How Long Would You Hold A Value Stock?

9 years and 11 months! That is how long I held on to a value stock known as Frencken. I recently sold it in Jun at $0.515, having first bought it in Jul 2007 at $0.535 when it was still known as ElectroTech. In between, I averaged down twice, at $0.33 in Jul 2010 and at $0.365 in Jul 2014. The figure below shows the share price performance since May 2005.

Frencken Share Price Performance Since 2005

As you can see, for a very long 9.5 years, the share price never recovered to its previous levels, until only recently. In between, it changed its name from ElectroTech to Frencken and took over not 1, but 2 SGX listed companies (ETLA and JukenTech)! It has been a very long 9.5 years for Frencken shareholders who bought it as a value stock.

In value investing, you are often told that you have to be patient; that the day will come when your value stock will rise significantly and become a potential multi-bagger. The logic is appealing: buy a $1 stock for $0.60 and eventually the market will come to recognise its value and price it at $1 or beyond! However, what is not mentioned is how long do you have to wait for this to happen. And in the case of Frencken, it took almost 10 years for it to recover to its previous levels.

You might ask, did I make a mistake for identifying Frencken as a value stock and for buying it at too high a price? I bought it in Jul 2007, so my assessment was based on the financial statements for Dec 2006. For FY2005 and FY2006, the respective earnings per share were 9.59 cents and 8.65 cents, the book value was 46.0 cents and 52.4 cents, and the dividend was 2.68 cents and 2.60 cents. Based on my original purchase price of $0.535, these translated to P/E ratios of 5.6 times and 6.2 times, P/B ratios of 1.16 times and 1.02 times, and dividend yield of 5.0% and 4.9% respectively. These figures suggest that Frencken was a value stock when I first bought it and I certainly did not pay too a high price for it.

The point I am trying to make is this: value investing does not always work. It is not a case of buying an undervalued stock and eventually it will become a multi-bagger. It is not that simple. As I later figured out, being undervalued is only a necessary but insufficient condition for a stock to rise to its intrinsic value. Some other catalysts must be present for the rise to materialise, such as a bull run, recovery in earnings, asset sales with special dividends, etc. Being undervalued alone is not sufficient.

In the case of Frencken, the recent recovery in share price is due to 2 factors: a bull run in electronics stocks that swept up not only Frencken, but also other electronics stocks such as Hi-P, Sunningdale, UMS, Valuetronics, Venture, etc. The other factor is a recovery in earnings. For the latest quarter in 1Q2017, it reported a 437% year-on-year rise in quarterly earnings. This explains the doubling in share price from $0.24 since the beginning of this year.

If being undervalued is the only necessary condition for a stock to rise, why did I have to wait for not 1, 2, 3, 4, 5, 6, 7, 8, 9, but almost 10 years for it to rise?

I used to be a value investor too. When the value stock that I bought rose, I believed that value investing worked. When the stock did not rise, I told myself to be patient, that one day the market would eventually recognise the stock's value and give it its rightful valuation. When the stock dropped further and turned into a value trap, I thought that there must be something that I missed and should work harder to improve my value investing skills. Seldom did I think that there could be some other factors at work that would determine to a larger extent whether I make money or lose money on stocks. If the value stocks rose, value investing was right (never mind that there could be a general bull market as in the case of 2004). If the stocks did not rise, value investing was not at fault!

It was only around 2011 that I realised that something was amiss with value investing. I found out that the stocks that I bought during the Global Financial Crisis did not rise as much as I expected. It was then that I finally understood that value investing does not always work. Being undervalued is only a necessary but insufficient condition for stocks to rise. From there, I kept an open mind and branched out to other investing strategies, such as growth, turnarounds, dividend, etc. 

Having said the above, value investing did not totally disappear from my investment strategies. The principles of not overpaying for investments have continued to stay with me (see What is My Target Price?). And I am actually very grateful to have learnt value investing back then in 2001. It taught me a scientific method to value stocks instead of using gut feel. But value investing could only bring me this far. To continue my investing journey, I had to understand what worked for value investing and discard what did not.

10 years. That is how long I held on to a stock bought on the thesis of a winning formula. How many 10 years does anyone have in his investing lifetime to realise that his much cherished winning formula does not always work?

See related blog posts:

• Confessions of a Serious Investor
• Investing Is A Life-Long Learning Journey
• An Advice for Myself

The Evolution of An Investor

2016 marks the 30th year that I have been involved in the stock market. The first 12 years were during my schooling days when I monitored stocks for my father while he was working. The next 18 years were when I invested with my own money after graduation. Looking back at these 30 years, it has been a pretty exciting journey. I experienced the market crashes of 1987 (crash for no good reasons), 1989 (ditto), 1990 (Iraqi invasion of Kuwait), 1997/98 (Asian Financial Crisis), 2000-2003 (dot.com bust, Sep 11 terrorist attack, US accounting scandals and Severe Acute Respiratory Syndrome), 2007/08 (Global Financial Crisis) and potentially another one brewing currently.  In the meantime, I also experienced the super bull run of 1993/94 (Singtel IPO).

Throughout my investing journey, my investment strategies have never stopped evolving. When I first began investing with my own money in 1998, it was a Wild Wild West approach in which I bought stocks that I thought would go up, with no consideration of their earnings history, dividend yields, etc. Needless to say, that approach did not bring me any consistent success in investing. 

In 2001, I took on a different path, thanks to a second-hand book I had picked up fortuitously. The title of the book was "Buffettology", which described the methods Warren Buffett used to analyse stocks. That book set me on the journey of value investing, and the methods described in that book were still used to-date to analyse stocks, even though I am no longer sticking strictly to value investing. That strategy brought me my first consistent investment successes when stocks recovered from the 2000-2003 bear market.

However, sometime after the Global Financial Crisis (GFC) in 2009, I came to realise that while value investing worked, it did not work all the time. Stocks bought before and during the GFC never quite recovered to the levels I had expected. And while there were several multi-baggers achieved through value investing, it also created a number of salted fishes whereby the stock had dropped to almost no value or was delisted. You can refer to How to Get a Multi-Bagger? and The Salted Fishes for a list of multi-baggers and salted fishes up till 2014.

When you realise that a long-held strategy does not work as well as expected and there could be other forces at work influencing your returns, you will be willing to open up your mind to other investment strategies. Beginning in 2011, I ventured into growth stocks at reasonable prices, following the path of Warren Buffett. 

However, there are really not many growth stocks available at reasonable prices. This poses a limit to the growth investing strategy and I started to put some money into turnaround stocks in 2014 and dividend stocks in 2015.

Outside of my cash portfolio, I started contributing to my Supplementary Retirement Scheme (SRS) account in 2006. That created another pool of money for investing. However, I did not want to invest the SRS money the same way as I invested my cash. Instead, I used the SRS account as an experimental lab to test out other ways of investing. That was how I started on Dollar Cost Averaging (DCA) on unit trusts in 2007. The viability of DCA as an investment strategy also lead me to adopt passive investing for my cash portfolio. I started my passive portfolio in 2013 and added a more spicy version of it in 2015. You can refer to The Passive Portfolio and The Anti-Fragile Portfolios for more information.

Despite the diversity in investment strategies, the evolution has not ended yet. A few months ago, I realised that I should begin to learn how to make business investments instead of financial investments. That culminated in a 20% concentration in 1 stock. The recent stock market volatility made this endeavour tougher, but I told myself that if I ever wanted to invest like Warren Buffett, this is something I could not avoid. 

It has been a long 30 years. My investing journey has brought me from the lawless Wild Wild West to the civilisation of value investing to the era of multiple investment strategies co-existing alongside each other. That evolution will continue.

See related blog posts:

• Confessions of a Serious Investor
• Investing Is A Life-Long Learning Journey
• How Long Would You Hold A Value Stock?

The Value of An Education in Investing

Last week, I blogged about the value of a Chartered Financial Analyst (CFA) education to an investor and concluded that while it is useful in providing a basic grounding on the various investment concepts and methods, it does not guide an investor on what he should look out for in investing. See The Value of a CFA Education for more info. Does it mean that investors should not pursue an education in investing? On the contrary, education is important to achieving success in investing.

I have been exposed to the stock market for 28 years and been investing with my own money for the last 16 years. Prior to 2001, my investments were going nowhere, with as many misses as hits. It was not until when I picked up my first investment book titled "Buffettology" did my investments began to show some progress. You may wish to read Investing Is A Life-Long Learning Journey for more info.

The book triggered my thirst for investment knowledge. I became a regular visitor to the investment section of the National Library, reading investment books ranging from time-tested ones like "The Intelligent Investor" to more contemporary ones carrying fascinating titles like "Dow 40,000", "Dow 100,000", etc.

Among the ones that I found useful, I bought them after reading them in the National Library, to serve as an reference in future. Some of the more important ones are desribed as follow.

Buffettology (by Mary Buffett & David Clark) - This book was written by the former daughter-in-law of Warren Buffett and describes the methods Warren Buffett used to analyse stocks. The book describes the mathematical steps involved in estimating the rate of return of a stock and is fairly dry. Nevertheless, it is an important book for me as the methods in the book became the model that I use to analyse stocks to this date. It is also the book that sets me on my path to an education in investing.

Stocks for the Long Run (by Jeremy Siegel) - This book discusses that in the long run, stock investments beat all the other asset classes, notwithstanding the fact that stock market crashes happen every now and then. It also describes the various effects such as calendar effects, small-firm effects, etc. Whenever there is a stock market crash, I would turn to this book to remind myself that in the long run, my investments would turn out well, despite the heavy paper losses sustained at that time.

Common Stocks and Uncommon Profits (by Philip A. Fisher) - Warren Buffett initially started out as a pure value investor, having learnt his trade from Benjamin Graham, the father of value investing. However, over time, he has introduced a growth element to the stocks he purchases. The influence for this change is Philip Fisher and his book. This book discusses that some companies are so good that there is often no good reasons to sell them at all. The book goes on to describe the various ways of identifying such companies. If Warren Buffett could achieve such spectacular returns with his value-cum-growth approach, then there must be something valuable with this approach.

Security Analysis (by Banjamin Graham & David Dodd) - This book is known as the Bible of value investing and is written by none other than Benjamin Graham. It was written in 1934, during the Great Depression period in US. It describes the ways to value stocks, bonds, preference shares and warrants. You can find an application of its valuation method for bonds and preference shares in The Lost Art of Bond Investment. Despite reading it twice, I still have not grasped the essence of the book, probably because the investing conditions then and now are different. For example, it could be discerned from reading the book that the accounting and disclosure standards are different from today's and hence, the book spends a fair amount of time on the interpretation and adjustment of income and balance sheet items. The basis of valuation is also quite different then, when book value takes on a greater importance compared to today.

The above are just some of the books that I found useful and bought for future reference. There are a lot more books that are useful which I never mentioned, such as "The Intelligent Investor" by Benjamin Graham. Generally, the value of these investment books lies in the fact that they contain practical wisdom from market practitioners who, through past experience, have figured out what works for them. By understanding and following their approaches, we are able to shorten our learning curve and start making money sooner from our investments. After all, with a stock market cycle averaging about 7 years, how many market cycles do we have in our lifetime learning and making money from investments?

Education is important to an investor. Without education, investors can only buy and sell on gut feel and/or follow the crowd. As an analogy, if you were to go to battle, would you select a general that has fought many battles, a general who has studied the art of war, or a general who is knowledgeable in both?

See related blog posts:

• The Value of a CFA Education
• Investing Is A Life-Long Learning Journey
• Confessions of a Serious Investor

The Value of a CFA Education

I took a course in Masters in Applied Finance and sat for the Chartered Financial Analyst (CFA) examinations in 2004 - 2006. The purpose of studying and sitting for the CFA exams was to understand the various economics, accounting and investment concepts so as to be a better investor. Hence, the topic of this blog post applies to an investor rather than a person working in the financial industry.

The CFA programme covers very wide topics, as follows:

• Ethical and Professional Standards
• Quantitative Analysis
• Economics
• Financial Statement Analysis
• Corporate Finance
• Portfolio Management
• Equity Analysis
• Fixed Income Analysis
• Derivatives
• Alternative Assets
• Portfolio Performance Measurement & Reporting
• Risk Management

Note that there have been some changes to the curriculum since I sat for the exams. You can find the latest curriculum at CFA Program Study Sessions.

Has the programme been useful to an investor who starts from scratch and has no formal education in investing previously? I describe some of the more relevant topics to investors and their usefuln below.

Financial Statement Analysis (FSA) is by far the most important topic as investors need to read financial statements regularly to understand how the companies are doing. FSA teaches how to understand the various items in the financial statements and the various accounting methods. For example, inventory could be recorded as first-in-first-out, last-in-first-out, or weighted-averaged. The different accounting methods will lead to different values in the balance sheet depending on whether prices are rising or falling. Adjustments will therefore need to be made when comparing companies adopting different inventory accounting methods. Also covered in FSA is how to identify red flags where there could be accounting irregularities. However, although providing the basic grounding necessary for understanding companies, FSA does not discuss what are the important items that investors should look out for when prospecting for a company, such as having low debt, high free cash flow, etc.

Equity Analysis teaches the various valuation methods that you can use to determine the intrinsic value of a stock, such as Discounted Dividend Valuation, Free Cashflow Valuation, Market-Based Valuation (e.g. Price/Earnings, Price/Book multiples, etc.) and Residual Income Valuation. However, it does not advise what kind of input parameters (e.g. dividend growth rate, rate of discount for Discounted Dividend Valuation) you should use for each stock analysis. You need to assume the input parameters and hope that they turn out to be correct. 

Portfolio Management teaches about the Modern Portfolio Theory, which is based on that fact that when 2 risky assets are put together in a portfolio, the combined risk (volatility) is less than that of the individual risky assets. It also discusses the Efficient Market Hypothesis (EMH), on whether the market prices reflect all known (including private) information about the economy, industry and company. Here, it discusses and concludes that the market generally reflects all known information and hence, Technical Analysis should not work. However, there are anomalies running counter to EMH such as the calendar effects and small-sized/ neglected companies producing better returns than larger companies with better analyst coverage. Portfolio Management also discusses the Capital Asset Pricing Model (CAPM), which essentially says that to get better returns, you need to take higher risks (beta). 

Risk Management (which was taught more in-depth during the Masters course) discusses what are the potential risks based on past case studies and teaches how to measure risk exposure using the Value-at-Risk method. 

The above are some of the more relevant topics to a investor. As an investor, I find the following topics to be most useful: 

• Financial Statement Analysis (for finding companies to buy)
• Fixed Income Analysis (for analysing bond prices & understanding bond features) - see Fixed Income blog posts
• Risk Management (for computing risk exposure) - see Risk Management blog posts
• Economics (for understanding how the economy works)
• Derivatives (for understanding the effects of structured warrants) - see Structured Warrant blog post

Due to the short space allocated for each topic above, I cannot completely describe what these topics teach. Generally, the CFA curriculum is useful for providing a basic grounding on the various concepts and methods, but it does not show what an investor should look out for. As an example, after passing my CFA exams in 2006, I still have investments that were completely wiped out. However, there also have been benefits from the programme. I narrowly avoided the Mini-bonds after reading through their prospectus and understood the effects of structured warrants that were prevalent in Singapore just several years ago. See Investing Is A Life-Long Learning Journey for more info.

In conclusion, CFA builds up your foundations, but do not expect the market to give you additional respect simply because you pass your CFA exams.

See related blog posts:

• The Value of An Education in Investing
• Investing Is A Life-Long Learning Journey
• Confessions of a Serious Investor

An Advice for Myself

A reader left an interesting question after reading my post on Investing Is A Life-Long Learning Journey. His question was "28 years is almost 3 decades, if you can start all over again, what would be your best advice to the past you?" This is by far the most thought-provoking question I have ever received on my blog. I replied with a short answer, but after thinking more thoroughly about it, I decided to post a fuller answer to this question.

There are many investment strategies that work, be it value investing, growth investing, dividend investing, index investing, etc. We have seen many highly successful masters in investing, each adopting a different strategy. In value investing, we have Benjamin Graham and his many disciples, including Warren Buffett. In growth investing, we have Thomas Rowe Price, Jr.. In index investing, we have John Bogle. We also have a number of other equally legendary investors whose investment strategies do not fit nicely into any of the investment strategies mentioned above.

However, although the investment strategies mentioned above work, they do not always work. If value investing works perfectly, there would not be any value-traps. If growth investing works fully, no price is too high to pay for growth stocks. If dividend investing works forever, we would not have the Mini-bonds saga. Yet, the presence of value-traps, overpriced growth stocks, Mini-bonds, etc. do not negate the fact that these time-tested investment strategies work. They just do not work all the time. There is no need to be too dogmatic about an investment strategy and continue to average down as the stock declines, believing that the investment strategy will turn out well at the end. There is a Chinese saying, "成也风云，败也风云", which translates to "the same factors that brought you prosperity could also lead to your downfall". Do not be dragged down by the dogma of sticking to an investment strategy that has worked well. Occasionally, it is important suspend your belief in your "winning" investment strategy and let risk management measures take over. There is another Chinese saying, "留得青山在，不怕没柴烧", which means "live to fight another day". It is no shame to make mistakes and learn from them. Many famous investors have recovered from mistakes early in their investment journeys and become stronger as a result.

See related blog posts:

• How Long Would You Hold A Value Stock?
• Investing Is A Life-Long Learning Journey
• Confessions of a Serious Investor

Investing Is A Life-Long Learning Journey

It is often said that it is important to start investing early, so that the magic of compounding can do its wonders. For investors who are keen in active investing, there is another reason for starting early, which is that it takes time to learn about investing. Thanks to my father, I was introduced to investing at the age of 11, and yet after 28 years, I am still learning about investing. Below is an account of my learning journey in investing.

The Growing Years (1986 - 1998)

From 1986 till 1998, I was helping my father monitor stock prices while he was away at work. Through this, I had learnt about the buying and selling of stocks, lotteries of Initial Public Offerings (IPOs), leverage of warrants, arbitrage of Malaysian stocks listed on both the Central Limit Order Book (CLOB) market in Singapore and Malaysian stock exchange, etc. It was quite a fascinating period. There was no scripless trading then. When you buy a stock, you get a share certificate delivered to you on settlement date. But the name on the share certificate is not your name. When the company pays a dividend, the dividend does not go to you, but to the person whose name is registered on the share certificate! You need to register the share certificate in your name in order to receive the dividend. Through this loophole, you could sometimes collect dividends even after you have sold your shares!

IPOs then were not always conducted by ballot. There were a couple of IPOs which were conducted via Dutch auctions. In this method, you could indicate the highest price you are willing to pay for the shares. At the close of the IPO period, the IPO manager would determine the highest price at which all the shares could be sold. Every successful bidders would pay the same price. For example, if you bid $2.10 for 10 lots and the successful bid price is $2.00, you will be allocated all 10 lots and pay only $2.00 per share. Conversely, if the successful bid price is $2.20, you will receive none of the shares. A tranche of Singtel IPO in Oct 1993 was conducted via the Dutch auction, with the successful bidders paying $3.60 compared to $1.90 for the discounted share tranche.

Along the way, I had witnessed first-hand the stock market crash of 1987 (crash for no good reasons), 1989 (yet another crash for no good reasons), 1990 (Iraqi invasion of Kuwait), 1997/98 (Asian Financial Crisis) and between them, the super bull run of 1993/94 (Singtel IPO).

During this period, I had also figured out that IPOs were not a good way of being introduced to investing. The reason is very simple. IPOs are packaged to sell. After it has been sold, buyers have to live with whatever quality they have bought. It is similar to job interviews. All potential applicants would put their best foot forward, but after the "best" applicant has been hired, he might not perform to the level he had shown during the interview. You may wish to read The Initial Public Offering for more info.

The Wild Wild West Years (1998 - 2001)

By 1998, I had graduated from university and was ready to invest with my own money. You might have thought that investing would be a breeze for me with the wealth of experience I had built up. Actually, no. During this period, I thought that there were 3 ingredients necessary to be successful in the stock market. The 3 ingredients were: Brains, Guts and Capital. You need the brains to figure out what nobody has yet to figure out, the guts to act on your conviction at a time when the whole world was acting against you, and the capital to profit from your insights. Unfortunately, I realised later that the same 3 ingredients of Brains, Guts and Capital were also the recipe for failure in the stock market! If your analysis is incorrect, having the guts to act on it can be a mistake. Hence, for a while, I had both hits and misses. My portfolio was getting nowhere.

The Game Plan Year (2001)

In 2001, by sheer luck, I had picked up a second-hand investment book titled "Buffettology" from a book fair. It described the methods Warren Buffett used to analyse stocks. The methods in the book became the model that I used to analyse stocks to this date. This was an important development, as it taught me the importance of having a system for investing. If I were to use the analogy of baking cakes, during the Wild Wild West Years, my recipe of baking cakes would be to "add some flour, some sugar and some water". At times, it would turn out well. At other times, it would turn out burnt. I had no idea whether the next cake would turn out well or burnt. With a system for investing, the recipe becomes "add 400g of flour, 10 teaspoons of sugar and 800mL of water". If the cake turns out burnt, you could change the amount of flour, sugar and/or water in controlled amounts and observe the outcome again. After sufficient iterations, you would probably figure out how much flour, sugar and water to add to bake a sufficiently good cake. Of course, there is always the unpredictability of the stock market, but at least you have some factors related to the companies' performance under control.

With a system for investing, that became the improved Brain component of the investing recipe. Sometime during this period, I also developed a plan for allocating the amount of capital to stocks. This became the improved Guts component of the recipe that I had used more or less to this date. The plan essentially institutionalised the contrarian way of investing by tying the level of stock allocation to the stock market index inversely. When the index is high, the level of stock allocation would be lower. Conversely, when the index is low, the level of stock allocation would be higher. By following this plan strictly, it forces me to buy shares when the index is low and sell shares when the index is high. You may wish to read Have a Plan for more info.

Finally, after working for several years already, I had built up sufficient capital to make meaningful investments in the stock market. The improved Brains, Guts and Capital recipe had served me well. I began to see some positive direction in my portfolio gains. While they have not made me a highly successful investor, at least they made me a competent investor.

The First Crash Years (2000 - 2003)

The years from 2000 till 2003 were quite bad for the stock market, having to navigate through the dot-com bust in 2000, September 11 terrorist attacks in 2001, US accounting scandals in 2002 and Severe Acute Respiratory Syndrome (SARS) in 2003. I thought I would manage quite well during this period, having experienced several market crashes already. The truth is that it is one thing watching a crash on the sideline and another thing experiencing it yourself. The losses, although only on paper, were very real. And when you run out of capital (which I did then), you are subject to the full force of the absurdity of Mr Market. If he wants the market to drop 50%, you just have to accept it since you have no more capital to take advantage of him and fight back. Thankfully, I had preserved some capital in my Central Provident Funds (CPF). That was the only period when I had to draw on my CPF reserves. I had learnt to set aside some reserves to save my portfolio during severe market crashes. You may wish to read Behind Every Successful Bear Market Recovery is A Cash-Like Instrument for more info.

The Back-to-School Years (2004 - 2006)

When you survive a crash, you will only get back stronger. After the crash years of 2000 till 2003, the stock market made a recovery in 2004, which was when I made my first pot of gold with the investing system and plan mentioned earlier. It was time that I thought I should receive a proper education in investing, having read through financial statements without fully understanding them previously. Using part of that profits, I enrolled myself in a part-time course in Masters in Applied Finance, graduating a year later. I also sat for the Chartered Financial Analyst (CFA) examinations, passing all 3 levels in 2006.

You might have thought that having academic qualifications would make me a better investor.  Again, no. My first wipe-out (i.e. stock whose company went bankrupt or was delisted with no exit offer) came in 2010, when JTIC went bankrupt after having some accounting irregularities. It was followed by 2 other wipe-outs earlier this year with Hongwei and Sunray. Having said that, I did managed to avoid Mini-bonds (narrowly) after reading through their prospectus. So, the academic knowledge helped to some extent, but not totally. The market does not give you additional respect simply because you have a degree in finance or passed your CFA examinations.

The There-Is-No-Spoon Years

I am not sure when this period started. After several years of investing, finding and fine-tuning investing formula and coming back from crashes, I somehow reach a state of "confusion". Confusion because of a realisation that there is probably no such thing as a sure-win investing formula. Of course, the investing system and plan mentioned earlier still work, but they only make one a competent but not a highly successful investor. There are probably greater forces at work that I have still not figured out after 20+ years in investing.

When you are not tied to any particular investing formula, you will try all sorts of formulas. I started a Dollar Cost Averaging programme in unit trusts in 2007, growth investing in 2012, passive investing with portfolio re-balancing in early this year and turn-arounds also in early this year. The objectives were not to find a winning formula, but a recognition that there is no winning formula.

Conclusion

Investing is often a life-long journey. It takes time to learn and unlearn about investing. After 28 years of investing, I am still learning it. I will probably keep on learning throughout my investing journey.

See related blog posts:

• Confessions of a Serious Investor
• How Long Would You Hold A Value Stock?
• An Advice for Myself

Confessions of a Serious Investor

Investing is a fascinating subject. It has the ability to captivate millions of investors and make them willing to watch stock prices on monitor screens for long hours. It also has the powers to galvanise investors to comb through long pages of financial statements filled with financial jargons without getting tired. You could be investing for 30 years and still not get sick of it. Yet, this passion for investing could present both joys and heartaches for many investors in their investment journeys.

The Awakening Moment

I cannot speak for all investors, but I think some investors will have early in their investment journeys a moment when they realise that the stock market was destined to be a part of their lives. I call this the "awakening moment", similar to the moment when Neo, the main character in the movie "Matrix", was told that he had all along lived in a world different from what he had known. It could be the moment when you struck your first Initial Public Offering (IPO) lottery, or made your first pot of gold on the stock market. For me, the awakening moment was on 20 Oct 1987, the day after the stock market crashed in US in 1987.

At that time, my father had just started investing about a year ago and I was 12 years old then, helping him to monitor stock prices when he was away at work. Perhaps because of ignorance, confidence and/or delays in communications, stock prices on the Singapore stock market opened as they had closed the day before, unaware that the US stock market had crashed by 22.6% overnight. It was not until after the lunch break that the crash on the Singapore stock market began. I remembered vividly there was a particular stock we were monitoring which normally traded at around $0.60 during that period. Before the lunch break, it was still trading at around $0.60. After the lunch break, the buyers started to withdraw their morning bids and submitted much lower bids at $0.40 while the sellers continued to offer at $0.60. I thought to myself that it was probably an entry error and very soon, the bid price would return to where it was before the lunch break. Yet, instead of converging back to the offer price, similar large gaps between the bid and offer prices appeared on other stocks. Soon, the prices started to transact at the much lower bid prices. The stock market had crashed. It was a sight that I had never seen before. At that moment, I realised that the stock market was no longer a child's play but a serious business where fortunes could be made or broken. From that moment, I knew that the stock market was destined to be a part of my life.

The Search for a Winning Formula

Once the stock market becomes a part of your life, it is very difficult to shake it off. You would spend a lot of time on it and do a lot of things to improve your investment skills and returns. The "Money" section of the newspaper becomes the first few sections that you would read everyday without fail, hoping to understand what is happening to the stock market, the economy and individual companies. You would google for the latest developments whenever your stocks have unusual price movements. Your ears would straighten up whenever you overhear any conversations on the stock market. You would learn to read all the financial jargons in financial statements and/or cryptic technical charts in the hope of finding the next winners.

I actually did not spend much time brushing up on my investment skills from 1987 till 1998, as I was still studying then. But I had time to experience the crash of 1989 (crash for no good reasons), 1990 (Iraqi invasion of Kuwait), 1997/98 (Asian Financial Crisis) and between them, the super bull run of 1993/94 (Singtel IPO).

In Jun 2001, about 3 years after I graduated from the university and was investing in the stock market with my own money, I had picked up a second-hand investment book titled "Buffettology" from a book fair by sheer luck. It was written by the former daughter-in-law of Warren Buffett and described the methods Warren Buffett used to analyse stocks. The methods in the book became the model that I used to analyse stocks to this date. Equally importantly, the book triggered my thirst for investment knowledge. I became a regular visitor to the investment section of the National Library, reading investment books ranging from time-tested ones like "The Intelligent Investor" to more contemporary ones carrying fascinating titles like "Dow 40,000", "Dow 100,000", etc. It was like Forrest Gump who kept on running non-stop while I kept on reading. Eventually, I stopped reading. But by the time I stopped, I estimated that I had probably read half of the equities investment books in the National Library. As for the other half, I had read the summary on the back covers and figured out that the content was similar to the half that I had read.

Along the way, I tested my new-found stock analysis model. The first stock that I had bought based on value investing was ASA Group, which has since been delisted from the Singapore Exchange (SGX). It was in the business of producing ceramics in China and was virtually unknown in the stock market. It was a great leap of faith into value investing by buying into a virtually unknown company. I bought it at an average price of $0.227 in Jan 2002 and sold it at $0.295 in Aug 2003 for a 30% profit. It was a small profit, but it was enough to know that value investing worked. Value investing became my winning formula.

The First Pot of Gold

Once you have tested, fine-tuned and kept faith with your winning formula, you will eventually make your first pot of gold. For investors who invest for capital gains rather than dividends, some of you might, like myself, wonder whether you would make a very good fund manager, making loads of money for your clients. You might also wonder whether you could write a best-selling investment book for the investing public. You might also want to challenge yourself and sit for the Chartered Financial Analyst (CFA) examinations.

In early 2004, I made my first pot of gold with my winning formula, generating a realised return of 33% on my invested capital. Using part of that profits, I enrolled myself in a part-time course in Masters in Applied Finance, graduating a year later. I also sat for the CFA examinations, passing all 3 levels in 2006. It was actually quite fun studying, since I was studying to improve my investment knowledge rather than for the degree to enter into the financial industry. The things that mattered were not the grades on my transcript, but how could I apply what I had learnt to make more money from investments. In any case, I became too old at the age of 30 to enter the financial industry.

The Unravelling of the Winning Formula

The problem with winning formulas is that they do not always work. Value investing was a time-tested winning formula, producing many famous investors such as Warren Buffett and Walter Schloss. For me, it had produced 18 multi-baggers over the 16 years since I started investing with my own money. But it also produced 3 wipe-outs and 8 write-offs (collectively called the "salted fishes"). It is sobering to note that I had 18 chances of doubling my money, yet, how many salted fishes do I need to encounter to lose it all had I steadfastly held on to my "winning" formula, averaging down as the share price dropped? Just one. And there were 11 of them! 

Many years later, when I looked back at this period of time, I realised that the pot of gold was probably a result of a rising tide lifting all boats rather than some truly "winning" formula that I had. At that time when you were winning in the stock market, you would feel that your "winning" formula was working well, not realising that there was probably a greater force at work. Occasionally, it is important suspend your belief in your "winning" formula and let risk management measures take over. It is no shame to make mistakes and learn from them. Many famous investors have recovered from mistakes early in their investment journeys and become stronger as a result. It would be truly wasted if you got burnt so badly that you stop believing in investing.

The Bailout

If you got burnt too badly, you would need a bailout from your parents, which I hope will not happen to anyone. For me, the bailout was a virtual one, happening before I started investing with my own money. It was during the Asian Financial Crisis in 1997, and I was one year away from graduating. Being the "smart" guy in the family, I recommended to my father to buy a financial stock that had fallen from $3 to $0.75. Unfortunately, we never saw the money on this stock again. I never mentioned about the stock again, and he never reprimanded me for it.

The problem with regrets is that they do not hit you straight away. Many years later, when the incident has long passed and you are in the comfort of your zone, you begin to wonder how did your parents managed to find the money to bail you out. Did they have to eat the humble pie and seek help from relatives and friends? As a son, you would want to do everything you could to provide them with a comfortable retirement, yet, instead of contributing to their retirement, you had to take away a part of their retirement nest-egg and/or make them suffer the humiliation of seeking help from others for your investment mistakes. You wished that your parents had reprimanded you harshly or beaten you. No, they did not. They did not grumbled nor barred me from investing further. They took it on their chins and moved on, as if the investment mistake was theirs and not mine to begin with. If ever there was any take-away from this blog post, it is this: Never, ever, put yourself in a position where you might need a bailout from your parents, no matter how good you are now in the game of investing.

Conclusion

You might be wondering why are you listening to rumblings from an investing old-timer who is probably jealous of your investment success. This is written for those who are willing to listen to the heartaches I have encountered so that you could avoid them. After 28 years of investing (including the 12 years I was monitoring stock prices for my father), I have been through the excitement of reading practically all the equities investment books worth reading in the library, dreamt the fantasies of becoming a successful fund manager and writing an investment best-seller, and gone through the regrets of requiring a bailout from my father. I am now just a boring investor.

See related blog posts:

• Investing Is A Life-Long Learning Journey
• How Long Would You Hold A Value Stock?
• An Advice for Myself