Value Investing: The Secret in Beating the Market

Transcript

1. Value Investing: The Secret in Beating the Market Puah Soon Lim, CFA
2. Disclaimer Disclaimer This presentation is for educational purpose ONLY educational purpose ONLY
3. GENTLE REMINDER GENTLE REMINDER NO PHOTOS NO RECORDING SILENT MODE Thank You for your Co-operation!
4. Ownership • Controlling/Permanent Ownership Ownership • Non-Permanent Ownership : eg. Hedge Funds Ownership • Can be long-term • Usually ESOS conversion Ownership • Market Players • % of paid-up capital : <3% Ownership (Mainly Institutional Funds) • % of paid-up capital : Up to Ownership • Small to Large investors • % of paid-up capital : Depends Controlling Shareholders Market Makers & Manipulators Management Speculators Quant Investors Value Investors YOUR GPS IN THE STOCK MARKET LANDSCAPE INSIDERS OUTSIDERS < 1% < 1% < 1% < 1% < 0.5% 97 % - 99 % Version 5.0 Last Updated : 27 Oct 2012 Ownership • % of paid-up capital : 75% • % of Shareholders : Top 30 Hedge Funds • % of paid-up capital : Sizeable enough to dominate average trading volumes • Tacit acquiescence of controlling Shareholder required • Usually ESOS conversion • % of paid-up capital : <3% • % of Shareholders : 99% • Transient ownership • % of paid-up capital : Up to 23% +/- • % of Shareholders : Up to a few hundreds • % of paid-up capital : Depends • % of Shareholders : Can be up to several thousands Purpose & Basis • Control of company • To raise public capital for business • SOE’s to meet social objectives Purpose & Basis • To make substantial short-term profits • To manipulate prices • Purpose & Basis • Ownership as reward for employment Purpose & Basis • Quick profits • Transient ownership • Movement in price and volumes factors Purpose & Basis • Invest in growth of the economy • Long-term investors (no need for immediate cash) • Hugging statistical averages Purpose & Basis • Invest in undervalued stocks for long-term • Realize profit when fully valued • Price & value divergence (Buy signal)/Convergence (Sell signal) Strategy • Privatize when public capital not needed anymore Strategy • To take advantage of market movement events Strategy • To realize long-term profit Strategy • Probability of Gaming Theory • Trading method : Momentum play Strategy • Efficient Market Hypothesis (Indices for economy or industry) • Correlation and variances for the long-term Average Strategy • Value investing principles • Generally a hold strategy until franchise changes Strength & Advantage • Price control due to excessive ownership Strength & Advantage • Price control due to huge funding resources Strength & Advantage • Price advantage due to insider information Strength & Advantage • Nimbleness and speed execution based on momentum Strength & Advantage • Large portfolio holding power for economic growth Strength & Advantage • Purchase based on analysis & undervaluation
5. Stock Markets Involve Risks Stock Markets Involve Risks RISKS RISKS CAPITAL at RISK CAPITAL at RISK TIMING Risk TIMING Risk Risks Drive Return. Risks Drive Return. Manage Manage Your Risks, Your Risks, Return Will Take Care Of Itself. Return Will Take Care Of Itself.
6. To Answer : To Answer : What & When To Invest What & When To Invest WHAT IS INVESTING ? WHAT IS INVESTING ? Investing Has A Certainty of a Positive Outcome Certainty of a Positive Outcome If Held Long Enough … via Slow But Certain Compounded Returns
7. Benjamin Graham Definition Benjamin Graham Definition WHAT IS INVESTMENT? WHAT IS INVESTMENT? A. ACCEPTED DEFINITION Ben Graham & Dodd (Security Analysis – 1934) “ …. An investment operation is one which, upon thorough analysis promises a safety of principal and an adequate return. “ …. An investment operation is one which, upon thorough analysis promises a safety of principal and an adequate return. Operations not meeting these requirements are speculative ….” MAJOR POINTS • • THOROUGH ANALYSIS THOROUGH ANALYSIS • • SAFETY OF PRINCIPA SAFETY OF PRINCIPAL • • ADEQUATE RETURN ADEQUATE RETURN
8. Valuations : Key to Investing Valuations : Key to Investing Accounting Intrinsic Replacement Break-up Salvage Different Types of VALUATIONS Different Types of VALUATIONS Accounting •Historical Values/Facts •Forward Projection Intrinsic •Net Present Value of Forward Assumptions Replacement •Net Assets Value Replacement •Business Assets Replacement Break-up •Sum of Current Value of Parts Salvage •Forced Sale •Liquidation
9. UNDERSTANDING THE BROAD MARKET MARKET THE 6 CATEGORIES OF STOCKS
10. The Six Categories of Stocks The Six Categories of Stocks 1. Investment Grade Stocks 2. Emerging Grade Stocks 3. Cyclical Stocks LOW 3. Cyclical Stocks 4. Turnaround Stocks 5. Sunset/Failing Stocks 6. Venture/Speculative Stocks HIGH BUSINESS BUSINESS
11. Investment Grade Criteria Investment Grade Criteria 1. Continuously PROFITABLE 2. Continuously DIVIDEND PAYING 3. Continuously Creating SHAREHOLDER VALUE 3. Continuously Creating SHAREHOLDER VALUE 4. Positive OPERATING CASH FLOW 5. Positive FREE CASH FLOW 6. Preferably Positive NTA (Net Tangible Assets) Can add more parameters …
12. How Do How Do You Get There You Get There Using Using Using Using BENJAMIN GRAHAM’S PRINCIPLES? BENJAMIN GRAHAM’S PRINCIPLES?
13. What is Value Investing ? Value (Non Public) Price Divergence Divergence Price (Public) Divergence Time (Years) Buy or Buy More Sell or Hold
14. Value Investing Strategies Value Investing Strategies A Need To behave like Controlling A Need To behave like Controlling Shareholders Shareholders • BUY & HOLD where Franchise is still valid • BUY & HOLD where Franchise is still valid • TRADING STRATEGY based on Price vs. Values Aim is to accumulate maximum maximum stock holdings over time of
15. Contradiction # 1 Market is Efficient Market is inefficient
16. Contradiction # 2 Doing Your homework is useless Doing Your homework is important
17. No Proper Tools X Insufficient Knowledge X
18. Contradiction # 3 Investing is Easy
19. Gambling is Easy
20. Getting Con is Easy
21. “Successful Investing isn’t rocket science it’s harder” harder” Michael J. Moore, portfolio manager
22. Contradiction # 4 Don’t Put All Your Eggs in one Basket
23. No Eggs Thank You, Only Tennis Balls
24. Contradiction # 5 Market Correction is terrible
25. Contradiction # 5 Market Correction is a beautiful thing
26. Which Stocks are Eggs? Which Stocks are Tennis Balls?
27. Buying Tennis ball At Cheap Prices
28. Investment Moat Durable Competitive Advantage
29. Fundamental Analysis: Fundamental Analysis: 1. 1. Understanding the Business Understanding the Business 2. 2. Analyzing the Annual Reports Analyzing the Annual Reports Revenue / Sales / Turnover Revenue / Sales / Turnover Revenue / Sales / Turnover Revenue / Sales / Turnover Net profit Net profit Dividends Dividends Cash Flow Cash Flow 3. 3. Future Prospects Future Prospects
30. CONCLUSION CONCLUSION “ “Investors do not make Investors do not make mistakes, or bad mistakes, or bad mistakes, in buying good mistakes, in buying good mistakes, in buying good mistakes, in buying good stocks at fair prices. They stocks at fair prices. They make make serious serious mistakes by mistakes by buying buying poor stocks poor stocks …” …”
31. “ …. An investment operation is one which, upon thorough analysis promises a safety of principal and an adequate return. Operations not meeting these requirements are these requirements are speculative ….”
32. Thorough Analysis
33. Safety of Principal
34. Adequate Return Adequate Return
35. HOW DO YOU GET THERE USING BENJAMIN GRAHAM’S PRINCIPLES?
36. Value Investing Strategy Value Investing Strategy Price Sell Sell ONLY APPLIES TO ONLY APPLIES TO GOOD GOOD COMPANIES COMPANIES Time Sell Buy Buy More Some Sell Sell
37. THANK YOU THANK YOU