Since I came back from overseas, I have been going around talking about fundamental value investing (FVI) to my course participants as well as others. When I mentioned about some real super investors, everyone seems to know Warren Buffett. However, when I mentioned about Joel Greenblatt, Charles Munger, Seth Klarman, Howard Marks, Mohnish Pabarai, Peter Lynch, Walter Schloss and others, except for my course participants, few, very few people, almost none know any of them.

For me, these real super investors in FVI in the US have a profound influence in my investment principles, methodologies and strategies as shown in the appended article here.

http://klse.i3investor.com/blogs/kcchongnz/86781.jsp

Out of these super investors, the one with the greatest influence on my investing is none other than Joel Greenblatt (JG).

I will make use of the stocks selected and published in i3investors in the last 4 years as shown in the portfolio shared in the link on “My amazing Bursa freebies” and as appended in the Appendix to illustrate,

http://klse.i3investor.com/blogs/kcchongnz/106650.jsp

Note that the stocks in the portfolio were all analysed thoroughly with detail analysis and comprehensive reports posted in i3investor at the time the stocks were discussed, and not merely just a portfolio of random stocks. One can find the analysis and detail reports by goggling them in i3investor website.

Investing following the principles and methodologies of Joel Greenblatt

JG is a genuine Graham value investor. I have mentioned about JG in numerous of my investment articles in i3investor as my investing principle and methodology is mainly based on his Magic Formula Investing. Here is one of them.

http://klse.i3investor.com/blogs/kcchongnz/51631.jsp

Joel focus on buying good companies at cheap price. Good companies mean companies with high return on invested capital, ROIC (Ebit/IC), and cheapness measured by earnings yields (Ebit/EV) based on earnings of the enterprise, or the whole firm. JG explains why he does that as below,

“We use EBIT–earnings before interest and taxes–and we compare that to enterprise value, which is the market value of a company’s stock plus the long-term debt that a company has. That adjusts for companies that have different ratios of leverage, different tax rates, all those things. But the concept is still the same. We want to get more earnings for the price we’re paying. That was sort of the principles that Benjamin Graham taught, meaning that cheap is good. If you buy cheap, you leave yourself a large margin of safety. Warren Buffett had a twist on that and said, ‘Gee, it’s nice to buy cheap things but I also like to buy good businesses.’

These are based on historical data, or rather the last four quarters results.  Almost all the stocks in “My amazing freebies” portfolio as shown in the appendix were chosen in that basis, except for a couple of property companies such as Plenitude and Daiman which were chosen based on the asset investing strategy, and one, Pantech based on high growth expectation, which had mediocre ROIC. This is what JG has said about high ROIC criterion,

“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.”

This is the concept that allows true value investors to differentiate the earnings power of one company versus another. A company with consistent high ROIC is likely to possess moat, something that puts limits on that supply and therefore makes a business more valuable.

The second part of the equations in earnings yield for all of the stocks, maybe except for Pantech, were selected because they were selling cheap,

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

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

“I just want to take advantage of prices away from value. If you do good valuation work and you are right, Mr. Market will pay you back.  In the short term, one to two years, the market is inefficient.  But in the long-term, the market has to get it right—it will pay you back in two to three years. Keep that in mind when you do your analysis. You don’t have to look at the next quarter, the next six months, if you do good valuation work—Mr. Market will pay you.”

How true is that for the portfolio of stocks I had above?

The portfolio of a total of 30 stocks published from 23^rd January 2013 until end of 2015 returned an average of 135% in an average of about two and a half years up to date on 18^th October 2016 as shown in the appendix, while the overall market is basically flat during the same period. This means the alpha, or extra-ordinary over the broad market is a whopping 135% over an average of two and a half year!

I particle like what Joel says here:

“Look down, not up, when making your initial investment decision. If you don’t lose money, most of the remaining alternatives are good ones.”

What does he mean by looking down?

One way is to only invest in companies with little or no debts. Companies with high debts are risky in times of financial and economic crisis, and these crises do come often. Almost all the 30 companies listed in the portfolio were debt free, except for Pantech, NTPM, Kimlun, MFCB, Tienwah, TongHer, and Scientex. Even that, their debts were just a small fraction of their equity, and their earnings and cash flows could meet the interest payment easily.

Another way to look down is only purchase the stocks when they are selling at a high margin of safety, enough to cover any mistakes. One common margin of safety is 30%. That was what I was trying to do before buying those stocks.

Not losing money in any of the stocks is an impossible feat, but at least once we look down first in our investing process, the chance of losing is greatly reduced, in this case, only 3 out of 10 lost money, or just 10%. Furthermore, the loss of each stock is minimal at less than 12%, except for Coastal Contract, which has lost a total of 53%.

The big loss in Coastal in fact taught us another value lesson from JG, who said,

 “If you are going to be a very concentrated investor, you should not use leverage. You can’t leverage because you need to live through the downturns and that is incredibly important.”

Imagine if I were to put all my money in Coastal Contracts, some more borrow another 50% of margin finance and bang everything on Coastal, what would happen to me?

欲哭無淚

Joel also warned investors about stock tips and advice from people purportedly want to make you rich.

“The odds of anyone calling you on the phone with good investment advice are about the same as winning the Lotto without buying a ticket.”

To be a successful value investor of any kind requires knowledge, experience and hard work. Most of the stocks in the portfolio were small cap stocks with very little of none analysts or investment bankers following them. Hence a lot of my own effort was necessary to carry out analysis of those stocks.

Most people try to invest for extra-ordinary return without having any knowledge of investing and without having to do any work, but merely following rumors and hoo-hahs in the market place. Relying on people to give you stock tips doesn’t work as shown in this link below, in fact, the investing outcome was terrible.

 http://klse.i3investor.com/blogs/kcchongnz/104168.jsp

One way to avoid this pitfall is to find a reliable and skillful person who is professional in taking care of your interest to do it for you, and at a low cost, as your cost will determine your return.

Conclusions

Joel Greenblatt has some valuable core principles in investing which I try to follow judiciously. He cares about the downside and take care of it, and let the upside to take care of itself.

JG’s success in investing because he doesn’t just buy good companies, but try to buy them cheap. He likes to buy when there is a wide margin of safety between the price and the estimated intrinsic value of the stocks.

My personal experience in investing in Bursa has been proven that the principles of JG work very well for me as shown from the return of my portfolios as explained.

For those who are interested to learn the implementation of these principles such as that of Joel Greenblatt’s Magic Formula to build long-term wealth in equity investment, please contact me for a flexible online course at

Ckc14training@gmail.com

K C Chong

Appendix