the bursa journey that worked for me. 2000-2019
THE PERCEPTION OF P/E or: How I learned to fear my Wife
Philip ( buy what you understand)
Publish date: Fri, 18 Jan 2019, 01:41 AM
Hi all,
I realized more and more that there is a growing misconception of of PRIME PRINCPLES in investing, aka:
LOW PE STOCKS = UNDERVALUED,HIGH MARGIN OF SAFETY, SAFE BUY
HIGH PE STOCKS = OVERVALUED, LOW MARGIN OF SAFETY, RISKY BUY
This as a basic principle in investing is something that all fundamental and technical analysts put at the back of their mind.
HOWEVER:
Let me try to explain the BUSINESS SENSE behind the usage of PE.
PE, or price to earnings RATIO , is simply what MADAM MARKET (here I put the irrationality that is my WIFE) is willing to pay you for your business. And as you know all women, they would buy 10 things that they dont need just because it is CHEAP in comparison to normal supermaket prices, rather than buy something EXPENSIVE that they really need.
ALLOW ME TO ILLUSTRATE:
Take for example.
If you went ahead and bought a stock that had a finite life, let say for example (bursa: FIXED4) which is a fixed deposit company that would pay you 1 year of earnings and dissapear forever, how much would you pay?
Imagine after 4 quarters of earnings report using 1 dollar of revenue, you will earn exactly 4 cents. (it says so in the prospectus). How much would you be willing to hold this stock? (of course assuming you live in Germany, with its negative interest rate)
Exactly: The share price of the stock would be exactly 4 cents.
Or more importantly: PE= 1.
Does this make this a good share or bad share? NO. all it means is that Madam Market know EXACTLY how much they will get from this business during its entire lifecycle. Why should you pay more for something that has no UTILITY OR GROWTH PROSPECTS?
HOW THIS WORKS IN THE REAL LIFE
I would like to use a particular stock comparison:
LEONFB:
in 2017, it did 577,357 million on 80 million net profit, with a PE = 1.93. it has a net equity of 334 million, today we are valueing the whole company at 155 million.
Now, is low PE = good undervalued company that will perform over time?
No, definitely not.
https://www.google.com/search?q=leonfb+share+price&oq=leonfb+share+price&aqs=chrome..69i57j0j69i60l2j35i39j0.3038j0j9&sourceid=chrome&ie=UTF-8
Low PE merely means either:
1. My wife has no confidence in this company in the long term
2. My wife has calculated the terminal value and cash flow possibilities for this company for the long term, and she decided that she is willing to pay only 50 cents for this 25 cent earning company, because this is how much she knows she will get over its entire lifetime
3. My wife does not know basic algebra, and does not realize that if you force sell the entire company, you will get more than the share value in terms of assets. (however on hindsight, she does realize that as a minority shareholder you cant do anything in the company, and a stock can go years of mismanagement before declaring bankruptcy or privatization)
But how does this unconfidence come about?
Financial Year Ended 2013 2014 2015 2016 2017
Revenue 455,268 489,194 505,404 498,716 577,357
Profit After Tax 25,773 27,547 18,479 27,678 80,369
Net worth 202,532 222,344 234,606 257,641 334,199
so if you ignore the gain from the compulsory acquisition of land by government, you would realize that the business itself is barely growing its earnings and equity. And if you use your business sense, you would realize a steel trading and processing company is usually a high capex company with a lot of leverage selling products that have no pricing power and is easily obtainable everywhere.
Ergo, if the business does well, everyone will come in and do the same thing, lowering your revenues. And if the business is not doing well, it is not making money anyway, so no one will be doing it.
SO, MY WIFE DOES KNOW WHAT SHE IS DOING AND HAS CHOSEN TO PAY BOTTOM DOLLAR FOR A COMPANY THAT DOES NOT GROW AND HAS NO GROWTH TRIGGERS IN THE 5-10 YEAR ESTIMATE.
With the opposite,
a high PE stock also does not automatically mean that the stock is an overvalued bad stock.
Take for example this company, my favourite:
Financial Year Ended 2014 2015 2016 2017 2018
Revenue 2,457.19 2,706.91 2,853.23 3,012.00 3,263.14
Profit After Tax 159.93 191.40 192.08 195.92 206.24
Net worth 1,278.86 1,420.32 1,584.51 1,737.24 1,781.98
Financial Year Ended 2009 2010 2011 2012 2013
Revenue 1,397.91 1,476.40 1,777.08 1,946.67 2,146.31
Profit After Tax 89.33 106.91 124.55 131.41 131.71
Net worth 412.40 496.45 727.30 804.01 883.55
Now, compare it to this company. This is also a trading and processing company that has high capex requirements selling livestock products that have no pricing power and are available everywhere.
in 2018, it did 3.263 billion on 206 million net profit , with a PE = 53.89. it has a net equity of 1.781 billion, today we are valueing the whole company at 11.14 billion dollars.
PE= 54?
Wow isn't that horrible? Buying a company with PE that high should be a wrong move, right?
Not exactly. High PE merely means either:
1. My wife has overconfidence in this company because her market lady told her this stock is chun chun win one!
2. My wife has calculated the terminal value and cash flow possibilities for this company for the long term, and she decided that she is willing to pay up for the company growth as it has shown capability of transitions into multiple revenue streams.
3. My wife does not know basic algebra, and does not realize that if you force sell the entire company, you will get 20 cents to the dollar.
So you see, if you think of it in business terms. High PE is merely the mark of a company outperformance (or 99% of the time admittedly sadly investor greed). But assuming major shareholders are minimally educated investors (and not i3 speculators), how do we look at high PE companies? We should look in terms of growth patterns and triggers, ADJACENCY EXPANSION, ORGANIC GROWTH.
How to look at business sense of PE via GROWTH TRIGGERS:
Pre 2000 - Feedmill trader company (penny stock, low expectations of future, low PE)
2000 - paid up capital 40 million, small surimi trader, feedmill plants open up - On 15th December 2000, QL acquired the poultry layer farm assets of Syarikat Wim Hing Poultry Farm. Diversification and vertical integration of feedstuff and poultry farming (some slight confidence in their ability to grow, but its just a company like any other)
2001 - On 23rd April 2001, QL acquired 80% of the shares in Figo Marketing Sdn Bhd and Figo Foods Sdn Bhd. (higher confidence now, they are doing organic growth into food for human consumption, they have decided to stop being subcon and become maincon)
2002 - QL acquired 65% of the shares in QL Breeder Farm Sdn Bhd and QL Tawau Feedmill Sdn Bhd, further diversifying our farming activities to encompass breeder and broiler farming in Tawau (even more confidence now, they have gained the management capability to manage territorial expansion. No more jaguh kampung, reach LAYHONG LEVEL)
2003 - QL commenced operation of the second CPO mill in Tawau region. The opening of the second oil mill increased our palm fresh fruit bunch (FFB) processing capacity to 500,000MT per annum. (exploding confidence now, they started the first one in 1998, now fully diversifying into palm oil plantation + vertical integration into refining business via boilermech, reach UNITED PLANTATIONS LEVEL CONFIDENCE)
2004, QL’s marine business expanded its business beyond Peninsula Malaysia by establishing an integrated marine base in Kota Kinabalu. The Kota Kinabalu operation includes upstream fishing, as well as downstream surimi, frozen seafood and fishmeal processing. The operation diversifies our marine resources supply and added processing capacity of the group. (even more confidence now, as they have fully diversified into marine and are doing well in multi region expansion, become from maincon into developer level)
2005, QL ventured into deep sea fishing operations with 5(after 13) fleets of purse seiners in Endau, Johor. (integrated and expanding in all the right areas. The magic word no diversification into silly stuff like property development etc, staying in their core capabilities, adjacent expansion of revenue streams. Excellent, ECSTATIC CONFIDENCE)
August 2006, QL made its debut foreign investment in Eastern Kalimantan, Indonesia. A joint venture of 74.5% (QL): 25.5% (Indonesian partner) was established for the purpose of oil palm plantation project. The project involved developing two parcels of plantation land into oil palm plantations in East Kalimantan, Indonesia, measuring approximately 20,000 hectares. This investment in Indonesia represents QL first regional replication of our business activities. (NOTE THE WORD SUCCESSFUL REPLICATION OF BUSINESS ACTIVITIES OUTSIDE MALAYSIA. 
GROWTH TRIGGER
May 2008, QL incorporated a subsidiary, QL Vietnam AgroResources Liability Limited Company. This subsidiary is to carry out poultry layer activities in Tay Ninh province, near Ho Chi Minh. In November 2008, QL incorporated a subsidiary, PT QL Hasil Laut, in Indonesia. This subsidiary is to carry out surimi and fishmeal manufacturing. Both the above investments are our efforts to further replicate our existing business model and activities in the region. (FULL EXPANSION BEYOND MALAYSIA INTO ASEAN REGION. WE HAVE GONE BEYOND BORDERS. CAPSLOCK TIME!!!! OVERCONFIDENCE)
2009 - WE HAVE GONE MAXIMUM OVERCONFIDENCE OVERLOAD. THEY HAVE SHOWN THE ABILITY TO OPERATE WELL IN A BUSINESS WITH LOW MARGINS AND HIGH CAPEX. THEN TRANSITION INTO MARINE, POULTRY AND AGRICULTURE. THEN VERTICAL INTEGRATION WITH BOILERMECH, FOOD PROCESSING AND PRODUCTION. THEN GLOBALISE WITH STABLE EXPANSION PLANS BEYOND MALAYSIA BORDERS!!!! LETS NOT BUY THAT HOUSE! LETS PUT MY FUTURE IN QL STOCK, 200K WORTH! LETS GO! LETS MARGIN LOAN THIS! 500K!
And the rest is that.
My summary is simple.
Dont look at PE as another indicator to buy or sell a stock. Use PE as a guide to tell you what the business confidence(or business performance) is in the stock. If PE is termporarily low, then there might be a mispricing. (which is very rare these days in the age of the internet) If the PE is consistently low, it may be a sign that the business is not growing, not earning, or not rewarding shareholders.
Same as the inverse, a high PE can mean overconfidence (which is very highly possible, especially in the days of the internet), or it can be a indicator of business performance. IF a business can guarantee safety, stability, high vertical integration and moat-like qualities, it deserves a PREMIUM.
I hope you learned something,
Philip
- free Philip quote of the day. If you only have the free time to be a part time investor in a company, then you are a full time gambler.
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Discussions
4 people like this. Showing 50 of 118 comments
Finally:
MARKET FLUCTUATIONS OF INVESTOR'S PORTFOLIO
Note carefully what Graham is saying here.
It is not just possible, but probable, that most of the stocks you own will gain at least 50% from their lowest price and lose at least 33% ("equivalent one-third") from their highest price -regardless of which stocks you own or whether the market as a whole goes up or down.
If you can't live with that - or you think your portfolio is somehow magically exempt from it - then you are not yet entitled to call yourself an investor.
BENJAMIN GRAHAM'S 113 WISE WORDS
The true investor scarcely ever is forced to sell his shares, and at all times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgement."
2019-01-18 18:38
This Ben Graham wise comment below is applicable to margin of safety stock like insas share price rm 0.70 with Nta rm 2.54 and nett cash Rm 0.70 per share with PE less than 10x and with decent div yield of about 3% pa loh..!!
Not applicable to overvalue stock like QL and Nestle, if u encounter big selloff on this type of counter u better cut n lari kuat kuat loh...bcos no margin of safety mah with Pe 50x, dividend yield of o.5% to 2.0% pa loh.....!!
Posted by 3iii > Jan 18, 2019 06:38 PM | Report Abuse
Finally:
MARKET FLUCTUATIONS OF INVESTOR'S PORTFOLIO
Note carefully what Graham is saying here.
It is not just possible, but probable, that most of the stocks you own will gain at least 50% from their lowest price and lose at least 33% ("equivalent one-third") from their highest price -regardless of which stocks you own or whether the market as a whole goes up or down.
If you can't live with that - or you think your portfolio is somehow magically exempt from it - then you are not yet entitled to call yourself an investor.
BENJAMIN GRAHAM'S 113 WISE WORDS
The true investor scarcely ever is forced to sell his shares, and at all times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgement."
2019-01-18 18:48
truth be told, I never see shares like LCTITAN as investment shares like QL and Nestle...shares like LC is and always a trading share...a good trading share because it follows logics....
2019-01-18 18:50
well, what stocks would you recommend as low risk + high return for this year?
2019-01-18 19:10
U ask yourself what type of earning power ??
When Nestle earnings yield is less than 2% pa based on PE above 50%...even u put monies in fixed deposits u get an earning power of 4% pa mah....!!
If u buy insas got earning power as Pe less than 10x...earning yield already exceed 10% pa mah...!!
Margin of Safety for those who are invested in Nestle, DLady, PBB, Petdag and HEIM, as explained and taught by Benjamin Graham, the father of value investing.
:thumbsup: :thumbsup:
In the ordinary common stock, bought for investment under normal conditions, the margin of safety lies in an expected earning power considerably above the going rate for bonds.
Over a ten-year period the typical excess of stock earning power over bond interest may aggregate 50% of the price paid.
This figure is sufficient to provide a very real margin of safety— which, under favorable conditions, will prevent or minimize a loss.
2019-01-18 20:19
U need understand what is real earning power loh...!!
Insas ROE only 4% pa....but based on rm 2.54 u generating eps of Rm 0.10 pa loh....!!
so if u buy insas at rm 0.70 u r getting yield of 14% pa....this is what we call earning power loh...!!
2019-01-18 20:31
Nestle ROE very terror 120% pa with NTA of Rm 3.00 it generate earnings of Rm 3.60....but u need to buy nestle for Rm 140.00...so ur earnings yield is less than 2.6 % pa loh...!!
Now u compare nestle 2.6% pa v insas 14% pa, u ask who got more earnings power leh ??
Of course Insas mah...14& pa warnings yield even kindy student understand 14% pa is more than 2.6% pa mah..!
But growth proponent may argue, nestle have growth woh ??
Raider ask very logical question loh...how much growth & for how long nestle need to grow from 2.6% pa to catch up with insas yield of 14% pa even, if u assume insas has no growth at all loh...!!
The answer is very long and very uncertain when nestle can catch up mah...!!
An english old saying a bird in hand is better than 2 in the bush mah...!!
Insas yield is already there with 14%pa...now u want to speculate nestle yield 2.6% pa can catch up, but when leh ??
Thus insas has definitely has higher margin of safety than nestle loh..!!
2019-01-18 20:49
mr loh..!!
the fact that insas is thong kok khee personal piggy bank meant margin of safety is completely meaningless loh..!!
u understand mah...?
2019-01-18 21:04
That is a separate issue under psychological investment aspect of share loh...!!
If u read sslee comment carefully, he has already dealt and risk manage this aspect u have highlighted mah...!!
Posted by lazycat > Jan 18, 2019 09:04 PM | Report Abuse
mr loh..!!
the fact that insas is thong kok khee personal piggy bank meant margin of safety is completely meaningless loh..!!
u understand mah...?
2019-01-18 21:09
Whoa Sifu Stockraider telling 2 Dinosaurs, One Quack duck, one lazycat and one smart alex
AhFah sure clever street smart!!
2019-01-18 21:11
all these uncle comment so long, can read whole day also can't finish haih
2019-01-18 22:01
cal and raid...Insas is a stock for novices..fact.......everyday shout for what? can go up meh?
2019-01-18 22:26
mr qqq3 , what stocks would you recommend to buy as a low risk + high return investment for this year?
2019-01-18 22:32
risk and return is what one makes of it....stocks by itself is risk is related to return....
2019-01-18 22:47
qL is a low risk high return share for philip because he knows how to handle it and already so much unrealized profits....
2019-01-18 22:51
risk and return is inherent in the share, any share...high risk high return....low risk low return...u wouldn't know it flips left or right until the future has come ....risk and return is what one makes of it....
just because a share goes up after purchase, it does not mean it is a high return low risk share......
2019-01-18 22:54
lazycat > Jan 18, 2019 10:32 PM | Report Abuse
mr qqq3 , what stocks would you recommend to buy as a low risk + high return investment for this year?
======
however if u are talking about share with growth characteristics that i like , I can give u ...Vitrox.....
2019-01-18 22:57
what stocks you considered as a low risk yet high return for year 2019?
would you like to share your stock picks?
2019-01-18 22:58
azycat > Jan 18, 2019 10:58 PM | Report Abuse
what stocks you considered as a low risk yet high return for year 2019?
=========
I thought I have answer u above....
2019-01-18 23:04
I can talk about it...but I am not naturally a buy and hold guy......I just don't have the temperament for it....but I respect and I like people who do....
2019-01-18 23:07
for 2019....I am naturally bearish..as I was naturally bearish for whole for 2018....
I wrote this...
https://klse.i3investor.com/blogs/qqq3/188428.jsp
I seems time to trade now...so I trade la.......
2019-01-18 23:09
read the vitrox report, I challenge anyone who is not impressed.
Penta? Penta is another level lower. Analysts are right when analyst don't like their listing of subsidiary in HK.
2019-01-19 00:48
Can someone do a comparative study of these 4 growing companies in Bursa:
Nestle
QL
Topglove
Hartalega
This study should be both educational and fun, and may even be rewarding too.
2019-01-19 12:20
These stocks are old hags & their success are already price in lah....!!
Just look for future growth stock, don waste time always looking at the rear mirror, telling us how good, how good loh ??
If u want to look at the rear mirror maybe can engage a Phd student to do an academic study mah...!!
Posted by 3iii > Jan 19, 2019 12:20 PM | Report Abuse
Can someone do a comparative study of these 4 growing companies in Bursa:
Nestle
QL
Topglove
Hartalega
This study should be both educational and fun, and may even be rewarding too.
2019-01-19 12:27
nestle not many can invest lah...over priced just like gold
QL everyday u eat chicken and egg and seafood won't make the share price go higher
glove stocks danger stock...wait for clear rebound
stock market is about perception, price and value can be made up by market makers
2019-01-19 12:32
just before glove stock crashed, they say dividend defensive stock lol then they say overvalued crash until mother father no eyes see...
controlled by market makers
2019-01-19 12:37
when u talk like professor in stock market, u are falling prey to the stock operators...
because they can read your next move...
learn to be the hunter, not the hunted
2019-01-19 12:44
Segmental businesses of QL
4 segments:
MPM (Marine Products Manufacturing)
ILF (Integrated Livestock Farming)
POA (Palm Oil Activities)
Family Mart (New)
2018 Annual Report
(m)
MPM
Rev 905
Profit 124.1
Assets 1076.6
Liabilities 258.3
Equity 818.3
Finance cost (6)
ILF
Reve 1971
Profit 103
Assets 1762.5
Liabilities 1017.7
Equity 744.8
Finance cost (36.7)
POA
Rev 387
Profit 27.9
Assets 486.9
Liabilities 159
Equity 327.9
Finance cost (6)
Revenues by countries
Malaysia 2601 (2018) 2446 (2017)
Indonesia 560.4 (2018) 471 (2017)
Vietnam 93.6 (2018) 90.5 (2017)
Others (China & Singapore) 7.7 (2018) 4.9 (2017)
2019-01-19 13:04
pos used to trade above PE 50
gdex above PE 100
look at this 2 stocks price now
2019-01-19 13:06
The shareholdings distribution of QL is interesting:
less than 100 (0%)
274
101 to 1000 (0.03%)
843
1001 to 10,000 (0.82%)
2882
10,001 to 100,000 (4.09%)
2093
100,001 to 5% (41.39%)
604
5%+ (53.67%)
2
Total no of shareholders: 6698
The number of shareholders with 100,001 + shares in QL is
606 (collectively own 95.06%)
Breakdown
2 own 53.67%
28 own 21.07%
576 own 20.32%
6092 own 4.94%
2019-01-19 13:27
Therefore, 9.1% of shareholders own 95.06% of QL.
This is not unexpected. It is well known that 1% of the population owns 50% of the wealth, the next 9% of the population owns the next 40%. The majority (90%) owns less than 10% of the wealth.
2019-01-19 13:34
At price of 6.87 per share, QL has a market cap of 11.146 billion.
Net earnings in 2018 was 215.7 m
Net CFO was 298.6 m
Capex was 339 m
Increase in debt was 169 m
Dividend 90.5 m
It is a good company, not a great company (by my definition).
It is also trading at a high valuation.
For these reasons, I shall not be buying this stock today. It will be in my radar screen though. I will spend a bit more time to understand its new business, Family Mart.
2019-01-19 13:43
I group Nestle, DLady and perhaps, Harta in a group of their own (great companies).
I will put QL and Topglove in the same group (good companies).
http://myinvestingnotes.blogspot.com/2010/03/the-three-gs-of-buffett-great-good-and.html
2019-01-19 13:47
family mart too many competition from mushrooming cheaper convenience store...
the convenience store concept only works well in high income country because selling overpriced items...
implementation at the wrong timing
2019-01-19 14:02
>>>>Haw Liao when u talk like professor in stock market, u are falling prey to the stock operators...
because they can read your next move...
learn to be the hunter, not the hunted
19/01/2019 12:44<<<<
These operators do not fancy the stocks I like.
2019-01-19 15:07
Dear all,
My response to Mr. Philip: THE PERCEPTION OF P/E
Definition of High PE or growth trap: Growth, again, has little meaning without any reference to the future return of the business. Growth is only good if it is above the cost of capital.
https://klse.i3investor.com/blogs/Sslee_blog/190733.jsp
Thank you
2019-01-19 19:06
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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....
3iii
Make sure you have the cash and courage to add more when your predicted correction comes true.
Do you not notice that stock prices do fluctuate a lot even in a 52 week period - up 50% and down its equivalent 1/3? Hopefully, you have a good strategy in place to benefit from this market price fluctuation (Mr. Market).
2019-01-18 18:29