kcchongnz blog
My 2017 i3investor Picks and The Magic Formula Investing kcchongnz
“The secret to successful investing is to figure out the value of something and then-pay a lot less”
Joel Greenblatt 
In investing, I like to follow some established, proven successful, and plausible methods and strategies used by super investors, especially those from the matured markets such as that in US. One such investing strategy is the Magic Formula investing strategy by Joel Greenblatt, a top-performing hedge fund manager who have made billions USD for himself and his investors. Incidentally, Joel is also a university professor in finance.
Anyone interested in the Magic Formula Investing, how fantastic it has been performing, and why it worked and continues to work, can refer to this link below:
http://klse.i3investor.com/blogs/kcchongnz/51631.jsp
The secret of his magic formula is no magic to it at all. It is basically “a long-term investment strategy designed to buy a group of above-average companies (High return of capital) when they are available at below-average prices (low EV/Ebit)”.
The key driving formulas used by Greenblatt for his Magic Formula are:
- Earnings Yield = EBIT / Enterprise Value
- Return on Capital = EBIT / (Fixed Assets + Net Working Capital)
The Magic formula outperformed S&P 17 out of the 22 years and achieved a compounded annual growth, CAGR of 23.8% as compared to the 9.6% of S&P. $10000 invested 22 years ago in 1988 has grown to $11m by the end of 2009, even after the US sublime crisis in 2008-2009, compared to $751k invested in the broad S&P Index. This is by no means a small feat.
My investing experience in Bursa
I have shared my experience of two portfolios stocks, “The GE13 Stock Watch” and “Stock Pick Challenge 2013 2H”, published in i3investor just recently in this article, “2017 New Year Reflection on Fundamental Value Investing in Bursa here.
http://klse.i3investor.com/blogs/kcchongnz/112906.jsp
Basically, most of the stocks in the portfolios were chosen using the principles of The Magic Formula. The portfolios returned 132% and 119% for the four years and three and a half years respectively, compared to the almost flat broad market over the same period.
The Magic Formula is plausible. It is intuitive; investing in good companies when they are selling cheap. It has proven to work in the US and other matured markets around the world. I have had good experience that it worked well, and continues to work well for my investing experience in Bursa, and that of the regional markets too. That is why I have chosen this sound principle of the Magic Formula for my stock picks in i3investor for 2017.
The Magic Formula has been proven to work for long-term, although my own experience shows that it worked for short-term too, very well indeed. However, I am still aiming for satisfactory return over a long-term period, rather than looking at quick gain.
“Investing should be more like watching paint dry or watching grass grows. If you want excitement, take $800 and go to Las Vegas.”
– Paul Samuelson
My 2017 i3investor stock picks
I, as a small-time retail investor, am just using the principle of the Magic Formula (MF), rather than a quantitative investing methodology used by Greenblatt, a hedge fund manager, who must invest a large sum of money. I do not have to know many stocks and invest in all of them, but just some of them, and can select the few best MF scores, rather than spreading over say 30 counters. I can also incorporate some other metrics to tighten my election to avoid investing in lemon stocks, and look at some qualitative issues too. I did just that by incorporating an additional metric, the cash yield, CY, besides the two MF metrics of ROIC and Earnings Yields, as shown in the appended link and Table 1 below for my 2017 i3investor stock picks.
http://klse.i3investor.com/servlets/forum/1100071070.jsp
Table 1: Magic Formula Scores for Stock Pick 2017
The constituents of the MF are all accounting numbers. I like to look at cash flows too, Free cash flows (FCF) in particular, to avoid companies using financial shenanigans to boast earnings. For those who wish to understand my preference of this may refer to this link below,
http://klse.i3investor.com/blogs/kcchongnz/76694.jsp
Table 1 above summarizes some of the highest MF plus CY scores for the stocks in my list, basing on the latest twelve months’ financial results. I tweak a little to exclude one-time gain such as foreign exchange gains/loss, gains/loss on disposal of PPE etc.
All the five stocks above meet all the individual criterion of ROIC, EY and CY. It is not easy to find free screeners for those metrics as few compute “Invested Capital (IC)”, and “Enterprise value (EV)”. FCF is lumpy and subjective, and it requires some personal judgment too.
“If something is easy to compute and understand, it is extremely unlikely that the market will misinterpret it. Therefore, such information will not, by itself, provide evidence of mispricing.”
The metrics may appear to be complicated, so much as that they have been regarded as “jargons’ and mumbo jumbos used to “impress” or to “mislead” people. Believe me, on the contrary, they are very useful, and if you care to learn, they are not difficult, compared to what we study in Engineering, computer science, and even high school mathematics. But of course, one must be interested in it for the purpose of building long-term wealth, and willing to spend some time and effort to learn it.
I, as an engineer, found this stuff highly interesting, and rewarding too, and they are so simple and yet so useful. I often puzzle why aren’t people investing in the stock market with tens, hundreds of thousands, or even millions, not interested in learning a proper way and which is proven successful.
Hence, if you wish to do that, you may contact me at,
ckc13invest@gmail.com
It is just my passion to educate those interested to be a better investor with higher probability of success investing in the stock market, with lower risk, and in a more stress free environment.
There are also many other investing strategies besides this MF, such as the “Dividend Investing Strategy”, “The Coldeye 5 yardsticks”, “Graham net net”, “Value on the Move” etc. taught in this flexible online course.
Besides, how nice it is to have regular watch lists with various investing strategies, plus stocks picked with detail analysis and comprehensive reports for you to consider to invest or not.
Happy investing.
KC Chong
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Discussions
10 people like this. Showing 48 of 48 comments
The magic formula should be called the Conservative Party.
Their success depends on maintaining stability, status quo, straight line extrapolations......Their success depend on the pre internet, pre social media world order., where things and businesses hardly ever changes. If X is what you get last year, X will be what you get this year.
Dynamic investing is the New World Order . We should be called the Progressive Party. We look for changes, look for disruptors, look for new trends. In this 21 century business environment and value discoveries, we need a new way to look at the share market. I call it entrepreneurship. You may call it some thing else.
No wonder the two parties cannot get along.
2017-01-11 01:58
And I too think the 5 stocks are well chosen by the Conservative Party for their conservative features.
2017-01-11 02:20
KC,
Your stock very good pick strong balance sheet, good cashflow and got sustained earning potential.
FYI raider also follow buy on 3 out of your 5 picks .
This type of investment, should able withstand the test of time or longer term hold.
Raider think u will do well in this 2017 competition, as your stock pick got a good winning chance.
Most importantly, you make monies in your interest of investment.
2017-01-11 08:10
these stocks are pick very well especially in terms of the magic formula ev/ebit and roic . however, it might expose itself with weaker usd in the year end... but there's chance to boost up by tppa which i think highly chance succeed. I hold few stocks of out 5 myself and i am mentally hesitate for upcoming changes. I hope these macro factors won't affect them but highly unlikely.. KC, would you share some of your thoughts?
2017-01-11 09:06
"Never invest in something you don’t understand well, and have a low conviction on, and is outside your circle of competence. If one changes his or her investment approach in response to recent underperformance, one might be doomed to mediocrity."
translated....KC should remain KC, there will be times the magic formula will serve you well., but not always.
2017-01-11 10:12
There is no holy grail....all investment system can fail loh....!!
Magic....is one of the best...value investment formula loh...!!
2017-01-11 10:16
I am a newbie and learning tremendously from all the sifus. Thank you all for your input. All the best for your investments!
2017-01-11 10:18
Old man, you mask it behind the 'Magic Formula' but come on who are you trying to blindside, old clueless uncles and aunties again? As I said earlier, you are taking a bet on one and only one direction...its pure export theme first (and we all know its going to be played/is currently being played - how else to unlock the intrinsic value), then only Magic Formula
Of course, on the balance of probabilities (Lord Denning god bless his soul), it would be the correct play since US are raising rates etc etc but history has shown, things can change...
In the mean time, try not to count your eggs before they hatch, old man, you dont see me trumpeting my returns do you, and half of the ideas havent even materialised
2017-01-11 10:26
As the word "Magic", it sometimes can wow you and sometime it can fail you too. Like what icon says, this competition is unique as you cant profit taking and results is compare during the end of the year. As of now it shows profitable and you can say your "magic formula" is working but end of the year the result shows negative returns, are you going to say the "magic formula" is not working well?
2017-01-11 10:28
As raider say...any investment system can fail u too mah...!!
Just that Magic is one of the best system...thus better chance of success loh....!!
2017-01-11 10:54
Magni I had looked at this company in the past. The CEO's remuneration is disproportionately high. I shy away from this stock due to this.
2017-01-11 11:35
Rather than just looking at EPS, it is better to look at ROE or ROIC.
There are differences between ROE and ROIC.
1. ROE looks at returns on equity. The ROE maybe high due to high leverage. So, be careful to look at the financial leverage of the companies with high ROE.
2. ROIC incorporates debts into the denominator.
As investors, we are interested in the high incremental earnings earned on the incremental capital employed or retained by our invested companies. ROE and ROIC are better measures for this than EPS.
[I am just repeating what KC has taught and shared with us many times in this forum.]
2017-01-11 15:25
Posted by valuelurker > Jan 11, 2017 10:26 AM | Report Abuse
Old man, you mask it behind the 'Magic Formula' but come on who are you trying to blindside, old clueless uncles and aunties again?
ME: I AM JUST CURIOUS ABOUT YOUR BRINGING UP. DID YOU PARENTS TEACH YOU ABOUT MANNERS? AREN'T YOUR PARENTS "OLD"?
BLINDSIDE "OLD" CLUELESS UNCLES AND AUNTIES AGAIN? WHEN WAS THE FIRST TIME? HOW IS IT "BLINDSIDING" UNCLES AND AUNTIES? FOR WHAT PURPOSE?
As I said earlier, you are taking a bet on one and only one direction...its pure export theme first (and we all know its going to be played/is currently being played - how else to unlock the intrinsic value), then only Magic Formula
ME: EXPORT THEME? YEAH LAH, MOSTLY EXPORT STOCKS. DIDN'T REALIZE IT. BUT WHAT IS WRONG IF THEY ARE ALL EXPORT STOCKS? MUST BE LOCAL STOCKS? SHOW ME SOME HIGH MAGIC FORMULA LOCAL STOCKS PLEASE!
OH, CAN UNLOCK EXPORT STOCKS AH? GOOD WHAT. SO WHAT IS WRONG IF IT IS SO?
Of course, on the balance of probabilities (Lord Denning god bless his soul), it would be the correct play since US are raising rates etc etc but history has shown, things can change...
ME; CORRECT PLAY AH? SO WHAT IS WRONG? THINGS CAN CHANGE? WHAT CHANGE? CHANGE SO WHAT?
In the mean time, try not to count your eggs before they hatch, old man, you dont see me trumpeting my returns do you, and half of the ideas havent even materialised
ME; PLEASE READ THE ARTICLE AGAIN AND AGAIN. WHAT IS THE PURPOSE OF THIS ARTICLE? IS IT ABOUT SHARING ABOUT MAGIC FORMULA INVESTING, OR TRUMPING ABOUT RETURNS OF THIS NEW PORTFOLIO?
WHERE IS THE PART OF THE ARTICLE WHICH SHOWS, OR TALK ABOUT, THE RETURN OF THIS 2017 I3INVESTOR STOCK PICK?
YOU GOT SOMETHING TO TRUMPETING ABOUT? REALLY AH?
2017-01-11 15:54
Eps can relate to sure price mah.....!!
ROE not related mah....if company having 35% ROE so what ?
If the share price is overvalue loh.....!!
But if company having PE 4X u will think very cheap...loh..!!
The other thinG...investor..misconception...high ROE means the company..can reinvest capital FOR HIGH return, but usually high ROE do not need reinvestment....bcos business already mature, no need more capital for reinvestment mah...!!
EPS and PE a better measurement than ROE loh...!!
But nothing to stop us, using both or various measurement loh....!!
LIKE W. BUFFET SAYS KEEP IT SIMPLE LOH...!!
2017-01-11 16:01
if one is happy with a portfolio full of these characteristics.....by all means.
the magic formula will magically transform you into those stocks. of similar characteristics.
a smaller, more conservative universe of simpler companies, more probably matured companies / industries., traded at very decent prices.
I don't think any of the 5 companies listed above will go bankrupt in the next 5 years. And if they continue to do well, surely the shareholders will also do well.
2017-01-11 16:21
if one is happy with a portfolio full of these characteristics.....by all means.
the magic formula will magically transform you into those stocks. of similar characteristics.
a smaller, more conservative universe of simpler companies, more probably matured companies / industries., traded at very decent prices.
I don't think any of the 5 companies listed above will go bankrupt in the next 5 years. And if they continue to do well, surely the shareholders will also do well.
at the end of the day, it is behaviour that counts.
its 99% about behaviour and 1 % about the stock bought.
2017-01-11 16:28
Yes...if u have a system n follow closely with discipline...u behavior under check mah...!!
Thats why govt of Spore so steady compare with msia...bcos they follow the system with discipline loh...!!
2017-01-11 16:35
In stockmkt u need to play a boring game to win....mah...!!
If want excitement go genting loh...!!
Always separate investment with gambling loh...!!
2017-01-11 16:49
raid
The investible world is very rich, very diverse
but if one is a frog like this raider, what will he know about how the eagle soars and what is above the clouds?
2017-01-11 17:00
Raider sifu are Ben Graham, W. Buffet, Peter Lynch, Greeblatt, Walter scholss, Philip Fisher....with all these successful sifu...do u think u need any other unproven things ?
All these sifu are proven sustainable dragons on their own rights loh..!!
Always learn from the successful master...with no ulterior motive, other than impact good investment tech...on investment loh...!!
KC is also a very good sifu loh....people should learn from him loh..!!
2017-01-11 17:08
Extremely difficult for major companies to get into magic formula.....too many people watching.
2017-01-11 18:32
Someone posted that PE of 4 is very cheap.
The last time I looked at Poh Kong, it was trading at PE of 5 (a few years ago).
Was Poh Kong at PE of 5 cheap, and was PBB at PE of 14 expensive?
Have you ever heard of Buffett using PE in his valuation?
2017-01-11 19:20
Posted by popo92 > Jan 11, 2017 09:06 AM | Report Abuse
these stocks are pick very well especially in terms of the magic formula ev/ebit and roic . however, it might expose itself with weaker usd in the year end... but there's chance to boost up by tppa which i think highly chance succeed. I hold few stocks of out 5 myself and i am mentally hesitate for upcoming changes. I hope these macro factors won't affect them but highly unlikely.. KC, would you share some of your thoughts?
How would you know "it might expose itself with weaker usd in the year end"?
How many of you expected Brexit last year?
How many of you expect the stock market still doing well after Brexit last year?
How many people gave chance to Donald Trump to win last year?
How many people expect the US market still doing well after Trump won?
2017-01-11 20:27
I think anyone thinking of magic formula will buy Gadang which made $ 95 million last year on $ 530 million shareholder fund.
But my own analysis suggest its PL will collapse compared to last year ......and the share will be punished this year.
and buying Gadang is buying a contractor with $ 600 million of outstanding works....making it the smallest construction company in the KLSE.
so go figure......
2017-01-11 20:52
Dear KC, thanks for your genuine comments. Unfortunately because of my current job, i often requested to predict the big picture before it happens. I could say Brexit and donald trump victory is expected within my expectations but often, the stock market and currency volatile cannot be predicted. What i am really trying to ask is that what will you react when macro factors are not on your side? Let say we all know the storm is coming eventually but we all do not have any idea when it will comes. What will you do in the storm? Will you stay aside temporary (selling stocks with negative factors and monitor the impact of the storm) or will you wait for the storm past and do nothing but believe everything will eventually past?
2017-01-11 21:47
Posted by popo92 > Jan 11, 2017 09:47 PM | Report Abuse
Dear KC, thanks for your genuine comments. Unfortunately because of my current job, i often requested to predict the big picture before it happens. I could say Brexit and donald trump victory is expected within my expectations but often, the stock market and currency volatile cannot be predicted. What i am really trying to ask is that what will you react when macro factors are not on your side? Let say we all know the storm is coming eventually but we all do not have any idea when it will comes. What will you do in the storm? Will you stay aside temporary (selling stocks with negative factors and monitor the impact of the storm) or will you wait for the storm past and do nothing but believe everything will eventually past?
I would say you were the very few who had predicted correctly the outcome of Brexit and Donald Trump. Well, in any prediction about the future, thee will surely be some who would be right.
Take for example, during the second Board saga when Hwa Tai was trading at RM150, and many others in tens of ringgit, you should know the storm is coming, and it be be furious. I would have long gone hiding.
The same is for the dotcom bubble when a startup with little revenue and losses were selling at Billion USD market.
But not now. Nothing is that euphoric yet. There are still plenty of good companies selling at cheap prices. The storm will come, but it could be beautiful sunlight for days before the storm comes. So I won't hide in the house but enjoy my golf.
2017-01-11 22:29
Wow, all exporters, how if USD weakening?
Do you practise portfolio diversification?
2017-01-11 22:34
Posted by mike90 > Jan 11, 2017 10:34 PM | Report Abuse
Wow, all exporters, how if USD weakening?
Do you practise portfolio diversification?
How do you know whether USD will be strengthened or weaken in the future?
Have you heard of financial risk management such as hedging using forward, futures and options and other derivatives?
No diversification?
Focus Lumber: the manufacturing and sale of plywood, veneer and laminated veneer lumber
Fibon:the formulation, manufacturing and sales of polymer matrix fiber composite materials and products for the Electrical, Electronic, Petrochemical and Automotive industries.
FAVCO: Manufacturing of cranes
Latitude: Manufacturing of furnitures
Magni: Manufacturing of garments
Aren't they having different kind of business?
2017-01-11 23:11
diversification by industry is one aspect.
but the true objective of diversification is co relationship. Study the co relationship of shares and groups of shares. Certain shares, they move as a herd, groups of shares...such as exports shares.......because they are very sensitive to a common factor.
it is a branch of study all together.
groups of shares such as blue chips and penny stocks, they have different group dynamics.
domestic economy stocks vs exports stocks....they have different dynamics and moves at different times.
on the other hand, a too diversified portfolio will never win the competition.....if you want to win the competition, you have to be ambitious, just like your portfolio. .
2017-01-12 03:05
how much to diversify is a function of the objectives of the portfolio.
Share have characteristics, certain shares have certain characteristics. The manager of a retirement fund will have to consider the characteristics of each share and their impact on the portfolio, classified by characteristics as well as by industry group.
not easy to be a public fund manager....but that is certainly outside the scope of this competition.
2017-01-12 03:14
Besides all in the KCMF which relied entirely on past figures and data, KC also input his sense of likely future industry/Company trend before recomending a stock, sometime really worth the look. eg his call on FAVCO lately. Thanks KC, appreciate!!
2017-01-12 10:58
Dear KCChong
Could you please do a review of your 5 selected stocks on 10Jan this year? The fundamentals are still strong yet the price appreciation is minimal. Therefore, we should not exit from these counters but maintain them in our portfolio. Correct? Thank you very much for teaching us fvi. I appreciate your magnanimous spirit.
2017-12-28 22:29
Hi KC, wanted to know if you knew any websites where we can download all the info on the shares in excel format so that we can workout the magic formula.
2018-05-23 09:58
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This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....
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win liao lo like that...awal awal already 出大招
2017-01-10 23:56