Will Value Investing Cease to Exist Soon?

With the rampant proliferation of workshops, courses and books purporting the theory of value investing the Warren Buffett way, will there be lesser value buys in the future when more investors follow the “rules”? Will the stock market tend to become more efficient in the future? Will value investing cease to exist soon? These are scary thoughts that a value investor would not want to see being materialized.

Nowadays, when you flip open the Straits Times, there are many advertisements about courses on value investing showing up almost everyday. Just recently, more books were published on investing like Warren Buffett. I came across  three and they are “Creating a Portfolio like Warren Buffett”, “Moats : The Competitive Advantages Of Buffett And Munger Businesses” and the best title so far goes to “Warren Buffett Invests Like a Girl: And Why You Should, Too”. More people are becoming financially savvy and more knowledgeable. I’m taking notice of all these as I’m into value investing and my eyes choose to “focus” on these proliferation. Just think about it. Let’s say you have chosen to buy a particular model of a car. As you are out-and-about, you will take notice of the very same model of the car you have in mind and see many cars of the same model on the road. They were all the while there but your eyes chose not to focus on them. Even though there has been a perceived proliferation of value investing courses and books, my take is that value investing will not cease to exist.

Why would value investing still prevail? Most people are still encouraged to trade and make quick bucks out of the market. People don’t like waiting and long-term investing is an oxymoron to many. Just look at how the prices of stocks shoot up when there’s a good news and prices plunge when there’s a bad news. Institutional traders, part-time/full-time traders, people who don’t know much about stocks, people looking to make quick bucks and people with “itchy fingers” still trade widely in the markets. The media (TV, newspapers, Internet, etc) encourages trading. Research houses and analyst reports encourage trading. All these heavy buying and selling bodes well for value investors. Trading creates liquidity and volatility. Good news = buy, bad news = sell become the rules of the day. When the crux time comes and a crisis strikes, not many have emotional stability and thus, sell heavily in panic. They flee the market wondering why they bought the stocks in the first place. This is when value investors rejoice. It’s like a Great Singapore Sale, except that now it’s in the stock market and it can happen in any month.

There can be lots of courses and books on value investing but not everyone’s psychology is suited for long-term investment. It’s the psychology and lack of emotional stability that will cause value investing to flourish and has caused it to flourish since the time of Benjamin Graham. When crunch time comes, how many investors become greedy when the world is fearful? Not many. This was seen in the Great Financial Crisis of 2008/2009 and it was seen in all the past crises. It will still be seen in all the future crises that’s about to come. Old habits die hard.

First-ever Owl Café at The Star Vista

Singapore’s famous Owl coffee brand will open its first-ever cafe called “Owl Café” at The Star Vista. The mall is slated to open beside the Buona Vista MRT station in September 2012. It is owned and managed by CapitaMalls Asia.

“A familiar and well-loved brand of award-winning coffee, Owl will open its first-ever Owl Café at The Star Vista. The café will offer various blends of authentic Straits Asian-inspired coffee with Straits Asian food and desserts.” – from CapitaMalls Asia Media Release on 21st March 2012.

Owl is owned by Super Group. In my previous post on Super (under the “Future Growth” heading), it was stated that Super was looking to open a cafe. The Management of Super has put money where its mouth is and has forayed into a physical store. This clearly shows that the Management of Super delivers on what it promises. If the Owl Café really takes off and proves to be extremely profitable, I’m sure there will be more cafes by Super springing up in other locations. And if I’m not wrong, this is the first local coffee brand that is opening a cafe. All the best, Super!

Coffee with FFN and Ken Chee

Ken is the CEO and Co Founder of a private investment company, 8 Investment Pte Ltd, which focuses on business, equity investments and education.

FFN: At what age did you get started in investing? 

Ken: I started investing in 2003 when SARS hit. First stock I bought was Singapore Stock Exchange (SGX) but I was studying this stock since 2002.

FFN: How did you get interested in investing and who inspired you to get started?

Ken: The situation that “inspired” me was when my family went through the Pan Electric Crisis in 1985. My father lost a lot of money in the stock market during that period. The lesson learnt was very painful.

I took a diploma in Singapore Poly from 1982 – 1985. During that period, I was thought to be a trader instead of being an investor. In 1995, I met Nick Leeson, the guy who brought down Barings Bank, in SIMEX. Since then, I decided not to become a trader. I took a degree after my National Service and worked for the financial industry. During my interactions with industry veterans, someone told me about value investing.

FFN: How do you choose which stocks to invest in?

Ken: First I start with circle of competence. The reason why I bought SGX was that it was the only company I understood. I was working in a financial information company. Our customer and supplier was SGX. My ex-company took real-time information from SGX and processed the information and then we sold it to banks. Although I sell information to banks, I don’t understand banks. Even up to today, I still don’t understand how some banks operate. However, for SGX, I understand it. They have a monopoly, asset-light, low capital expenditure, among others.

FFN: So has your circle of competence become bigger over the years?

Ken: I hope so. I’m still learning everyday and we make mistakes. We still can make mistakes. Overall, I have made more gains than losses. It’s ok to be wrong but it’s not ok to stay wrong. Just admit the mistakes. From the mistakes, we start to learn more and more.

FFN: Warren Buffett didn’t go into technology stocks until very recently. Do you don’t like technology stocks too?

Ken: I think it depends on what kind of technology you are talking about. I like companies that supply certain parts to a technology company. For example, Corning makes the glass screen for smartphones. I rather look at the part suppliers than the technology company itself.

FFN: What are some of your strategies you use to buy stocks?

Ken: We use the 3R approach which is buy the right business model, with the right management and at the right undervalued price.

FFN: What are some of the stocks in your portfolio currently?

Ken: I bought SGX at $1.60 in 2003 when SARS hit and it was a great opportunity to buy this company. I sold it at around $7.50 – $8.

Another will be Vicom. I bought it at about $1.70 and I’m still holding it. The dividend yield I’m getting now is around 9%.

I also bought SATS. Not a fantastic business model but I bought at a low price at around $1.30-$1.40. Dividend yield is also around 8-9%.

FFN: Where and how do you look for companies to invest in?

Ken: By daily observation. I will be very curious and ask questions to unearth it.

FFN: What are the mistakes you have done pertaining to investing and what are the lessons learnt?

Ken: Plenty. Being overconfidence, making wrong assumptions, moving out of circle of competence without realizing it. Talking about the last one, 2-3 years ago, we were looking into the shipping industry as they were going through a rough patch. We bought into Courage Marine. Financially, they are stable and have prudent management but the industry mechanics itself is eroding and there’s oversupply of ships.

Some companies we bought into seem like a value buy at first but it turned out to be a value trap.

FFN: So, how do you know you have bought into a wrong company?

Ken: The business itself will reflect the results. Quarter to quarter, the revenue tanks, earnings keeps going down. Free cash flow becomes no free cash flow.

I feel it’s not really prudent to watch quarter-to-quarter results too closely as it’s being short-term biased whereas value investing is for the long-term. We should instead be looking at yearly results. What’s your take on this?

I think the key thing is not to buy at one shot. Watch the story unfold and buy bit-by-bit. Buy with the right margin of safety. We saw the net profit and revenue was coming down but we bought more. It was stupid of us. Not only that, after we realized our mistake, we didn’t cut loss, that’s even more stupid of us. Holding our view too strongly is sometimes our downfall. We need to accept that we have made the wrong judgment call and cut loss.

When we invest in a company, the questions we need to ask is “Will this company be still around 10 years’ down the road?” and “Will it be more valuable 10 years’ down the road?”. I think if you cannot answer these two questions, looking at quarter-to-quarter results is not going to help.

FFN: You said one needs to ask if the company will be around 10 years’ down the road. Taking Corning as an example, you wouldn’t know ten years’ down the road if the company will still provide to smartphones as technology is evolving so fast.

Ken: Corning is not only doing for smartphones. They can scale this business into other things into the future when technology picks up more. This is a small piece but in the future, they can make it into a big piece (size of a conference table). For example, the whole conference table can be made into a screen in the future and you wouldn’t even need a phone. All the communication can take place through the conference table. It’s the vision and how you imagine it into the future. It’s whether you can visualize and see the usage of the products in the future. Sustainability is important.

FFN: What psychology do people need to succeed in investing?

Ken: Emotional stability. You must be able to understand what you are investing in. There are four emotions that are deadly for value investors – excitement, fear, greed, envy.

FFN: So, how can investors be more emotionally stable?

Ken: Awareness leading to choices. Being aware emotionally will help you make better choices.

FFN: What lessons have you learnt over the years as an investor?

Ken: I’m still learning. In life, you never stop learning. The more I read, the more I realize I don’t know. Life is constant learning.

FFN: There are cases where you learn more and you get confused more. You get diluted by other people’s views of investing. How do you mitigate this?

Ken: When you are learning, you need to exercise independent thinking. We need to ask ourselves, “Whatever I’m learning, is it based on facts or opinions?”

FFN: How was it meeting Warren Buffett face-to-face?

Ken: I met him in 2009. It was cool meeting him. He’s a very nice guy. I bought his “Snowball” book and he autographed on it. Bill Gates, Charlie Munger, Warren Buffett were in the room. It was fantastic and amazing. I encourage all shareholders of Berkshire Hathaway to go. It was a rock concert with 35,000 people.

FFN: How about an advice for the youth who are looking to build up their future?

Ken: Very good question. Develop a habit of saving. Get the right investing knowledge. The greatest resource they have is time as time allows compounding. Don’t ever get yourself into debt. Buy things they can afford. Understand the greatest things in life is not money and passion they have in their work. They must develop a sense of purpose in life and the money will have a meaning. Without a sense of purpose and they are only in the pursuit of money, life itself will become meaningless.

FFN: What kind of knowledge does one need to start investing?

Ken: The basic accounting knowledge must be there and must understand company from an investor’s point of view. Investing requires intellect. Investing is simple but not easy due to emotional stability.

FFN: How did your personal financial planning changed after a big change in your life eg. marriage, having kids, buying a house, buying a car?

Ken: I lived a very lean life when I started working. I cycled to work. During lunch, I went swimming without eating lunch. I only ate fruits during lunch.  There are certain periods where I don’t even use a single dollar. Sometimes people will buy me lunch or I cooked at home. I saved 70% of my income and started investing. This was from 2003 to 2007. I did all these to save money and invest.

My lifestyle changed after I got married in 2009. I got a HDB flat even though I could afford a condominium or landed property. My first car was a 9th hand BMW. One year later, sold it away and bought a Mitsubishi when COE was $0 (undervalued). I got married, bought a house and bought a car all within 6 months.

FFN: Would your lifestyle change after having kids, for example?

Ken: I don’t think my lifestyle will change. Today, I pamper my wife a bit. We go for cruise. We no longer need to be very tight. I will spend money on things that give moments of happiness, like travelling and eating out.

FFN: What does financial freedom mean to you?

Ken: Having choices to do what you want.

FFN: Give us an “insider look” of a typical day in your life from the moment you wake up to the moment you sleep

Ken: I wake up at 5am and go for exercise like running. I will come back and read. Reach office at around 9.30am. Work till 4-5pm. I will attend talks, meetings, spend time with family and friends for dinner. At night, continue to read. If possible, watch movie at home with my wife. Back to bed around 12am.

FFN: If you could summarise your whole life in one word, what would it be?

Ken: Integrity.

FFN: A parting shot for the readers…

Ken: Come and learn more about value investing at our Millionaire Investor Program Asia. To find out more, go to http://millionaireinvestor.asia.

Management Integrity and Competence

How well do you know your spouse or children? You might have stayed with your spouse and kids for many years but can you say for certain you know every single thing about them? Knowing about people in-depth is a very challenging task. In the same way, when researching into a company, the most difficult task to ascertain is the integrity of management. However, that doesn’t mean you can chuck aside this nebulous part when researching into a company. Looking into the management is one of the most important aspects of investing. If you don’t know who’s running the company, how are you going to trust your hard-earned money with them?

To get a glimpse of the management’s integrity and competence, you can read the Chairman’s statement that is in the Annual Report of the company you are interested in. You have to read the statements from all the years since IPO. If this is too tedious, at least read the past five years of the Chairman’s statements. By reading the statements, you can know the style of the management and if they have delivered on their promises. If in the past, the company has promised future growth, discern if the promise has been upheld. Also, look for frank and candid way of admitting any mistakes made. Check for consistency over the years. Do note that the Chairman’s statement is usually beautified to promote the company so you should always read the statements with a pinch of salt.

You can also look at the profiles of the managers and directors of the companies. How many years of experience do they have? What are their achievements so far? What educational qualifications do they have? Also, look at the company’s mission statements, vision and goals. Does it empower the employees to strive towards a better future for the company? Or is it just corporate hoopla?

You can also go to the company’s Annual General Meeting (AGM) and look at how the meeting is conducted. Is it conducted in a business-like way? Also, notice how the managers and directors carry themselves when interacting with people. Are they humble? Are they approachable and friendly? Are they forthcoming? Observe the body language of the management when someone hits the nail by posing difficult questions about the business. You can ask certain questions during the AGM that will uncover the management integrity and competence. If you are not a shareholder of the company, you can email the Investor Relations department and request to attend the AGM as an observer. However, you will not be allowed to ask questions as an observer, usually.

When you are at the AGM, you can also question non-shareholders and non-stakeholders like cleaners, deliveryman, etc on how the management interacts with them. Do they treat them with respect and smile at them? Are they friendly towards them? This can be one of the best ways to uncover the integrity of the management.

On top of that, check the SGX filings for insider ownership and for any share buybacks done. Insider ownership allows the management’s interest to be aligned with the shareholders’ interests. Note that share buybacks should be done when the company’s share price is undervalued and not when it’s overvalued.

Also, check the compensation package of the management and directors and ensure they not overly paid. They must be paid according to their performance in the company. The compensation is revealed in the Annual Report. Also, ensure that the compensation is in line with peers.

Management competence can be found from the financial statements. Are the margins high and are they increasing over the years? Is the ROE high and increasing over the years? Are the retained earnings and free cash flow increasing over the years? All these reveal if the management is capable enough to increase shareholders’ value.

In conclusion, knowing the integrity and competence of the management is paramount when investing in a company. The integrity and competence of the management can be found from the Annual Reports, by going for AGMs and by looking at insider ownership and the financial statements, among others. For a bettor betting on a particular horse to win a race, he has to know if the jockey is capable enough and has experience. Similarly, as an investor, we have to uncover if the management is competent and has integrity so that we will know our money is in safe hands.