Dear Investor,

From the beginning of this year, the US stock market have proven to be exceptionally resilient in the face of market volatility, despite being on many measures the most expensive. The broad S&P500 Index has risen by 6.4% from 2044 points from the beginning of the year to close at all-time high of 2174 at the end of July 2016. The S&P 500 Index has gone above a PE ratio of 20.

Most bourses in the matured markets follow the trend of Wall Street. However, Bursa bucked the trend with the KLCI Index dropped by 2.4% year to date to 1653 at the close on 30^th July 2016.

As at 30^th July 2016, I have purchased a diversified portfolio of 15 stocks for you as shown in the attached Excel file. Focus Lumber was cut loss and sold off after a drop of 18.5%. I am afraid there is something I do not know as a major shareholder has been selling the stocks relentlessly. Furthermore, if the share price drops further, I am afraid heavy margin calls for some traders will come into play, which can be quite scary. Otherwise, I still think at this price now at RM1.70, the downside is limited, considering its good fundamentals; consistent earnings and cash flows and healthy balance sheet.

The proceeds of the sales were used to purchase KESM and Stock O, which proved to be a very good move as their share prices have moved up by about 20% since purchased.

Your net gain for this quarter is +7.37% against the loss of the broad market of 3.9% during the same period, or for a positive alpha of 11.27%. This includes ex-dated dividend you have received, or to be received for some stocks as shown in the spreadsheet attached.

The good performers are SAM (+27.4%), Thong Guan Holding (+23.3%), Stock H (+22.5%), Stock O (+21.4%), KESM (+19.2%), Stock G (+14.4%) and Padini (+13.1%). Not too bad relatively for this short-term period of just three months, when the broad market has actually declined by 3.9%. 

Note that except for Focus Lumber which incurred substantial loss, the loss of those few underperforming stocks are generally very minimal, all with low single digit losses, whereas the gains are generally outsized as shown above. This fits my investing philosophy below perfectly,

“Take care of the downside, and the upside will take care of itself.”

It is still too early to conclude anything as the return is only for a short-term of just three months’ period as investing is a long-term endeavour. I am sure there are many others out there who have done better, or much better. However, I believe if we follow the “correct” philosophy, “right” methodologies, “well-proven” strategies, and a “well-thought of” process in investing, I believe one should be able to earn reasonable and satisfactory return over a long period of time. And most of all, with lower risks.

Before I stop, I would like to address some issues raised by one of your course mates.

Quote [Hi Kc,
Good day to you.

Would like to ask you about the current economic climate.

I have been very cautious lately about stocks in general as US S&P index is at an all time high, fueled mainly by cheap money. Therefore I am just buying REITs and also some property developers stocks at the moment. 

Am I right in my assessment to say if the US market crash, it will bring the world down with it? Including Bursa, SGX and HKEX? Or would it depend, if we buy the right company, which are not too richly valued now, a crash will not affect these companies much?

Also, would it not better to preserve cash now?

BUT, I do know no one can forecast this and how severe it will crash, but my concern is - would all countries be affected similarly?

Also I am thinking if it is a good idea to be holding ringgit now? On one hand I see it is undervalued, but on the other hand, our economy do not look healthy.

Would you recommend that we keep some other currencies (If so, what currencies? SGD?) or even gold/silver as a way to diversify our wealth?] Unquote

Robert Shiller, in his book “Irrational Exuberance” shows that the average historical PE ratio of S&P is 15.6. At S&P PE ratio above 20 now, the US market is not cheap any more. But is it expensive?

In today’s Business headlines in Yahoo Finance, “Sell everything”, said DoubleLine’s Gundlach, when S&P 500 touched an all-time high of 2177. He advises investors to hold gold instead. We have also constantly heard from one well-known fund manager singing the same tune, over and over again every year, and already for many years.

I personally really have no ability to predict what the US stock market will crash or not, and if it does, it will definitely affect the other markets in the world, including Bursa, SGX and HKX. I do not think anyone else can confidently predict that. But if you are really that scared about it, maybe it is advisable for you to preserve cash, but maybe not purely in Ringgit which I will elaborate later. Note when market crashes, Reits and property stocks will also not be exempted from the fall.

What is the use of holding gold or silver when there is no convenient yield from them? You may even have to pay for their storage if it is physical gold or silver. Historically, the long-term real return of gold is insignificantly different from zero.

What are you going to do with the cash when the real return after inflation is negative? With the low interest environment and many countries pumping liquidity into the financial system, where will those cash end up to, into the bonds where yields are so low or even negative, or likely into the equity market where the earnings yield is 5% (inverse of PE of 20)?

I have no concrete answer, nor any prediction to the above as there are many factors affecting the capital markets and investment. Hence although I take heed about all these macro news, I try not to let them rule on my investment decisions.

I will continue to focus on scouting for good companies at cheap prices to invest in, with good investment principles, following the principle that investing in a stock is akin to investing in part of a business. And never forget about risk; the risk of paying too much for a business which may turn out to be wrong in our decision.

I will also never forget about diversification, asset allocation and including geographical diversification, and hence diversification into SGX and HKEX, for example. Remember, diversification is the only free lunch in investing.

There are some clear problems in our beloved country, with some rampant corrupt practices, political risk, currency depreciation risk etc. Hence it pays to diversify into other currencies if you have substantial wealth, and those who have the intention to send their children to study overseas later. Investing in overseas bourses such as SGX and HKEX presents a better option as diversification than putting there in cash which produces very low yield.

More importantly, the stock markets in Singapore and Hong Kong are much more attractive valuation wise, with PE ratio of 12+ and 10+ respectively, compared to the 18+ in Bursa. I can find many more companies fitting very well with the Joel Greenblatt Magic Formula, Dr Neoh Soon Kean’s dividend yield, and Graham net net investing strategies which I have been propagating to you in your online course in these countries. Besides, the corporate governance in those countries seem to be better and they are more transparent.

Anyway, the above is just my personal view. You have been taught to be independently thinking.

Please do not hesitate to contact me at the following email address if there if you need any help.

ckc14training@gmail.com

Happy investing. Investing is a long-term endeavour.

KC Chong