My Investment Strategies
“The secret to successful investing is to figure out the value of something and then-pay a lot less” Joel Greenblatt
“An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operation not meeting these requirements are speculative” Benjamin Graham
I have been asked numerous time on how do I make investment decisions. Here I would like to share with you my investment strategies.
My philosophy of investing follows that of Warren Buffet, i.e. to observe his two important investing rules;
Rule No. 1, Don’t lose money (at least try),
Rule no. 2, Don’t forget Rule No. 1.
With those rules, I generally have two major investment strategies which I have been harping on all this while;
- the Magic Formula of Greenblatt and
- the Graham Net Current Asset Value (NCAV)
The first one is about buying good companies on the cheap, or with reasonable price. Good companies are those having excellent performance in term of return on capitals. In this respect, besides the return on equity, I also use the return on invested capital to avoid buying company earning high return by the use of excessive leverage, and the manipulation of accounting practice with one-time-off gain on non-operating activities.
Cheapness means the share price of the company is way below its intrinsic value and hence there is a wide margin of safety. It is determined from the earnings with respect to its price by capitalizing on the market inefficiency. In Greenblatt’s Magic Formula, the earnings of the firm is used with respect to its enterprise value by taking into considerations of the debt level and the excess cash the firm has. This is again done with the purpose mentioned in the above paragraph to avoid the pitfalls of the commonly used price-earnings ratio.
I augment the Greenblatt’s Magic Formula with other additional criteria in order to enhance the probability of success. The companies to invest must also have good quality of earnings as evidenced from its cash flows over a number of years, and healthy balance sheets without excessive borrowings. I also try to avoid companies with questionable management.
In my opinion, buying good companies on the cheap by capitalising on the market inefficiency has a higher chance of achieving extra-ordinary return. Most of the stocks were and will be selected based on this investment strategy. For those stocks which I have bought based on this strategy, I have done thorough analysis on most of them before which you can find my reports in i3investor website if you wish.
Buying Quality Assets on the Cheap
In this investment environment now where the market is no longer considered cheap, I also tend to use my second investment strategy, the Graham net current asset valuation (NCAV). This strategy focus on buying companies with good quality assets on the cheap. With the quality asset way above its share price, the downside is taken care of, and the upside will take care of itself. This fits in Buffet’s rules perfectly well.
I also augment this strategy with addition criteria as safety nets. First I ensure that the company generally has positive operating income. More importantly the company doesn’t burn cash, i.e. it generally has positive cash flow from operations. In here, the credibility of the management becomes more important such that cash is not wasted in their shareholder value destruction activities.
Insas which I just bought fits in this investment strategy perfectly. Its NCAV is substantially higher than the share price if you just consider its holding in cash and cash equivalent and book value of its investments, less off all its liabilities. However, if you take into consideration of the market values of its sum of parts of its subsidiaries and associate companies, the price-value discrepancy becomes more glaring and the investment thesis becomes more appealing.
Besides Insas has just announced the corporate exercise of five for 1 redeemable preference share at 4% interest rate and two free warrants for 5 shares held, which I think if we go through the whole exercise, there should be some good returns.
When to sell
As you can see I am following a fundamental approach in investing, the share will be sold if its share price has risen close to its intrinsic value as shown in the graph below:
The share will also be sold if the fundamentals of the company has deteriorated and its share price is no longer justify the declining intrinsic value, or when fund is needed to invest in better investments.
K C Chong in Auckland (1st August 2014)
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