In a popular article written by my good friend Icon8888, “My Observation & Assessment of KC Chong's Investment Philosophy” in the link below,

http://klse.i3investor.com/servlets/forum/600099028.jsp

I came across an interesting comment by someone as below,

[Posted by BoPoint > Jun 29, 2016 04:01 PM | Report Abuse

There's one huge problem in KC Chong strategy, or I shall term it as financial analysis. It is just a component of a thorough analysis but he seems to make it as though financial analysis is everything else in investment. As much technical as his articles sound, you can easily learn all this by going through CFA books, Joel Greenblatt, Howard Marks, Seth Klarman, Walter Schloss and of course Buffett & B Graham. There's no reason to email him to follow his courses. Everything you can learn from him, you can learn from the few investors and CFA books that I've suggested. BUT, the underlying problem is his failure in finding great business moats and sustainable business models. Or that he lacks analysis in this area. This, coupled with local economic understanding, will prove to be greater key to investment. Regardless of KYY's personality, his golden rule of "higher earning in the coming QRs" seems legit. Just that behind this rule, are all the tedious research that one has to go through.]

I kind of agree with the gist of what the author is trying to convey; that for one to invest in the stock market with the hope of better return should heeds the following:

1. Financial statement analysis is a component of a thorough analysis
2. Everything you can learn from him, you can learn from the few investors and CFA books that I've suggested.
3. Everything you can learn from him, you can learn from Joel Greenblatt, Howard Marks, Seth Klarman, Walter Schloss, Buffett and Graham

"him" here refers to KC Chong

Let’s deliberate those interesting comments above, well, just for the fun of it.

Benjamin Graham, the father of value investing said,

“An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”

Hence you can see “thorough analysis” is a prerequisite for an investment operation. No doubt about it. Financial statement analysis is certainly a component of a ‘thorough analysis”.

To me, not only financial analysis is a component of “thorough analysis”, it is the most important part of the “thorough analysis”, as investing in a stock is akin to investing in part of a business. In order to make a good decision whether to invest in a stock or not, you must understand the business well; how it makes money, is it sustainable, is there growth in the business etc. How do we know that? Of course the financial statements tell most, if not all of it.

Of course financial statements are not the only thing investors must understand and interprets well in order to have a higher probability of success in investing as implied by the author of the above comment. The other aspect is the business selling at a reasonable price?

“Investment success doesn’t come from “buying good things,” but rather from “buying things well.”
-Howard Marks

Yes, you can learn all these things from CFA books. They teach you how to read financial statements and interpret them. You may also be able to spot financial shenanigans and able to avoid investing in lemons. You will learn about all kinds of valuations; valuations on equity, bonds and derivatives, and properties. You will learn various kinds of valuations for equity alone; relative and comparable valuation, absolute valuation, valuation on private market acquisition and takeover value etc.

CFA stands for Certified Financial Analyst. It is the professional qualification an aspiring analyst must acquire before he can become a professional. with the qualification, he can then work in an investment bank, or a fund house. Analyst is a lucrative career, but mind you, there aren’t many around. But why?

Yes, one certainly can learn all these things from CFA books. But to be successful in investing for a retail investor, I think he must also learn from all those super investors mentioned by the author of the comment. I learn most of my stuff from them and hence I can verify that.

What you can learn from the super investors?

You can learn different thing from different people. I will just use those super investors mentioned by the author of the comment.

Joel Greenblatt

This is Joel’s thoughts about stock price and value:

 “Buying good businesses at bargain prices is the secret to making lots of money.” 

Joel also emphasize this, like all other super investors,

“Companies that achieve a high return on capital are likely to have a special advantage of some kind. That special advantage keeps competitors from destroying the ability to earn above-average profits.”

So if you follow what Joel is saying; about buying good business, and buy it at “bargain price”, then you will be doing very well.

But make sure you understand what he means by ‘good business” and what it means by “bargain price”.

Howard Marks

What can you learn from Howard Marks?

Howard Marks’ book. “The most important thing” is the first book I give to my course participants and they are asked to read this book first before proceeding to others. His book is without any numbers, but filled with investing wisdoms. Warren Buffett used to say,

“When I see memos from Howard Marks in my mail, they’re the first thing I open and read. I always learn something…”

Here is another famous saying of his which I keep on reminding my course participants,

“I keep going back to what Charlie Munger said to me, which is none of this is easy, and anybody who thinks it is easy is stupid. It is just not easy. There are many layers to this, and you just have to think well.”

One more here,

“Trying to avoid losses is more important than striving for great investment success. The latter can be achieved some of the time, but the occasional failure may be crippling. The former can be done more often and more dependably….and with consequences when it fails that are more tolerable.”

One way to avoid high risk is to know and understand the price-value relationship in investment.

“For investing to be reliably successful, an accurate estimate of intrinsic value is the indispensable starting point. Without it, any hope for consistent success as an investor is just that: hope.”

Yes, one must know how to accurately estimate the intrinsic value of something in order to compare with its price. How else to make decision to buy something if not you must know its value?

But Howard Marks doesn’t teach you how to value something, but Seth Klarman does.

Seth Klarman

Below is the gist of valuation technique used by Seth Klarman:

“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 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).

“A margin of safety is achieved when securities are purchased at prices sufficiently below underlying value to allow for human error, bad luck, or extreme volatility in a complex, unpredictable and rapidly changing world.”

How else should we invest if not this way, to know the value of something before we think of paying a price for it? This is the very essence of fundamental value investing.

What do you understand about simple concepts as intrinsic value, margin of safety?

We had a retreat for my course participants in Pulai Spring a month ago and when I talked about these concepts, they smiled and nodded enthusiastically, and understood excatly what i was talking about, and asked me more about them.

I gave a talk about value investing to about 45 engineers and accountants in Kuching recently about these concepts, and when I asked them what are these things? 90% of them showed me blank faces. Except for Warren Buffett, they know nothing about Seth Klarman, Howard Marks, Joel Greenblatt, Walter Schloss etc.

I talked about these to my remisiers, two of them last time and they are both accountant trained, they asked me sheepishly, what are those stuff, intrinsic value, margin of safety?

Walter Schloss

We can sum up Schloss investment philosophy in one sentence: “He buys cheap stocks”. That was precisely the cigar butt investment approach of his mentor, Benjamin Graham.

He liked to buy stocks at low price-to-book ratios, and when he did look at earnings, he liked low prices to normalized earnings.

“I try to establish the value of the company.  Remember that a share of stock represents a part of a business and is not just a piece of paper. … Price is the most important factor to use in relation to value…. I believe stocks should be evaluated based on intrinsic worth, NOT on whether they are under or over priced in relationship with each other…. The key to the purchase of an undervalued stock is its price compared to its intrinsic worth.”

Walter returned a CAGR of 21.3% for 28 years as compared to the 8.4% of that of S&P over the same period.

When I talked about this to my remisier, he asked me again, what is this CAGR?

Warren Buffett

Warren Buffett requires little introduction. He is the most successful investor in the world.

Warren Buffett’s investing principles focus on return of equity, ROE. This is his 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.”

Last night a previous course participant told me he had paid RM9900 for a value investing course from a reputable course provider, they don’t even teach what ROE is!

Yes, I am teaching all these in my online investment course. As I have said, if you learn all these stuff and follow the principles and methodologies of those super investor, and through experience, you should be able to earn decent return over a long period of time.

However, if you think learning all these things on your own by reading books is daunting, like some of my students said in the appendix below (one of them is a professional accountant), you still have this KC Chong to help you for a small fee if you wish by contacting him at

ckc14invest@gmail.com

What about his statement below?

"BUT, the underlying problem is his failure in finding great business moats and sustainable business models. Or that he lacks analysis in this area. This, coupled with local economic understanding, will prove to be greater key to investment."

Well, I do touch on moats and sustainability of business in my course. But if you want to learn more about it, and analyze about it, you may email this BoPoint. I am sure he can teach you loads of it. But for me, I like what my Panlai friend said below:

[Posted by leno > Jun 29, 2016 04:06 PM | Report Abuse

u dun need to find "great business moat" to be successful in investing. Likewise u dun need to sell second hand mercedes or BMW to be successful second hand car dealers.]

“When it is clear that you can’t achieve your goals, don’t change your goals, change your actions.” Confucius

My next course is starting today. For a change, there will also be 10 good stock picks selling at good price for you to consider once you have signed up for the course.

Who knows with this thingy as Brexit, it may present you with good opportunities to build up your long-term wealth.

The train is moving, and the next train will be quite some time later, if it ever arrives.

KC Chong

Appendix

Kc , I have never been so sad when my teacher tells me I am almost "graduating" . Even tho this is time consuming , I had a lot of fun learning .  Studying with like -minded people and the discussions are helpful , as oppose to forums like I3 where  there are many people who don't make much sense .

Let me share something with you . I started investing when I graduated about 5-6 years ago. I would arm my self with investment books and try very hard to understand them . All I knew were the basic P/E , ROE , P/B etc... but I could never put them all together . This is especially true for income statement , balance sheet . I just could not figure out their relationship together. It is no surprise I "paid" for these lessons with losses of my hard earn savings.

I remember few years ago , i was trying to learn DCF  by reading books , and ultimately giving up because I just could not fully grasp it and I had no one to ask for advice. Because of that , all the "valuation" i knew was P/E and P/B and I would buy stocks based on that . Big Mistake .

I can't tell you how pleased I was when you marked my recent DCF homework and said it was ok.

Of course I know there are still big gaps in my financial knowledge and there is much more to learn. At least now , I have some foundation knowledge which I can built on in the future.
 

dot phang25 October 2014 20:19

I have been in the market years ago but eating lemons. Didnt seriously learn as I saw KLSE as Goreng plc than fundamental. Then i started to read hopefully not wounded again but as I have told MrChong a while ago that I have TRIED reading some investment books but after some pages, I was in Wonderland.

But Mr Chong has given me a guided path on how to better prepare oneself in value investing. Steps by steps is shown in telling what is a good co & bad co & not falling into traps!

TQ MrChong again!