​Value Investing Weekend Notes

So the weekend of 17th June I went to two value investing workshops. Value investing is basically buying stocks and holding on to these stocks for a long time. Below are my notes.

SATURDAY

It was a meetup held by Journal Investors Group.

Key thing: moat and no moat.

Moat = a good business, with a competitive advantage. Is it branding, ties with suppliers, trust, technology etc?

Only invest if the moat of the business seems to be increasing in the next 10-20 years. Maybe even 30 years? Who knows.

To get rich, don’t think about how to get rich. Think about how to lose your money. What are all the pitfalls you can fall into? Don’t fall into those pitfalls.

Invert your thinking. Always ask, what if I’m wrong? What if I’m the fool here? Avoid confirmation bias: don’t look for reasons to support your stand, look for reasons to reject your stand. What if your investment is completely crap? What if your companies won’t have their moat?

A lot of this is subjective. Different people would see different companies’ moats differently. The guy who’s sharing the strategies only invests in big ish companies, so no startups. He only goes in if he’s sure that the company has a big and growing moat.

Also, it’s best to look for companies that are so secure, even bad management can’t sink it. Even if the CEO changes to an incompetent one, make sure the company you want to invest in has such a strong moat that it can still survive.

If you don’t want to decide on which stocks to buy, ETF (funds which buy all 7000 stocks on the market) are good enough. They outperform 95% of hedge funds. But they include tobacco and alcohol stocks too: you buy everything.

If you do want to pick, just pick at most 6 stocks. Because your other ideas may not be that great; the returns peter out a lot after that. Diversify your brokers, in case they cheat you of your money. Don’t put all your stocks with one broker.

Only pick stocks thay you’re very very sure of. If it’s a gray area, why choose that stock? There will be a better stock out there with fewer uncertainties.

How he does stock picking is this. He looks through all the 7000 stocks on the market, starting from the first stock, and reads all about it. Then he picks his stocks.

He also tries to look at patterns. Want to invest in Samsung? Look at Motorola, Nokia. Look at companies that were big 10, 50 years ago. Why did they grow at first, and why have they died? Is Samsung going to die too? Look at the history of different companies in the industry. Are there patterns and insights? How easily is the competitive advantage eroded? Of course, you still won’t know for sure if Samsung will follow the other companies’ footsteps. And don’t get fooled by fake patterns: seeing trends when there are none, for example. The graveyard is huge out there. Study the failures too.

Countries have moat too. Is Singapore’s moat growing or shrinking?

Also, what is the purpose of the company? Eg Facebook’s purpose is to communicate. Before that, people had IRC, MySpace. Is the purpose going obsolete? Maybe Facebook will be replaced by something else eventually. You never know.

On property: stocks is more diverse than property. Owning property is just like buying many title deeds.

On banks: they’re actually quite scary. Banks earn money by lending your money out to other people and companies and charging interest. This gives the bankers incentive to lend to the high risk people so that they get more interest back. Of course, they might also not pay back the money. Banks also have the right to hold your money in the bank indefinitely. It’s called gating. All his savings are actually in stocks instead of banks.

500 years ago, the bank that commissioned the Sistine Chapel is no longer around. Many financial crises caused by banks. Hmm.

This happens because the money they’re using to fund loans is not their own money. Will new banks go this way? Who knows. But the problem of not having skin in the game still exists. So maybe banks aren’t that great after all.

(It’s a bit different when it comes to family owned banks because they have a personal stake in the bank.)

That being said, there are rules in place. That’s why banks have to put money with the central bank too so that they won’t lose all the money.

In Singapore, they guarantee returning $50,000 of your money if there were ever a crisis. (I think?)

SUNDAY

I went for the Value Growth Workshop by 8I education.

Invest in companies that:

  1. Will grow in the future
  2. Have good management. Management should be majority shareholders to align interests with investors. Pay should depend on performance too (be variable) so that they are encouraged to do better. Shouldn’t take too much of the profit as salary. Management should also have integrity. Try to attend AGM. If they did what they said they would do in the prospectus, it’s good. Bad sign: management uses the $ to buy cars etc
  3. Have good financials (financial reports)
  4. Have good business model and have an edge (preferably almost monopoly)
  5. Are undervalued (when price < value. aka wait for recession or crisis and buy when all the stocks are “on sale”. Small crises happen very often, and big ones happen every 10ish years.)

You’re only right if your facts and reasoning are right. You don’t have to care about whether others agree or not. (Although I think it’d be good to double check with others)

Invest to beat inflation, so your money won’t lose value.

You’d need about $1.6million ish to retire in Singapore if you’re in your 20s, if inflation is at 3% and monthly spending is $1.5k. Assuming you retire for 20 years. It’s hard to save this amount. Did you plan for this amount?

Start early, so that you have time to (make mistakes) and compound your starting amount.

Have a plan for when prices drop. Don’t care about when prices drop, care about what you’ll do when they drop.

Rule of thumb: buy the stuff you can eat, wear etc. consumer goods companies have been doing pretty good. They have a pretty good moat. e.g. Nestle can probably survive a war because people will still buy their stuff (like Milo) in wars.

Price competition is not a moat. eg airline industry – you’re not familiar, and moat isn’t really there because too much competition and high costs. So don’t touch. However, SATS is a better investment because it’s a necessary business here.

Case study: VICOM. Car/equipment inspection service in Singapore: 70% monopoly (they own most of JIC, another inspection service)

Why is it good in Singapore?
Comfort delgro own 69% of VICOM, so they’d send their taxis to VICOM. Cars in Singapore will be increasing too.

It has pretty consistent market share too for vehicle inspection, since 2005.

It will still be around 10 years later, since our population will increase and vehicles will increase.

VICOM survived the 2008 crisis, too. Find companies with moats like these. There will still be risk, no matter what they do.

Cash ratio: if it’s <1, they can’t fully pay back their loans to the banks. But >1 means can pay back. No debt tends to be a good sign, but it depends on why there’s the debt.

VICOM would also almost always give out dividends. Because Temasek Holdings owns ComfortDelgro owns VICOM, and if Temasek needs money, dividends are a good way to give money to Temasek. We investors also get this dividend money too.

Dividends can help you earn back your capital. After you’ve done that, all the dividends are “free” money. (And dividends are tax free.)

Investment is necessary because otherwise, your money will shrink and lose to inflation. And you need the money for retirement. (Although I guess you can just earn more and more.)

Brokers earn money from transactions so they’ll encourage you to change stocks often. But you’re better off making fewer but more thought-out ones. So interests conflict.

Identify the bottleneck companies: eg pilot pens. They’ve completely captured the global ballpoint pen business. Quite a big monopoly there.

You can also look for companies who produce locally but sell globally (especially for weak currencies). Lowers costs and raises profits.

Think about the risks each company faces, too. Competitors, technology, labour & visas, pricing power etc

Be emotionally stable so that you won’t make bad decisions.

Hartalega is a good nitrile glove manufacturer. Ticks all the boxes of a good investment. Super 800 (waste collection company) too.

Ask this question of companies:
Among your peers, who do you intend to benchmark against?
(to find out the strong competitors)

Investing is less risky than business – can use less of your own money.

Don’t spend all your money on stocks: invest some, but don’t invest all.

30/30/40 rule for money that you have:
30% for undervalued/fair value stocks + good dividends (4% or more of profit)
30% during mini crisis times (2011 tsunami etc)
40% savings to plug up small gaps: if 30% of each part run out. If you know a major crisis is coming soon, then save it for the crisis to buy stocks.

These sort of rules help you become emotionally stable. Detached from the decisions made.

When to sell?

  1. If there’s not much dividend and it’s overvalued 2-3x of its intrinsic value. But also depend on the stock itself. Change strategy depending on the stock.
  2. When it’s a mistake
  3. When a better replacement comes along (max 8 stocks, so if a 9th one appears that’s even better, replace the weakest stock in portfolio)
  4. Stock turns bad (company’s moat changed)
  5. When market is overheated. When everyone – literally everyone – starts buying stocks. This means that a bubble is forming, so quickly sell. Then buy after the crash.

*my own extra thoughts on investing:
How does investing in stocks, property create value for society? How can I use my money to be rich but also make it add value to society?

I guess, invest in good companies who have potential so that the potential can be realised and help make the company happen.

Starting a business: actually creating value for society.

Investing: accelerate value creation.

Consultancy seems to make you familiar with many different industries. This can give you more info on which companies and industries to invest in.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s