Value Investing in Growth Companies: How to Spot High Growth Businesses and Generate 40 to 400% Investment Returns
By Rusmin Ang & Victor Chng
Value investing is an overused word in the investment world, with some tossing it around without appreciating its meaning. Or worse, for marketing sake. Think Oprah’s “You get a car” moment, now substitute that with “You are a value investor”.
So, what is a value investor? Or maybe we should first touch on, what is an investment?
I would go with the traditional Benjamin Graham & David Dodd’s definition – “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” More than 70 years later and it’s still pretty legit. To oversimplify, you have to do your homework, estimate that the odds of you making money are much more than the odds of you losing money, and your train of thought should make sense.
But isn’t value investing just about buying all those low P/E, low P/B, high dividend yield-type of companies?
Yes, and no. Value investing, and value investors come in different shapes and sizes. I would count the above as a subset of value investing. At the crux of the matter, value investing can be described as buying something at a much lower price than how much you think its worth, eventually with the belief that others will come to appreciate its value together with you.
In Benjamin Graham’s The Intelligent Investor, it was mentioned: “Thus the growth-stock approach may supply as dependable a margin of safety as it found in the ordinary investment provided the calculation of the future is conservatively made and provided it shows a satisfactory margin in relation to the price paid.” That’s some wisdom back from over 60 years ago. When you think about it from this way, it is not contradictory for growth companies to exhibit value. If the company can execute (sometimes it’s a very big if), the margin of safety is present in the growth itself, and if assessed fairly decently, this margin of safety can sometimes be pretty significant.
Looking for a value investing approach-based book written in step-by-step, easy-to-understand manner littered with real-life examples of companies listed in Asia?
Value Investing in Growth Companies might be what you are looking for.
What Can I Learn From This Book?
What you see is what you get. You get to understand how value investing can work for growth companies. Value Investing in Growth Companies covers the following:
-Investment mindset: It is more than just numbers; your mindset matters more than you think
-The Jigsaw Puzzle approach (a really interesting way to think of investing, which we highlight later)
-A breakdown of the 4 puzzle pieces helps you make sense of this whole value investing in growth company situation. In the authors’ words, “Investing is just like a game. It is full of puzzles that remain to be solved by investors.”; the idea is that these 4 pieces will come together to help you make sense of the story. From screening, to assessing the business and management to valuation, Value Investing in Growth Companies not only provided the tools (what to use, where to find information, from reading annual reports and attending AGMs), they also provided readers with a map (real-life examples to guide us along the way).
-To refrain from too much spoilers, I will just list the 4 pieces in general (a chapter is dedicated to each puzzle piece) – 1) Business (how it makes money), 2) Management (people), 3) Numbers (financials) and 4) Valuation (how to estimate its worth).
-The life cycle of an investment from screening to buying to monitoring and eventually selling (it might surprise you, but knowing when to sell is as harder or even harder than knowing when knowing when to buy)
-How to manage a portfolio of growth companies
So What Are The Stuff To Look Out For?
The 4 chapters dedicated to the Jigsaw Puzzle approach, which filled up over 93 pages or close to 50% of the book are the highlight of Value Investing in Growth Companies.
By focusing on 4 criteria or puzzle pieces, simple business models, quality management, healthy financial numbers and accurate valuation, Rusmin and Victor comb through both the quantitative and qualitative aspects of the target company. Chapter 5 and 6 especially help those fresh in their investment game with have no idea what to look out for in an annual report. A read of these 2 chapters should clear up quite a fair bit of the smoke.
Another plus is the short summary at the end of each chapter refreshing our memory on what the chapter was about.
Who are Rusmin Ang & Victor Chng?
Rusmin & Victor are co-founders of The FifthPerson (inspired by the story of the blind men and the elephant where multiple perspectives are preferred to a single one). Their articles have been published in The Business Times and AsiaOne. Rusmin and Victor have also been featured multiple times on Channel NewsAsia and 938LIVE for their investment opinions.
Additionally, Value Investing in Growth Companies was also endorsed by Ronald Chan, CIO of Chartwell Capital Limited, author of The Value Investors: Lessons from the World’s Top Fund Managers.
Personally, I had the privilege of meeting both Rusmin and Victor in person, and they are pretty stand-up guys. I would listen to what they have to say.
What Makes This Book Stand Out?
Many investment books, especially value investment-linked books are written with a Western (especially United States) backdrop. Value Investing in Growth Companies brings us much closer to home.
In addition, for regional (Asia-based) investment books, most of them are either investing 101 (which you can find most info off the net) or thick textbook-style books too theoretical for most of us to appreciate. Theory is all good and stuff, but the trouble is that in theory there is no difference between theory and practice, in practice there is. This is where Value Investing in Growth Companies, littered with real-life examples, comes in handy.
Also, this is not the traditional low P/E or low P/B type of companies where a number of investment books go towards. Reading about growth companies are relatively more entertaining.
In my opinion, the benefit of this book is that it brings us through Rusmin and Victor’s entire process – from screening all the way to valuation for growth companies. Many books might just show you the tools, Value Investing in Growth Companies gives you the map as well. Because even with the right tools we might get temporarily disorientated (too much noise), it helps to have a map (real-life examples) to bring us back on track.
As mentioned, Value Investing in Growth Companies is recommended for someone looking for a value investing approach-based book written in step-by-step, easy-to-understand manner littered with real-life examples of companies listed in Asia.
What Could Make The Book More Interesting?
As value investing books in Asia goes, Value Investing in Growth Companies is one of the better ones. By better ones, I mean books with real-world practical applications and not just all talk no walk (all theory).
Here are 3 comments I thought could add value to the book:
1) Real life companies were used throughout Value Investing in Growth Companies; however, we feel that it might help readers more of there were more detailed case studies from screening to valuation for more reference. Although 5 case studies were available for download, my preference is for it to be included in the book for easier reference (because of the path of least resistance).
2) There was a chapter on avoiding common mistakes, but it was more towards things you should not do. Hence, I thought that it might also be good to include a section on red flags, stuff that practically hints at us before things might be going south.
3) The tough part about valuing growth companies is about its growth. The future is uncertain, hence the valuation range for such companies are very wide, sometimes in both directions. Herein lies one of the key problems for growth companies, often they are tough to estimate. It might have been good to give this issue more airtime.
Where Can I Get My Hands On It?
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