Value Investing 01 (May 08 - Dec 08)

[Cheng]

When someone tells you that they are value investors, what first comes to mind? "Buy and Hold" strategy, invest for the long term, it is futile to time the market, buy on value at a margin of safety and invest in your circle of competence. Is that all? So easy? That is what I thought at first. OK, besides those difficult to understand FA analysis and valuation of companies, I shall touch on the general concepts of value investing that most value investors have not noticed.

"Buy and Hold"

Warren Buffett popularised this strategy and practices it more than often because he had an eye for scouting what I called "super companies" like Wal-Mart, Coca Cola, GEICO. They had superior earnings growth year after year for many years in the past(or now? I haven't looked at their income statement). They had ROE>20%, EPS growth per year and quarterly of >25%. Superb growth companies. Looks like C=current quarterly EPS and A=annual earnings increases, from the "CAN SLIM" method popularised by William O'Neil. They always look for companies with exceptional growth.

What most value investors did not notice is that Warren Buffett do not buy-and-hold forever for every company he bought. He sells off companies that he thinks is over-valued like PetroChina or mistakes like Dexter Shoe and US Air. Although there were no losses but very little gains as capital was not properly allocated. He did not allow his portfolio to tank 50% in value and more or even average down on them. Warren Buffett soon realises his mistake and did not chase good money after bad companies. In fact, he averaged up on Wal-Mart when prices kept soaring over the years with earnings.

If you had read his letters to partners, the Buffett Partnership performed better in a bear market than in a bull market using the Dow as yardstick. In fact, his portfolio has never recorded losses in a bear market. I believe he took some profits when signs of the bear is clear.

On investing long term

Benjamin Graham said "In the short run, the market is a voting machine but in the long run it is a weighing machine."

Value investors never realise that in the short run the market is always correct. Never try to beat the market because the market is bigger than you. It is like trying to out debate with millions of people and you will lose badly. If you think Citi was cheap when it is trading at $30 and 2 months before it was $50, you are so wrong. The market does not think this way and prices continue to tank until $20. At $30, I believe most investors know that prices will definitely go down further and why would someone buy at $30 knowing that it would fall further?

I used to think that it is futile to "time" the market. However by saying that, I am telling myself that I do not understand market psychology which is a very important characteristic in investing. By timing the market I do not mean by the exact buy and sell point of the stock. It is more of demand and supply. Take Koda for instance, I know it has very good management, stock selling at below NAV. However I would not buy it now because demand for their products are decreasing due to the slow down in global economies. Most value investors fail to revalue their companies realising that the bear is coming and sell them when they think it is overvalued.

By failing to do so the value investor did not realise that earnings would slow down or turn negative in a bear market, hurting overall performance of the company in the long term. If in the next 10 years the company can collect 100M of free cashflow, adding 3 years of bear market, they might have 60M at the end of 10 years. That is why prices go down from the high valuation in the previous bull market. Things would have been so different if we are in a bull market now right? It is not very difficult to tell from a bull and bear. Nevertheless nobody can predict the extact top of the bull or the bottom of the bear. We just have to be patient and analyse the market and companies carefully. Warren Buffett also did not rush to buy companies immediately few weeks after the sub-prime crisis. He knows the market very well.

Ps: Have been reading on "Can Slim" and TA stuffs. Some of the concepts makes sense to me and might have influenced my thoughts on value investing. I find that I understand value investing a lot better now. =D

[winston]

Hi Cheng,

I have just sent you a PM.

Take care,
Winston

[Musicwhiz]

Generally the consensus seems to be that value investing is close to impossible in Singapore market because of the low volume, small market and lack of sophistication. Value investors also generally get more flak as compared to other types of investors/speculators (for some reason).

I am not here to debate the merits or demerits of value investing vis-a-vis other methods, but I think value investors should be accorded some respect for their belief system even though it may be flawed in certain ways. We are all learning and a value investor is human too, thus is bound to make mistakes and "slip up". This does not mean the method does not work, it is simply the practitioner who needs to improve.

I do note that other methods which incorporate some form of market timing or market psychology reading do seem to be more popular than "pure" value investing. Perhaps it's a sign of the times.....

[winston]

This does not mean the method does not work, it is simply the practitioner who needs to improve.

Agree. And during bear markets, there are normally a lot of M&A activities. And those stocks that are bought out are normally well run Industry Leaders, trading at attractive multiples.

Also, when stocks does rebound ( maybe in two years ), the ones out the gate would normally be well run Industry Leaders.

To me, the most important thing now is to identify catalysts that would move a stock and then wait for those catalysts to happen before buying...

[blid2def]

BTW, just for the record, and to pre-empt any misunderstandings from other newer members (I'm pretty confident the members who've been here for a while know the following already):

Huatopedia is neither biased towards being TA practitioners-only, nor is it a FA/VA practitioners-only forum. We're simply an "all comers" traders'/investors' forum. Believers in each camp may make their own noises and to different decibel levels, but ultimately, this forum is "school-blind". So, if you're from one school or another, don't be discouraged by arguments here against your school of thought and think that this place is "anti-you".

[Musicwhiz]

If people are that good, why write books to share their golden geese. Philantropy? Again something for you to ponder.

I do agree 100% with this point, this is why Buffett has not written a single book !

[Musicwhiz]

By the way, just to add:

I think I've learnt more about value investing in the last few months than the whole of lasy year and since Sep 2006 when I "switched" to value investing. It encompasses a lot more than fundamental analysis, that's all I can say. It is a discipline, a mindset and a way of looking at things and it's not easy at all. Suffice to say that it is just the beginning of my value investing journey. The end will only come when they nail shut my coffin !

[millionairemind]

Hello Cheng, your post certainly generated alot of views..

Let me be the first person to welcome you to Huatopedia and thanks for your first posts. We looked forward to many of your posts in the future.

FA/TA, growth, value whatever lah... as long as it makes you money and minimizes your losses in a bear market, that is a good strategy.

We all have to learn our way thro' the market cos' it is the best teacher

[fclim]

well said, grandrake... it is HA here man....
HA = Huatopedia Analysis... as long as you can make money, well... thats it!

well, with regards to the initial post... i think the examples cited might be well... ermm... personal opinion / analysis of what mr WB is thinking? I try to be careful, when I quote examples, cos even with the full context, the takeaway is different for everybody...

anyway, i much prefer mr munger's explanation of the stock market being the horse-racing track (sortof)... again i run the risk of mis-quoting/mis-understanding mr munger...

from my impression, mr munger compares the stock market to the horse-race, where the odds and bets are always changing.... and there are always people who bet against and bet for the particular horse....

most of the times, the house wins, coz there is a 'tax' / 'fee' when placing bets... so the odds is against the gambler, rather than the house...

anyway, there are occasions, when the odds is very skewed, to the benefit of the gambler, but it takes a very experience guy to figure out when such a situation arises... most of the times, i think mr munger just sifts through the numbers, understand them and try to wait out for the appropriate situation...

so, it is not impossible to beat the house and win big, just that it takes a lot of hardwork and experience... even then, there is always the risk of mis-calculating the odds...even for very experienced guys...

oh just for the record, i'm now more belong to the FA/VA camp... but on occasions previously, I sometimes think I'm more TA... of coz there was a 'dark' period that I consider myself GA (gambler analysis)....

have fun,
fc

[helios]

mei mei is speaking from a Brand perspective,

i would define Value as the freeplay rights that a listed Company is able to separate/ extract its Brand identity, further exploit on its Brand (& the customer goodwills aspects that it has built up) ... e.g. it is the free use [licence] of the Virgin Brand and replicate this on multi-businesses - in dynamic situations.

for example, Virgin has detailed an agreement between themselves and different entities it represents. This kind of agreement would mean to re-brand all consumer operations with the Virgin brand within one year of the Virgin board approval of the brand license. Why do they need to do Valuation in their portfolio? Because combining their businesses will make them the first UK company to offer quadruple play to customers – Virgin Airlines, Virgin Mobile, Virgin Broadband, Virgin TV, Virgin Records ... (this list can be endless)

So, the different Virgin business entities will need to enter into a 30 year exclusive brand licence with Virgin Enterprises Limited for the use of the Virgin brand. And, Richard Branson’s Virgin Enterprises stands to make 0.25% of ntl Telewest revenue from licensing the Virgin brand to ntl Telewest, and at minimum £8.5million per year.

i know, many aisa brands are unable to capitalise on their Brands due to the lack of critical mass, as musicwhiz has mentioned - it is the small market size - who knows? MZ can be a good marketeer?

What if, Mr. Ho [or the bank] sells off the Banyan Tree to another hospitality player? he still holds the Banyan Tree Brand Licence, right? he explictly mentioned this ideology in the Dialogue Forum. (oh, i don't know if he can be as rich as Richard B.?)

What is deemed as the instrinsic value to the buyer? this will need to be rated, audited, and valuated through complex metholody. Yes, as Winston has highlighted, these are M&A opportunities and consolidations ... hence, intangible assets [values] will be recognised by investors/ buyers?

for example, in China micro-environment, we have OEM players to become OBM ... (own Brand Manufacturer) ... then, we are now shifting our gears to talk about Value in the eyes of the Chinese being able to grow the brand business into sustainable brands ahead of times.

my bottomline: sustainability is value.