I was invited to give a talk about my share investment method in Johor Baru, Penang and KL recently. Here is the summary of my talk especially for those who did not attend.

Out of about 1,000 listed companies in Malaysia, I only own shares in 5 companies. I am a substantial shareholder of VS Industry, Latitude Tree and Lii Hen. I also have some shares in Poh Huat and Xingquan.

The price charts show that Latitude has gone up from Rm 1.00 to above Rm 7.00 within the last 26 months. Lii Hen and VS have gone up more than 300% in the last 18 months. You can verify these from the company announcements in Bursa Malaysia.  

The theory of the “efficient market” hinges on two beliefs:

1. People make rational decisions

2. People are unbiased in their predictions about the future.

If this was true then every stock would be trading at its fundamental market value and you cannot find underpriced shares to buy. As regular investors, we know this is not the case.

There are three layers to the human brain-

1. Handles automatic functions, like breathing and heart beat

2. Controls emotion

3. Controls logic and higher level thinking.

With most major decisions in life, emotion overtakes logical thinking. As a result, most investors including professionals cannot perform. They are called “irrational investors”.

How did I select them?

To be a successful investor, you must overcome your emotion and be able to think logically. You must have the guts to go against the crowd and be a contrarian investor. You must dare to buy while others are selling desperately and you must dare to sell when others are eager to buy aggressively.

As you know, in the last one year or so, our KLCI has been falling due to our political instability. Most investors including local and foreign institutional investors are selling their holdings. They are afraid the political situation and the stock market will get worse.

In view of these factors, our ringgit is now at a 17 year low and I concentrate on companies that export their products in US$. That is how and why I bought those shares I mentioned above.

Most important share selection criteria:

There are many stock selection criteria such as NTA, dividend yield, cash flow etc. The most important is profit growth prospect. Earning per share, EPS growth is the most powerful catalyst to move share price. The reason for the prices of my selected shares to go up so rapidly is because they have very good profit growth prospect.  

Why I did not sell?

Many attendees wanted to know why I did not sell some of my holdings since all of them have gone up more than 100%. I would not sell because they have been showing increasing profit every quarter and I am sure they will make more profit this year than last year. They are still very cheap in terms of P/E ratio, less than 10. For example: Latitude’s EPS for 3 quarters is 65 sens and Lii Hen’s EPS for 1^st Quarter is 18 sens which indicate that they will surely make more profit in this year than last year. Why should I sell ?    

My Golden Rule:

I will not buy or own any share if I am not sure that the company can make more profit this year than last year because when the annual accounts show reduced profit, the share price will drop. Now you must check all your shares to make sure that they can make more profit this year than last year. Otherwise, you sell them.

Price Fluctuation:

Finally, the most important and rarest quality of all, is the ability to live through volatility without changing your investment thought process. This is almost impossible for most people to do. When the chips are down they find it hard to sell their stocks at a loss. They find it difficult to average down or to even put any money into stocks at all when the market is going down. People don’t like short term pain even if it would result in better long-term gain. Very few investors can handle the volatility required for high portfolio returns. They equate short-term volatility with risk. This is irrational. Risk means that if you are wrong about a bet you make, you lose money. A swing up or down over a relatively short time period is not a loss and therefore not risk, unless you are prone to panicking at the bottom and locking in the loss. But most people just can’t see it that way. Their brains won’t let them. Their panic instinct steps in and shuts down the normal brain function. Their emotion controls their logical thinking process.

Learn from past mistakes:

To be a super investor, you must be able to recognize and admit your past mistakes so that you can improve. For example, if you have bought Latitude at say Rm 2.00 and sold it at Rm 4.00. After you have sold, the price continues to go up because its quarterly profit keeps increasing. Its 3^rd Q. EPS is 65 sens and its 4^th Q. ending 30^th June will be announced before the end of August which should be about 85sens.

What do you do? Are you willing to admit your mistake and buy back the shares at a higher price?

Now you know why I have not sold and remained a substantial shareholder of Latitude, Lii Hen and VS.

How to use margin finance to leverage your profit?

Buying shares with margin finance is not meant for novice. Unless you have the necessary experience, it is more risky to buy with borrowed funds. If you are confident of making more than the interest rate of 4.8% pa, you can increase your profit by using margin finance. 

When do I sell?

I will sell some of my holdings as soon as I see the company’s quarterly profit is reduced to reduce so that I can reduce my margin loan. I will sell more aggressively if the company shows reduced profit for 2 consecutive quarters.   

NOTE: I am not asking you to buy the shares I mentioned above. But if you decide to buy, you are doing it at your own risk and I am not responsible for your profit or loss.