Here are some questions by a purchaser of my book, “The complete guide to value investing that works!”
[Good morning Mr Chong,
I have read it reaching to the sections on financial statement analysis and interpretation, and valuations of your book. They prevented me further from accumulating those counters that do not meet the minimum criterion.
I have a few questions:
Thanks, and best regards,
In less than a month from end of February 2020 to now, the KLCI has dropped by 11% from 1483 points to the close of 1324 points on 26th March 2020. The drop of the FBM Smallcap Index was far more severe by a whopping 30%. Many stocks have dropped by a lot more than the broad index, some even by more than 50%. Even some seemingly good companies are not spared. In fact, may be except a couple of glove companies, almost all shares dropped during this period.
The biggest culprit is none other than the Covid-19 which is a very contagious virus and causes the unprecedented lockdowns or partial lockdowns of many countries, including our 4-week Movement Control Order. This caused the plunge of crude oil price in fear of a prolong world recession and the extreme fear of the stock market. In fact, we are probably in recession already. This global fear of the covid-19 is not slowing down anytime soon. In fact, fear is soaring, and Europe is struggling to contain the virus, and the US has no solid plan to contain the pandemic. A little good news is China, the epicentre of the COVID-19 pandemic, has been able to contain the virus successfully. Wuhan is opened again for close to normal activities. Korea and Japan are doing a great job in the containment too. U.S. lawmakers have agreed on the passage of a $2 trillion stimulus bill to blunt the impacts of an economic downturn set in motion by the global coronavirus pandemic. Our government is also trying to put in place some economic stimulus packages to try to ease this hardship too.
Nobody knows how this Covid-19 thingy will finally plays out. It may go away in a month, or it may linger much longer. The optimist in us thinks that although over the next month or two things will get worse, they will then start getting better.
The viciousness of these price falls in Bursa has caused a lot of anxiety of punters, speculators and investors alike. Bursa has entered a bear market of high volatility. Investors see the value of their portfolios plunged 10% a day, and another 10% the following day, etc. That also includes many of the stocks in my own portfolio. If you look at the screen all the time, it is painful, and stressful. Losing a lot of money (in the short time) is never a nice feeling
However, the stock market is highly unpredictable. In fact, no one has correctly predicted the direction of the market in a consistent manner. Hence, there goes the viability of market timing in investing. You would have heard that one “should have” sold off all the shares a month or two ago, and then wait for the market to go down in order to buy back. This type of argument is true, but always after the fact.
I have emphasized before that investing to build up wealth is a long-term endeavour. You are supposed to invest for a higher return than putting your money in the banks for your retirement, or university education for your kids which are usually years, or even decades away. Hence, do not unduly worry about the short-term volatility. We have to learn how to live with this volatility. Switch off from the negativity of the market, trade less and detach yourself from this short term “external” loss in this bear market. You will reduce your stress this way. Remember, the stock market has gone through numerous crisis and plunges, big, huge and humungous, it is always in the long-term uptrend. Chapter 5 of the book on Stock market plunges has a good description of this.
Also remember, the value of any asset is the present value of its cash flows, which will include good and bad quarters, economic expansions and recessions.
When asked once about whether he was worried about a big drop in the value of Berkshire Munger said in a very direct way:
“Zero. This is the third time Warren and I have seen our holdings in Berkshire Hathway go down, top tick to bottom tick, by 50%. I think it’s in the nature of long term shareholding of the normal vicissitudes, of worldly outcomes, of markets that the long-term holder has his quoted value of his stocks go down by say 50%. In fact you can argue that if you’re not willing to react with equanimity to a market price decline of 50% two or three times a century you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.”
However, please remember, the stock market is unpredictable. Low price can go lower, or even much lower. If you don’t have the cash which you can leave there for a few years, or if you are uncomfortable, and can’t sleep well, it may not be advisable to invest further.
“Understanding that we do not know the future is such a simple statement, but it’s so important. Investors do better where risk management is a conscious part of the process. Maximizing return is a strategy that makes sense only in very specific circumstances. In general, survival is the only road to riches. Let me say that again: Survival is the only road to riches. You should try to maximize return only if losses would not threaten your survival and if you have a compelling future need for the extra gains you might earn.”
Peter L. Bernstein, the author of investment classics “Against the Gods: The Remarkable Story of Risk”
If you have a lot of spare cash, the cash which you don’t need to touch for many years, and for those who have little exposure in the stock market at the present and are not that risk averse, it may be good to buy those RM1m businesses from others who are threatened by Mr. Market for less than RM500k now. It’s better to be too early than too late. It has been proven again and again, if you buy stocks at a big margin of safety, there is little risk and eventually market will revert to its mean. But make damn sure that you buy good companies at big discounts, and not buying lemons and overvalued companies, no matter how good they are. Avoid companies with precarious balance sheet. Now is the time to pay utmost importance of the health of the financial position of a company. Have good asset allocation and diversification practices as described in Chapter 5 of the book. You may also opt to make your positioning conservative, reserve cash so that you are able to pounce on new opportunities while others are forced to sell in the later stage.
In the meantime, during this lockdown period, and the depressed market, spend some time and improve your skill in reading the Annual Report, analysing and interpreting the financial statements, and the various business valuation techniques in the book you have purchased below. Understand the business and buy it at a margin of safety.
Tis goeth down to a fundamental aspect that “An investment in knowledge pays the best interest” - Benjamin Franklin
The above book is selling in the major bookshop, including MPH and Popular for less than a meal for a family of four. If anyone interested to get a copy to read during this lockdown period, you may write to me at the following address,
In conclusion, at times like this, one sympathises with those have lost a lot of money and must run for the exits. But if one is investing for the long term and doesn't need short- or medium-term liquidity what's the point of second guessing the market? However, everyone has his own personal risk profile. Some are risk takers and some risk averse. There is no one-size-fit-all thing.
I will spend some time to organize and write to give you my response on your question 2 above soon.
For your third question, if you have read the Edge interview with me which is in the Personal Wealth section in the latest issue dated 29th March 2020, you would have seen this prominent phrase I used.
“Do not buy stocks purely based on tips, rumours and recommendation is one of the earliest lessons I learnt.”
I never give stock tips any more in the public forum. It is a hazardous thing to do. Maybe give me some time to see if I can come out with a response to that question.
I shall sign off with the following quote.
“This too shall pass” The Wisdom of King Solomon
K C Chong at email@example.com