We have sent out a survey during the last few weeks to ask our readers for their most pressing investment questions. We have gotten more than 200 questions from all of you! We have finally been able to arrange and classify them into different investment topics and here are my answers for all of them.
Thank you so much for replying our survey and we hope the answers would help you get a better understanding what investing is really about.
ON DEEP VALUE INVESTING
Question #1: Can deep value investing work in Asia?
Answer #1: Yes. If deep value investing speaks to you, it is definitely a possible investment strategy here in Asia. However, in my opinion, deep value investing is a considerably more capital and time-consuming strategy where you have to invest in a larger pool of companies to diversify away from the risk of investing into value traps. Professional deep value investors who I have interviewed constantly invest more than 200 stocks at a time. It might be tough for a retail investor to practice such a style. And if we buy too few stocks using this style, it can be quite risky.
ON FINANCIAL ANALYSIS
Question #1: How should we read financial statements in an annual report?
Answer #1: The most important portions to read in financial statement are
- Management analysis and discussion
- Chairman statement
- Income statement
- Balance sheet
- Cash flow statement
- Notes to the Financial statement
Question #2: How should we read and understand the Balance Sheet, Income Statement and how do we link the figures and tease out the critical numbers like P/B, P/E, Dividend Ratio, ROE the correct way and not to get hoodwinked?
Answer #2: We have published dozens of articles on financial ratios and how to use them. You can view them here: https://valueinvestasia.com/how-to-invest/financial-ratios/
Additionally, if you are interested to know more about the important financial terms, you can sign up for our FREE investment course where we will talk more about it here: https://valueinvestasia.com/freecourse/
ON CHINA A-SHARES
Question #1: What are the options available to invest in China A-share?
Answer: Most brokerages in Singapore should have access into China A-Shares now, you can check with your brokers. Alternatively, you can consider using Interactive Brokers, an online brokerage from the United States. They do offer access to A-Shares, you can find out more about them here. https://www.interactivebrokers.com.hk/
Question #2: Is the China market slowing down?
Answer #2: The economy is slowing yes. But the stock market might not be 100% correlated with the economy, and vice-versa.
Question #1: How to avoid value traps, and what are some accounting red flags to look out for?
Answer #1: The best way to avoid value traps is to invest in companies that are at least showing some signs of growth rather than focusing on companies that are just “cheap” statistically. A “cheap” company with a dying business will see its value just deteriorate away.
We do detail accounting red flags at length in our book, and if you are interested, you can find more information here: https://valueinvestasia.com/value-investing-asia/
We also recommend a good book on the topic – Financial Shenanigans, one of the best book talking about this topic. Click here to find out more.
Question #2: How do we distinguish between a stock that has a run-up in price with still room to appreciate, and a stock that has reached its peak?
Answer #2: I focus a lot on the quality of the management and the market potential of the business. If a company has a huge market potential compared to its current size and is run by high-quality management, I tend to stay invested even when the price has run up. On the other hand, if it is just a mediocre business, I would sell it if it has passed my estimated value.
Question #3: Methods to be used to determine the intrinsic value when evaluating property and palm oil companies?
Answer #3: A good way to value property companies could be just from its book value, with reference to its long-term P/B trend. Or you could do a revalued net asset value (RNAV) calculation on its asset base. For companies in the development business, you might also want to take into account the possible profits coming from its planned developments. For palm oil companies I would use a Price/Normalised earnings to check their valuation. This is because palm oil is a cyclical industry and I prefer to view the earnings of such companies over the average of a few years to balance out the business cycle.
Question #4: How can we to value banks?
Answer #4: A simple and direct method is to use a P/B approach. However, I would compare with the bank relative to its own long-term average P/B rather than to its peers. This is because better-managed banks tend to have a higher P/B than badly managed banks. If you just go and invest in the bank with the lowest P/B ratio, most likely you would end up investing in a badly managed bank.
Question #5: What is a simple method to value a company?
Answer #5: It depends on the type of value are you expecting from the company. If it is an asset value company, a simple way is to use a P/B ratio BUT after making an adjustment to the book value.
If it is an earning value company, the simplest method is to use a P/E ratio BUT after making an adjustment to the income statement to remove one-off transactions.
Question #6: What is your view on discounted cash flow and margin of safety?
Answer #6: I think valuation is only a guide, and we should not take the estimated value of a company too seriously. My own opinion is I place a lower weighing on valuation for high quality, high growth companies but place a higher weighting on valuation for mediocre companies.
Question #7: Among EV/EBITDA, ROE, P/B or DCF, which is the better valuation model?
Answer #7: It really depends. Among the four, ROE is not really a valuation method but rather just a method of how well the company is in reinvesting its capital, EV/EBITDA tends to be more commonly used for companies with higher debt levels. P/B is good enough for companies with asset value, where we are buying the company because they have high-quality assets with a high liquidation value. Discounted cash flow is good for earnings value companies which have stable earnings power. The more stable the earnings, the better a DCF approach will work out, well it also largely depends on your assumptions used. Remember rubbish in, rubbish out.
Question #8: How accurate is valuation in achieving the target price?
Answer #8: 100% inaccurate! Haha. Valuation should only be a guide for us to gauge the current pricing of a stock. However, due to the high number of assumptions needed to do a valuation, we should not take it as a law. It is just a guide.
Question #9: How can we derive a target price?
Answer #9: It depends on what type of value we are expecting from the company. In our book, we discussed that there are only 3 types of value to be extracted from a stock; Asset Value, Earnings Value, and Growth Value. For an asset value stock, it is easiest to use a simple P/B approach to estimate its value. For Earnings value companies, we can choose to use P/E, dividend yield or discounted cash flow to value the company. For growth companies, we can choose methods like P/E or PEG (Price to earnings and growth) ratio to value a company. Even so, a range of values is more realistic than a target price.
However, my opinion is that valuation is just a guide, and we shouldn’t take it too seriously.
Question #10: How do we to determine the intrinsic value of REITs?
Answer #10: The simplest way is to just use its distribution yield, but we have to ensure that our expected yield is sustainable.
Question #11: When should we sell?
Answer #11: For me, the three main reasons for selling are:
- You need the cash now
- You have made a mistake, meaning that the original thesis of investing in the company no longer holds true.
- You found an even better opportunity
I do not believe in selling just because a stock has risen or fall in price. I always check back to the fundamental of the company to decide if I should be selling it.
Question #12: Where do we gather the information required?
Answer #12: The best way is to read the annual report of the company. Websites such as SGX.com, Bursamarketplace.com, aastocks.com, Morningstar and just googling news about the company are great tools to find information.
Question #13: How you arrive at your valuation and how you adjust for Chinese companies’ “creative accounting”?
Answer #13: We can’t. All we can do is to check for financial red flags and avoid such companies And if we cannot find any, what we can do is to incorporate a margin of safety in our assessment of the company. From a portfolio level, we can minimize our risk by keeping our investment in the company to a comfortable position.
Question #14: Is the discounted cash flow valuation model still relevant in today market?
How do you value growth stock?
Answer #14: Yes, but I only use it for companies with very stable earnings and cash flow to minimize the risk of error; in other words, such companies have less uncertainty in the near future, more of business as usual going forward I do not place a great weighing on valuation for growth stock because I make sure I only invest in growth companies with
- Huge market potential; and
- Run by world-class management
Valuation is also always the last part of my investment research process. I rather buy a great company at a fair price than a mediocre company at a cheap price.
Question #15: Should we have a stop loss?
Answer #15: I do not use a stop loss. Mainly because I have formed my investment process to focus on high-quality businesses. So, I always make my investment decision on the fundamental of the company rather than the stock price of the company. If a stock has its stock price fall by 50% but I do not see any major issue with its fundamental, I will not sell. But if I see a decline in a company’s fundamentals, I would still sell even if its stock price is rallying.
ON MARKET TIMING
Question #1: Is the SG market currently overvalued? The US markets have had an incredible run for the last few years, the SG market not so much. If the US markets correct by 20%, how much will the SG markets be affected?
Answer #1: Personally, I do not feel the Singapore market is overvalued. However, I make an investment decision based on the company rather than how the market is doing. It does not mean that everything is overvalued when the market appears to be overvalued, and vice-versa. So, I might still invest in a particular company even when the market appears to be overvalued from traditional metric point of view.
I do not know how much the Singapore market will be affected by the US market. Traditionally, all markets are affected by how the US market is doing, however, the correlation seems to be decreasing in recent years.
Question #2: What is the right time to invest and correspondingly, the right time to exit? Is there a method or indication on when to exit?
Answer #2: Not really. However, I think we should not base our investment decision solely on the price that appears “cheap”. For me, I do not base my investment on where the market is. I always focus on finding high quality business which I want to be a part of for the long term. This is because good growing companies tend to grow its value over time. However, if we just base our investment decision on where the market price is, we will be pressured to act too often and make more mistakes.
In my opinion, the three main reasons for selling are:
- You need the cash now
- You have made a mistake, meaning that the original thesis of investing in the company no longer holds true.
- You found an even better opportunity
I do not believe in selling just because a stock has risen or fall in price. I always check back to the fundamental of the company to decide if I should be selling it.
Question #3: How to know the day’s (not the exact time) big and smart money may be moving?
Answer #3: Personally, I do not follow “Smart Money” because I 97% of all fund managers underperform the market anyway. However, there is a mobile application called Spiking: https://spiking.com, which helps you track investment made by funds or billionaire investors.
Question #4: Will the US market crash in 2018?
Answer #4: No one knows for sure, but I do feel the US Market is slightly on the high side.
Question #5: Should we continue to invest in equities in 2018, bearing in mind the valuation is rather high.
Answer #5: Yes, I am still invested because investing in great companies tends to grow your wealth over the long term compared to just keeping it in cash. That said, I know friends who have continued investing, with a more stringent screening criteria.
Question #6: Most markets are 52 week high or breaking records. Bargain stocks are few in between. Should we just take a back seat?
Answer #6: For me, no. I am still invested but I keep a good healthy 20-25% of my portfolio in cash to be able to take advantage if the market does crash.
Question #7: In your opinion, when will be the major correction in the stock markets?
Answer #7: Yes, very possible. But the market can rally 50% before it falls 30%. Because we never know when is the peak or bottom, I always prefer to just stay invested because the market tends to rise over the long term while my paper cash tends to depreciate over the long term.
Question #8: How to decide when to Enter & Exit the market? When to buy or sell a stock?
Answer #8: I think it is better to view the stock market as just another way to store our wealth. When you look at some of the richest people in the world. When media reports that Robert Kouk is worth US12.2 billion, it does not mean he has US12.2 billion in CASH. In fact, most of the richest people in the world store their wealth in stocks. This is because the stock markets tend to appreciate over the long term while paper cash typically depreciates over the long term. So, I prefer to follow what the rich are doing, by storing my wealth in stocks.
Question: What is the due diligence needed for a retail investor to react (enter/exit) before any news of insider trading or the financial statement report is out?
Answer: If we invest for the long term, basically we would not need to react to short-term news or new reporting release, unless there is a fundamental shift in the business. Investing by constantly reacting to short-term news will cause us to make more mistakes, or as they say in tennis, unforced errors. In investing, the less movement that we make, the less mistakes we will make. So, my advice is to have strict investment criteria and avoid micro caps stocks that are more easily manipulated by stock market pundits.
ON TECHNICAL ANALYSIS
Question #1: As a fundamental investor, is technical analysis considered as well?
Answer #1: No, I feel that these are two different school of thoughts. Mixing them up will only confuse you as an investor. For me, I only follow the fundamental form of investing, mainly because I have never met a billionaire technical analyst. But I know many billionaires and great fundamental investors.
Question #2: Which is more important, Fundamental Analysis or Technical Analysis?
Answer #2: Fundamental Analysis, for sure.
Question #3: Do you use moving average used to time the BUY and SELL?
Answer #3: No.
ON MARKET CRASHES
Question #1: How to prepare for a crisis? How should we act during a crisis?
Answer #1: For me, I try to ensure I have sufficient cash and not use leverage in investing. It is good to try to train ourselves emotionally for a crisis because it is extremely hard to really act greedy when others are fearful.
We have to understand that the stock market is just another method for us to store our wealth. Even when you own everything in cash, you are not without risk. When your currency sharply depreciates, your wealth would still be affected.
If the market really crashes, there is a good chance it would decline for months. Most likely, I would invest in a regular interval and once I am out of money, I would stop monitoring the stock market (especially the price) as there is no longer anything more than I can do. Staring at your portfolio wouldn’t make it rebound. So, I would just have to wait out the storm. But I would always focus on very high-quality business with the strong balance sheet to invest in. This is because they have a higher chance of surviving a market downturn.
Question #2: How to sieve through the numerous recommendations in the current topping market, what are the guiding principles and strategies. (What and How). How to ring-fence ourselves while staying invested?
Answer #2: For me, I tried to keep a good strong cash buffer of around 20%. And I do not use any leverage in investing. So, when others are having margin calls during a market crash, I would have the cash to buy from them. However, my investment process is focusing on finding great companies that I would want to invest in for the long term. Regardless of market rally or market crashes, I would still only focus on great companies rather than “cheap” companies.
ON INITIAL PUBLIC OFFERINGS (“IPO”)
Question #1: Should we invest in IPO shares? Please provide justification/reasons of pro and cons in investing in IPO shares
Answer #1: Generally, no. This is not because IPO shares are riskier. It is because we do not know much about the management of the company during an IPO. I prefer companies to have a few years of a track record as a listed company so that I can assess the integrity of the management, to see if they have made deals during those years that are unfair or short-changing minority shareholders. A company can have great prospects, but if it is run by dishonest management, the profit will never reach the investors’ pocket.
ON THE MALAYSIA MARKET
Question #1: What is the market outlook for Malaysia in this uncertain political environment?
Answer #1: Actually, I am quite optimistic about the future of Malaysia. I think we have seen from examples like Syria, Ukraine and other countries, the most important ingredient for economic growth is not a good government, but rather just peace. And I personally feel that Malaysia has a strong enough private sector to push the country forward as long as there is lasting peace. Just my personal opinion.
ON THE SINGAPORE MARKET
Question #1: What is the outlook for the Singapore stock market in 2018?
Answer #1: I think the oil and gas sector might start to turnaround soon, a reason being most companies that cannot survive are already in default. I still like Singapore’s REIT sector given that they have one of the best yields around Asia backed by very high-quality assets.
ON THE HONG KONG MARKET
Question #1: What are the risks that we need to pay attention to when investing stocks in Hong Kong?
Answer #1: I would avoid micro-cap stocks as there is just too much manipulation happening in that space. I prefer to invest in large and growing companies in Hong Kong. Given that the Chinese market is so huge, many large companies still have a long runway of reaching a point of saturation.
Question #2: How do we navigate in the Hong Kong markets (websites and stuff) and what are some tools to manage a portfolio (do you rebalance or not?)
Answer #2: Generally I download annual reports of the company from the respective company’s website, http://www.hkexnews.hk/ and http://www.aastocks.com. I also use Morningstar to check their financials. For my portfolio, I track it with just an excel sheet and Yahoo Finance. I typically do not rebalance unless a company grows to extremely big in my portfolio (more than 10-15%).
Question #3: What are the best Hong Kong stocks to buy for 2018? Which sectors should we look out for in Hong Kong in 2018?
Answer #3: Our Stock Guide 2018 does highlight two Hong Kong listed companies. Generally, I invest more in Chinese companies in the consumer space that are listed on the Hong Kong stock market.
Question #4: Which is a better place to invest, Hong Kong or Singapore?
Answer #4: Every market is unique. In my opinion, Hong Kong is more of a growth market, especially with their China-linked H-shares. While Singapore is more of a yield market, providing very good dividends for the investor.
ON INCOME INVESTING
Question #1: When to buy, sell, or hold stock when investing for dividends?
Answer #1: If it is an income stock, I would mostly find high-quality companies or REITs which I can keep for a long time and just enjoy the growing dividends.
Question #2: What are some disciplined methodologies on picking stable/income stocks?
Answer #2: Always focus on the long-term; great mature companies with a fairly visible future like Carlsberg Malaysia, Nestle Malaysia, and Singtel, they tend to increase their dividend over time, giving you higher and higher yield based on your cost.
Question #3: What is the difference between dividend investing and value investing?
Answer #3: Dividend/income investing can be described as a subset of value investing. When we talk about value investing, we are talking about the philosophy of investing in a stock like a businessman. So we focus on the long-term and the fundamental of the company, rather than the stock price. In value investing, there are three main strategies; being asset value investing, income/earnings value investing and growth investing.
Question #4: I am an income investor hence which shares should I buy in the short term and which shares should I buy in the medium term for income generating purposes i.e. value shares with income generating potential?
Answer #4: It depends on what do you mean by the short and medium term. To me, investing is a long game, we should stay invested for as long as we can, I am talking about decades. If you have cash flow needs and need to match your cash flow from your investment to your cash flow outflow, a good way is to look into bonds as they are more predictable in nature. If you can take more risk, REITs are a hybrid instrument that provides you a good yield and also potential upside. And if you have no liquidity needs at all, you can also look into high-growth companies.
Question #5: As I am in the moderate risk category, I am interested to know which are the defensive stocks.
Answer #5: I would classify defensive stocks as companies with very stable earnings. So, you are talking about companies in industries like utilities or consumer staples. Companies in the commodity business like oil and gas or cyclical industry like properties would be much higher in risk for you.
Question #6: Is there other higher yields, low risks investment other than REITs?
Answer #6: Some REITs in Singapore are already providing very good yield up to 6-7% and it seems to be sustainable. Given that we are at such a low-interest rate environment, we should really balance out our expectation on how much we can earn in the stock market. The stock market has averaged just around 5-10% the most in a year over the long term. So we shouldn’t expect to find an investment that returns too far from that in a sustainable manner.
Question #7: What are the more secure dividend stocks for generating passive income and how do we determine how to sell such a stock?
Answer #7: Good defensive dividend companies have these common characteristic:
- Stable earnings.
- Some pricing power so its products can raise prices according to the inflation rate.
- Company paying out most of its earnings or free cash flow back to investors.
If you are able to find such a good dividend stock, hopefully, the time to sell is NEVER.
ON MARKET PSYCHOLOGY
Question #1: Why do some companies appear to be overvalued, yet their prices still appreciate? Is it due to brand equity?
Answer #1: Market can be irrational for a long time. Remember a stock market is a voting machine in the short term, so popular stocks will get all the attention. However, the very fact that we can find undervalued stock in the market means that there will always be overvalued stocks in the opposite spectrum of the scale.
Question #2: What are the long-term (5 years) and short-term (1-year) stock performance expectations?
Answer #2: Traditionally, the market can return around just 3-10% in the longer term, say 10 years or more. So within 5 years that could be a reasonable expectation as well. Within just a single year, things can be much more volatile, the stock performance expectation can range from -100% to 100% positive.
Question #3: What to do when a good stock falls 20-40%, what’s your action?
Answer #3: For me, a good stock is a growing company with a strong management in an industry with huge market potential and it is winning market share. So if such a company is to fall by 20%-40%, most likely I would buy more after making such that nothing fundamental has changed, and only if I am confident that it is really a GOOD company.
ON INVESTING TOOLS AND RESOURCES
Question #1: How to find safe and reliable information about companies and their owners?
Answer #2: The best way is to read the annual reports and the financial filings. Googling to find out more about the major shareholders can help as well.
Question #2: Since you are invested in several markets, how do you allocate financial resources, research time & effort into the different markets? Can you recommend a tool to track stock performance & dividends received?
Answer #2: I use a nominee account at Phillip Capital and also Interactive Brokers. So both account will alert me to dividends and corporate actions. I also track my own portfolio in Yahoo Finance. A good way to keep track of your companies is with Google Alert. Just enter the company name into Google Alert and whenever there are new articles about the company, Google will send you an email to notify you. Best personal assistant ever.
Question #3: What are the tools for an investor?
Answer #3: Some of the common tools and website I use are SGX.com, Bursamarketplace.com, http://www.hkexnews.hk/ , AAStocks.com, Morningstar, Yahoo Finance, Google Alert and downloading annual report. I keep a Watch List on a notebook as well and keep all the thesis I have about my investment in a file so that I can refer back to it.
Question #4: How to evaluate and maintain to watch the stock without using too much time?
Answer #4: We talked about having the “5-Finger” Rule in our book, to quickly scan through the merit of a company before spending too much time in it. That is a good way. But I also believe in the 80/20 rule, where most of the time, 80% of our investment decision is just based on 20% of the information we get. So I would not spend too much time in one company after I get the core facts about
- Its business
- Its financial
- Its management
- Its valuation
Spending too much time can be dangerous as it forms an emotional bond with the company and you might end up investing in a not so great company just because you have spent too much time in it and you do not want those time spent to be wasted.
ON RISK MANAGEMENT
Question #1: What are the different possibilities of risks involved. How do we assess downside?
Answer #1: Some of the more common risks of an investment are:
- Currency risk
- Political risk
- Management risk
- Replacement risk
- Market risk
A good way to manage these risks is to have a diversified portfolio where each company does not have too many similar risks. So if you are investing too much in the oil and gas industry, you have the market risk of the industry. A good way is to invest in sector or businesses that run counter to that industry.
Question #2: How to limit downside risk?
Answer #2: For me, I do that by focusing on high-quality companies so the chances of survival and growth are higher. And I have a very diversified portfolio of more than 30-40 companies.
ON GROWTH INVESTING
Question #1: How to identify growth stocks?
Answer #1: Some characteristic of growth companies are:
- Operate in a big addressable market
- Track record of growth
- Huge pricing power
- Run by world-class management
- Have a strong corporate culture that is above just making a profit
Question #2: What is the best way to value a high growth stock with high P/E?
Answer #2: The best way is to not value them because it is not possible to accurately predict how a growth company will be in 5-10 years’ time. Valuation is just a guide. For high growth companies, I focus on the market potential of how much it can still grow to compare to what its current market share is. So I would want a company that is winning market share in an industry that is also fast growing in nature.
ON MARKET OUTLOOK
Question #1: What is the best sector to look at in 2018?
Answer #1: I think the oil and gas sector should be recovering since most of those companies that need to be restructured are already in default. I still like the technology space in China. More and more technology powerhouses are being built in China and many of them are leading the world in term of innovation. That is an interesting space to watch. The REITs market in Singapore is also one that I am optimistic about.
Question #2: How to identify industry/segment that will change the level playing field and give them the added advantage to outshine their stock performance and price in 5 to 10 years’ time?
Answer #2: The way I do it is to just read and listen more to how the world is developing. I constantly listen to many business podcast and interviews with great business leaders. So you will get a sense of where they are leading the world towards. Right now, the industry that could potentially change a lot of our lives is the technology industry in China. They are extremely innovative and many of them are starting to expand overseas. We talked about the digital economy at the moment, but there could reach a day where the concept of having a digital economy no longer holds true because everything will be digital. It is similar to how people talk about the electrical economy in the beginning of 20th century. But today, everything should already be connected to electricity. The connectivity of the internet should be the electricity of our era.
Question #3: Sectors to avoid in 2018?
Answer #3: It is the same for me every year. Avoid speculative penny stocks. These stocks are too small to be able to trade based on the company’s fundamental level. At those levels, it might lean towards more speculation than investment. For long-term investing, speculation is not a sustainable strategy.
Question #4: What will be the black swan event that can occur in 2018 – 2019?
Answer #4: Some of the macro risks I am watching is the trade relationship between the US and China. So far, both countries are still growing so there is less tension. But if one party push too far (most likely the US), it could create a chain reaction of retaliation. Another area I am looking at is just the quantitative easing that has been happening globally. The US, Europe, Japan, and China have all been printing money. That has fueled much of the global rally in stock prices for many years. Now that the US is winding down its QE program, I do wonder what will happen when other countries wind down their QE programs also.
Question #5: If the Tech sector was the winner in 2017, what would be the one for 2018?
Answer #5: I do think that the technology sector has a long runway as we are all moving towards a more connected and integrated world. I think the technology space is much more than just a one-year wonderkid. The oil and gas rebound could be a potential one-year wonderkid.
Question #6: Which of your company in the Stock Guide are more likely to have a lasting economic moat and will have grown over the next 5 years? What are the industries with the poorer outlook for the next 2-3 years?
Answer #6: In our Stock Guide 2017, I do think Tencent Holdings has the largest economic moat among the ten stocks. Moreover, it is a company that still has a huge market opportunity to capture.
On the flip side, I think industries such as traditional media such as newspaper and television network would have a harder time to transform its business model.
Question #7: How do you think China’s debt is going to impact the country in the next 12-24 months?
Answer #7: I am not that worried about it. I think China’s financial system still has a long way of opening up. Its financial sector is not fully opened to the international market yet. By opening it up, more funds will flow into the country. Its bond market and equity market are both underdeveloped as well. As they mature, it will create more liquidity for the country. The questions are how fast, and how open would it be?
Question #8: You have both said in the book launch presentation you were happily Asian based and Asian focused; will that still be the case in 5 years’ time?
Answer #8: Most likely still yes, unless we went into World War Three, in that case, I will be swimming to New Zealand most likely or wherever that is far away from the danger.
Question #9: When is the correction coming?
Answer #9: Your guess is as good as mine.
ON PORTFOLIO MANAGEMENT
Question #1: What are the various strategies to create a stream of passive income via the stock market?
Answer #1: If you are an income investor, you can consider building up your portfolio in either passive ETFs, strong and stable dividend stocks and also REITs.
Question #2: What should be the ideal asset allocation of the different asset classes for an investor?
Answer #2: That is really dependent on your own investing objective. If you are someone who is not that interested in investing and just want a decent return. Investing fully in just passive index ETFs is good enough. If you are someone who needs the cash flow from your investment, then your allocation to yield instruments such as bonds, high dividend stocks, and REITs should be higher.
Question #3: How much cash are you holding now?
Answer #3: At this moment (January 2018), about 20% of my portfolio is in cash.
Question #4: Should we stay invested at all times? Or should we maintain a level of cash vs stock at any point in time to take advantage of a market correction?
Answer #4: For me, I see stocks as just another form of storing my wealth. So I am invested at all times. Even if we keep all our money in cash, that is still not risk-free. As our currency depreciates and as inflation sets in, our wealth is slowly dying away.
Question #5: How not to lose money?
Answer #5: Keeping our money in a fixed deposit.
Question #6: What are the various exit plan? When and how?
Answer #6: From a portfolio standpoint, it depends on what is your ultimate aim for investing. If you are investing for your retirement, when you retire, you can live off the dividends or you can withdraw and enjoy your life. If you are just thinking to sell because the stock has increased in price, you would still need to find a next stock to buy. So, if we are investing for the long term, the exit plan is really just to exit when you need the money.
Question #7: I’m a beginner. So what really I want to know is, 1) how to choose a stock that can give at least 10% capital gain or/and 10% dividend in a year? I want to know this question because in Malaysia have ASB and Tabung Haji that can give at least 6% to 8% dividend without using too much time. So for me, 8% is my indicator for investment. For a time, I know stock need time but time efficiency is important to compare especially if I want to attract other people to invest in the stock.
Answer #7: You are totally right! We can easily get a market return by investing in the market passively. So the only reason why we should think about stock picking is to find stocks that can potentially give us higher return. When I am looking at which stock to add to my portfolio, I will think about how much the stock can grow in the next 5-10 years and work my way back to see if that return is higher than the market. If it is not, I would just invest in the market like how you are doing through ASB, ETF or other pension funds.
Question #8: What is a good mix of stocks that you would recommend?
Answer #8: For me, to have a diversified portfolio, we need at least 15-30 stocks.
Question #9: What is a good distribution of types of shares to keep in one’s portfolio for 2018
What indicators should we take note of to know is time to sell a share
Answer #9: When diversifying, some common risks to think about are our country risk, currency risk, industry risk. I tend to sell my share only when my thesis for buying it no longer holds true. For example, I might sell an income stock when they no longer can sustain their dividend or a growth stock when they no longer can grow their business.
Question #10: What do we do during down market if we cannot short sell?
Answer #10: We can keep a higher portion in cash and we can short sell-through buying inverse ETF. Or some brokerages do allow you to short sell. Of course, such strategies are riskier.
Question #11: What are the signals to watch to sell our stock? Is investing in ETF better than individual stocks?
Answer #11: I keep a record of why I bought a stock. So I can review my stock after a few years of buying to see if my original thesis still holds true. If the company did not meet my expectation or my entire thesis is wrong, I would sell it.
Investing in ETF is a great and time-saving way to get market return. In the long run, market tends to return around 5-10% if you are investing for more than 10 years. If that is good enough for you, ETFs are a great instrument to invest in.
Question #12: How to pick an investment horizon?
Answer #12: For me, there is only one type of horizon; long term.
Question #13: How should a retiree invest and what percentage of retirement fund should be invested?
Answer #13: This question really depends on your current financial situation. If you only have your portfolio to sustain your lifestyle. It might be better to invest in companies with very strong and sustainable dividend. So defensive companies like utilities, consumer staples or even REITs. Bonds would also be a good choice to have a very scheduled cash flow from your investment. In term of using your retirement fund, it depends on whether you are happy with the yield your retirement fund is giving you now. If you are happy with that, there is no need to take it out to invest. However, if you need to find higher yield, then maybe you would need to take out some to reinvest. Most importantly in your case is just to invest at a yield that can sustain your lifestyle. So there is no need to invest in penny stocks or risky growth stocks.
Question #14: Given general lack of liquidity and size of listed companies in the region, do you set a minimum market cap/liquidity requirement when investing?
Answer #14: Generally there is no issue as I do not have a huge portfolio of hundreds of millions. However, I tend to invest in larger companies with market capitalization above S$300million. This is because micro-cap companies are more prone to being manipulated by stock market pundits and so fundamental base investing would not really work for them as they do not trade according to their fundamentals.
Question #15: With limited resources, how much to invest, should invest less (more prudence) in toppish market and more during a market downturn? what are the guiding principles and strategies? To sell some for cash for use during the downturn? Is there a % for cash?
Answer #15: The key here is to see the stock market as just another form of storing your wealth. If you see most billionaires, most of them store their wealth in stocks. Even if the media reported them as having a net worth of USD 50 billion, that does not mean they have USD 50 billion in cash. In fact, most of it will be in stocks. So if we think in such a way, generally we should still be investing either in an up or down market, mainly because we never know what is top or bottom anyway. And secondly, stocks do tend to perform much better in the long run than just plain cash. Even if you have invested in the peak of 2007, you are still better off now if you have invested in stock compared to if you have kept all your investment in cash for the past decade.
However, you can, of course, have a feel of whether the market is high or now. If you feel the market is high, you can raise your cash position. For me, I have about 20-25% in cash at the moment. But everyone is different and you should see your own financial needs and design a portfolio that suits you. As for selling during the downturn, I think the opposite is actually true, we should be buying when others are panic selling.
Question #16: On position sizing – how much to invest in a stock in the beginning (in case it went wrong) and when to top up?
Answer #16: This is again your own choice. If you can handle the volatility, you can invest in fewer stocks. If not you should have a more diversified portfolio. I have about 30-40 stocks in my portfolio. So each position is roughly about 3%. I might add more to a stock only if I believe the fundamentals of the company is still strong. I do not make my investment decision purely based on how much a stock price has moved up or down.
ON STOCK PICKING
Question #1: I would appreciate if Value Invest Asia focus on the analysis of “top 10 Asian Stocks for 2018” as of why those company, potential upside, the potential risk involved and key event(s) to take note which related to those companies.
Answer #1: Yes, during our Grand Webinar 2018, we focused not just on the education on how to invest, we also go through in our presentation, a detailed analysis on what we think about each of the ten stocks.
Question #2: Which investing style do you practice – dividend, growth or deep value?
Do you plan to offer stock picking service?
Answer #2: I believe that there is just three main value to be found in a stock market; Asset Value (or Deep Value), Earnings Value (Dividends) and Growth Value. I am predominately an earnings value investor, focusing on great companies with strong and stable earnings. However, once I formed my core investment holdings, I can take more risk by investing in growth companies. Sometimes, but seldom, I will invest in asset value companies.
As for stock picking service, we are not investment advisors, so we do not provide stock picking services. However, during our 2018 Grand Webinar, we did release our Top Watch List stocks for 2018 and explaining our analysis process with members on the risk and rewards of these companies.
Question #3: Which is more important, ROE or Free Cash Flow if the company has no debt?
Answer #3: If I have to choose, I would say free cash flow is more important as the value of a company comes from its ability to generate more cash for its shareholders in the future. Earnings of a company can be manipulated through aggressive accounting but cash flow is harder to fake.
Question #4: Where to begin with any investment?
Answer #4: Always start with the fundamentals of a company. I look at its business first, then its management, then it’s financial and lastly its valuation.
Question #5: What is the most important mindset in investment?
Answer #5: Think long term. Wealth can be grown slowly and surely in the stock market. If we focus too much in the short term, we will fall into the trap of becoming a speculator. I have not seen any speculators who are able to grow their wealth in the long term but I have seen many great long-term investors who have built wealth to unimaginable levels.
Question #6: What factors are to be considered when selecting a stock to buy and when is the most appropriate time to buy/sell stocks?
Answer #6: When selecting a stock I look at four key areas;
- The business, I want a company that is growing, with business I understand
- Management, I want a company with high-quality managers who are honest
- The financials, I want a company that is able to generate cash and reinvesting it rather than taking on more debt
- Valuation: Preferably, I want to invest in these company at a fair to the cheap price.
The best time to sell is never. I see stocks as just a form of storing wealth, so even if I sell, I rather own stocks than cash because cash will depreciate in the long term while stocks tend to appreciate in value.
Question #7: Where do you get your stock ideas. how do you evaluate a company before looking at its financials?
Answer #7: Now more often, I am looking at companies I come across in my daily life, with the applications that I use to the coffee I drink or the services I use. I also focus on reading many business books and viewing many business programs, from there I will come across many interesting companies. Other than that, you can surely do a screen to find investment ideas. A good screener that you can consider is Financial Times screener.
Question #8: What checklist or scorecard do you use to evaluate whether or not to invest in a company/security?
Answer #8: Investing is not an exact science so I tend not to use a checklist or scorecard. However, things to take note of when selecting companies is focusing on the four key aspects; Business, Management, Financial, and valuation.
Question #9: How to start picking stocks and how to choose the right one?
Answer #9: I would say, start by analysing businesses that you already deeply admire. If you are a diehard Apple fan, maybe researching more on Apple will give you an interest to dig more, allowing you to gain more insight into the company. If you love shopping on Taobao, maybe you can start by understanding the business model of Alibaba. That is the easiest way to start.
Question #10: How to spot undervalue stocks and what is the percentage of safety margin should we use?
Answer #10: My own opinion is that valuation is just a guide and it really tells us more about the valuer than the company. So my rule of thumb is that for high growth companies with great management, I will place less emphasis on valuation, but for so-so business, I would want to invest with a safety margin of at least 30% based on my estimated value of the company.
Question #11: What are your top 3 STI stocks pick?
Answer #11: Yes, we did feature three Singapore-listed stocks inside our Stock Guide 2018. However, the webinar has held in mid-January and only released for members. We will keep you updated if we ever release it again.
Question #12: How to pick the correct stock and reduce risk in the process of investing?
Answer #12: It is impossible to never lose money in the stock market. As long as your portfolio as a whole is in the green, it’s all good. If you have a hit rate of profiting from 60% of your stock pick, that is already a good ratio. I reduce risk by investing in a high-quality business with a proven track record.
Question #13: How to maintain the desire to monitor and act on buying or selling?
Answer #13: I would say stock picking is not for everyone. If you have no interest in it, the best way to invest is just to buy low-cost passive index funds like an ETF. In that way, you still get good market return without worrying about spending time researching in individual stocks.
Question #14: How to screen out value traps?
Answer #14: There is no 100% foolproof way. But I do it by focusing on companies that are still growing and has a huge market opportunity. Value traps tend to be companies with a dominant shareholder who treats the company as their personal piggy bank or the company is unable to grow.
Question #15: Accuracy in Stock Trend Picking
Answer #15: Normally, if we are able to make a profit in 50%-60% in our stock pick, that is already very good. That is because every time we make a mistake, the most we can lose is just 100% of the invested amount and if we make it right, our profit can be unlimited.
Question #16: What is your top pick for 2018?
Answer #16: We do not give stock recommendations but we featured 10 stocks we like on our Watch List 2018. If you have seen our presentation, you can see that companies like Tencent Holdings Limited and Taiwan Semiconductor Manufacturing Company, Limited are two of the 10.
Question #17: How to spot great capital allocators?
Answer #17: I will look at the ROE of a company. The higher the figure, it indicates that management is able to generate a good return on the reinvestment.
Question #18: What are the 3 most important parameters related to a stock that will indicate that the time is ripe for a stock to be disposed of?
Answer #18: I would sell if:
- The company is struggling to grow
- Integrity of management is questionable
- Management is unable to change with time and become defensive about their business.
Question #19: How do we determine if a company’s management is good? We all know annual report and investors relation officer are PR exercises and will never project negative images, what we want to know is the real story.
Answer #19: If it is a consumer company, we can easily check that from customer reviews or our personal experience using the product or services. We can also take a look from its competitors point of view, normally a good company is leading the industry, compared to its competitors who might be copying them. Another financial measure is to look at its ROE. A good company should have decent or growing ROE, indicating management is good at reinvesting its capital.
Question #20: How to define a company’s moat in today fast going era?
Answer #20: A key measure is looking at the company’s pricing power. If the company is able to dictate the pricing for its products or services, it shows it has some economic moat compared to its competitors. If we see companies like Tencent Holdings, Carlsberg Malaysia or Facebook, these are companies that have shown they can raise prices and demand would not be affected.
Question #21: How do you invest in the region given the lack of information provided by management?
Answer #21: Generally, a huge chunk of the information out there is redundant, basically just noise. Most of the time, 80% of my investment decisions are just based on the first 20% of the information I found about the company. So we do not need very detailed information about the company before we can make a decision. As long as we are clear about the risks and we diversify our portfolio, we can have a fruitful experience in investing. After all, there is no perfect company.
Question #22: How can we identify catalysts?
Answer #22: Catalysts are more important for asset value companies. These are companies with hidden asset value but need something to happen for the value to be extracted. Such catalyst can be a recovery in the sector, a change of management, a pending merger or just some sales of assets. However, for companies with earnings value or growth value, catalysts are less important.
ON EVERYTHING ELSE
Question #1: What is your take on crypto currencies?
Answer #1: I view them the same as going to the casino, you can win big or you can wet your pants.
Question #2: Would you conduct hands-on stock valuation course with a spreadsheet?
Answer #2: We hold offline workshop sometimes and we also do educational courses in our webinar events such as our 2018 Grand Webinar. If there is a request from our readers, we will arrange for a course.
Question #3: What does your website provide that separates it from the others?
Answer #3: We see ourselves as a media company. So we want to bring you the best information about investing and about companies in the region. We also focus on the fundamentals of a business to help our readers get a better sense of how to identify great businesses.
Thank you, everyone, for all your questions. We hope this will give you a better understanding of what investing is about. Have fun investing in the stock market!
If you are just getting started in learning about investing in the Asian Stock Market, we have created a full 15-Video Course for you to help you get up to speed on how to look for great investments in Asia. Click here to find out more.
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