumer in i3investor.

[Posted by yeo219 > May 3, 2016 04:24 PM | Report Abuse

Study and understand the methods of selecting good and potiential companies to invest and apply it but never blindly follow to buy the stocks recommended by all the guru-guru.]

For those who do not wish to be the sucker in the stock market anymore but wish to learn how to value a stock in order to have a higher probability to earn better return, or if you do not have the time to acquire this skill or invest yourself in the market but hope someone can give you some potential good fish, please contact me at

ckc14training2@gmail.com

K C Chong