I wonder how many retail investors dabbling in Bursa know what value investing is. My hunch is that when asked the reply, if any, would be buying cheap stocks – those that are trading at low price to earnings or low price to book value.
If you read the comments from a self-proclaimed “super investor” in i3investor below about his poor understanding on value investing. You can’t stop laughing at his foolishness and naivety,
{Posted by qqq3 > Aug 13, 2018 11:28 AM | Report Abuse
too bad for all the value investors....value investors specialize in buying lousy shares at low PE.
[Posted by qqq3 > Sep 11, 2018 05:26 PM | Report Abuse
firstly, to practise Bufalology, you really need to buy the bigger companies, the more established companies, those with some history as guidance...
i3 forum members what they chase? go ask KC the fake Bufalo man....he likes the small caps, easier to go up, ...or ask OTB, the adventurer....the FA and TA man.....all hang pig head sell dog meat.]
In the link below, I have taken the trouble to explain what value investing actually is,
https://klse.i3investor.com/blogs/kcchongnz/89477.jsp
It has nothing to do with buying cheap stocks, those with low PE or price-to-book ratios. Far from it.
The key principles describing why value investing works as explained by Benjamin Graham in his widely followed book “The Intelligent Investor” are summarised as below,
1. Price is not value
2. Mr. Market is a crazy guy
3. Every stock has an intrinsic value
4. Only buy with a margin of safety
5. Diversification is the only free lunch
I have deliberated these key principles in the link below,
https://klse.i3investor.com/blogs/kcchongnz/174104.jsp
The key principles of value investing are plausible. Value investing follows a process. It has been shown in the experience of many followers of this school of thought. In my article below, “Does value investing work and what are the evidences” in the link below,
https://klse.i3investor.com/blogs/kcchongnz/174215.jsp
I have shown the phenomenal track records of each of nine disciples of Benjamin Graham with annual compounded returns of between 18% and 29% lasting between 14 to 30 years, using various and different strategies of value investing.
There are many academic researchers in US, Europe, Asia and other parts of developed markets which showed evidences that value investing works all over the world.
What are the different strategies in value investing which successful investors have used? Do they work in Bursa?
- Buy-and-hold great companies’ stocks at fair prices
where is that NZ guy?
long term investments work for him or not?
why no defender of value investing and buy and hold?]
After reading the stocks held by a forumer who practises fundamental value investing in i3investor recently, I have chosen his portfolio of stocks for illustration. The stocks and their returns after about 10 and a half years are shown in Table 1 in the Appendix.
This portfolio above consists of high quality big-caps stocks which are followed closely by fund managers and institutional investors. They are considered as great companies following my criteria as deliberated in the link below,
https://klse.i3investor.com/blogs/kcchongnz/161473.jsp
The stocks in the portfolio are great companies with durable business and moat, and great management. They also generally meet the requirement of quantitative value investing in one form or another such as stability of earnings and cash flows, high return on capitals, growth, high dividend yield etc. It returned an average of 362% over the last 10 and a half years as on 4th January 2019 as compared to the return of the broad index of 52% during the same period. In compounded annual return (CAGR), it is a whopping 15.4%, close to 4 times the 4.1% of the broad index.
There are indeed great companies in Bursa worth to buy and hold for a long time. One thing I must raise up is that they were actually selling at fair prices at an average PE ratio of just 14 then, not long after the US Subprime Crisis. Nestle was selling at a PE of just 20. Their PE ratios have mostly expanded; for example, the PE ratio of Nestle is two and a half times now at 51.
As these are great companies, I believe if these stocks are held for another 10 years, their return will still be satisfactory, but probably not as good as before, unless the good growth continues, as there is a limit of PE expansion. However, as a company grows bigger, it is generally harder to grow as the previous fast rate of growth. That is inevitable for most businesses.
- Buy good or mediocre companies’ stocks at cheap prices
In the above article, it mentions that for the last 10 years from the year 2007, just before the subprime housing crisis in the US, which also adversely affected the stock markets all over the world, and up till September 2017, 70% of the stocks in Bursa had positive returns.
My estimation shows that the broad KLCI increased by about 52% for the 10 years period from 1414 points to 1784 points as on 18th September 2017. Together with dividends, the compounded annual rate of return (CAGR) was about 5.5%.
The Busy Weekly also compiled a list of 20 “bull” stocks with a mix of good and mediocre companies, returned over 1000% over the 10 years. They were mostly small and mid-cap stocks listed in Bursa which were selling at cheap or fair prices. The best performer, MYEG, returned 3443%, and the last in the list, Poh Huat, also a 10-baggers at 1147%. Those numbers are equivalent to a CAGR of 43% and 29% respectively, more than 10 times the return of fixed deposit a year, for each of the 10 years.
The returns of those stocks out-performed the broad index as well as the returns of the great companies above by a very wide margin. However, if you were to hold those stocks until now, the return would still be commendable, but a far off from the good time in September 2017.
Hence, investing in good companies at a particular time of cyclical businesses may not be wise to hold for too long. The rules of value investing such as intrinsic value and margin of safety has t be followed more closely. It is not easy though.
My personal experience in value investing
My strategy in value investing is to buy a basket of 10-15 stocks of good companies selling at cheap prices, with a margin of safety high enough above their estimated intrinsic values. I would like to summarize all the portfolios of stocks which I shared in i3investor over the years and their returns after the portfolios were formed.
In my article, “Investing in Bursa for 5 years: 5 年的等待”in the link below,
https://klse.i3investor.com/blogs/kcchongnz/138098.jsp
I have shown that the portfolio of 10 ordinary stocks named “GE13 Watch” established in i3investor on 21st January 2013 returned 146%, more than seven times the return of the broad market of just 20% in the same period of about 5 years.
My second portfolio of 11 stocks named “2013 2H Stock Pick Challenge” established in i3investor on 1st August 2013 and as shown in the link below, “Search for The Holy Grail in Investing: The Magic Formula” returned 175% in about four years against the return of the broad market of just 10% during the same period.
https://klse.i3investor.com/blogs/kcchongnz/127825.jsp
The excess return of the portfolios of stocks was huge.
The stocks in the two portfolios were chosen following the principle of the Magic Formula of Joel Greenblatt; buying quality companies with high return of capital of the firm when they are selling cheap as valued at the enterprise level.
My third established portfolio in i3investor was done at the end of year 2015 for investing for year 2016. This was using a different value investing strategy; the high dividend yield investing strategy as documented in the link “Tips for Dividends Investing: A sure cash flow for investors” below,
https://klse.i3investor.com/blogs/kcchongnz/122285.jsp
This portfolio of 5 high dividend stocks has gained an average of 67.4% for the one-and-a-half-year period as on 5th April 2017, compared to the gain of the broad market of just 3.8% during the same period, again with huge excess return.
My last established record in i3investor was in the stock pick challenge for 2017. I did not do that well in this portfolio of stock, but it is still a positive return of 5% at the end of the year.
I must say that if I were to hold all the stocks in the portfolios above until now, the return would have been greatly diminished, but I believe they are still satisfactory. Hence most stocks in the portfolios are not advisable to hold for long term, unlike those great quality companies above.
It is also noted that value investing is about buying, and selling of stocks basing on the prices and their intrinsic values, the change in macro and micro conditions, and not the least, the alternative opportunities available.
Does value investing work all the time?
Of course not. In fact, no strategy works all the times under all market conditions. Most value investors would have their portfolio value diminished substantially for the year 2018. But what other investment strategies make money in 2018?
I do understand there were some traders who made money in 2018. One particular guy wrote blogs and numerous comments in i3investor boasting he bought a stock at say RM1.00 and then sold at RM1.05 a couple of days later and made 20%. However, it is hard to prove that unless he shows his trading records. This is only hearsay, and has no value to us.
In the abundance of evidences available and my own personal experience, value investing works most of the time and over a long period of time. However, it doesn’t mean it works all the time. At least, it works better than all the alternatives I can think of.
Conclusions
Value investing has been shown to work in almost all matured as well as emerging markets in the past everywhere in the world. I have also shown that it works in Bursa.
The principles of value investing are logical and plausible, control your emotion of fear and greed, be contrarian and right about it. Have an estimated value of the business and compare with the price, and only buy at a big margin of safety, and sell when price is above estimated intrinsic value. It may not work all the time, and sometimes not in the short-term, but it will certainly work for most of the time, and in the long-term.
There are different paths in value investing. One could invest in great companies when the opportunities arise when they are selling at fair prices and hold them for long term, or one can buy some mediocre and good companies at cheaper prices and wait for the realization of values by others, and hence their rise in prices and profit by selling.
KC Chong at ckc14invest@gmail.com
Appendix
Table 1: Return of portfolio of great companies
https://klse.i3investor.com/blogs/kcchongnz/188915.jsp
