Introduction:
After my retirement 1983 as an executive director of IJM Corporation Bhd which I was one of the founders, I started investing in the Hong Kong stock market when the market crashed. The Hang Seng index went below 1000 and HSBC was selling below HK$10 per share. As soon as China granted extension, the market rebounded. Within 2 years, I managed to make so much money that I bought up 46% of Kaiser Stocks and Shares Ltd. a HK stock broking company.
The above is a lesson of a contrarian investor, buy when people are afraid and sell when people are bullish.
Value Growth Investing:
After having studied all the investment philosophies of Benjamin Graham, Peter Lynch and Warren Buffet, I started investing seriously. All the investment Gurus were preaching Value growth investing which I consider is safe but too slow to make money.
For example, currently there are many undervalued property companies in Malaysia. It is safe to buy them but you have to wait a long time before the property share prices go up again.
For example, currently there are many undervalued property companies in Malaysia. It is safe to buy them but you have to wait a long time before the property share prices go up again.
When you buy any share, you expect to gain from dividend and appreciation of share price. As most Malaysian companies are young, most of them do not give out more dividend than bank interest rate. You have to depend on the price appreciation to make money.
The most important stock selection criteria:
There are many criteria such as NTA, healthy accounts with cash deposit, cash flow, dividend yield and earning per share (EPS).
EPS is the most powerful catalyst to move share price.
Golden Rule:
After many years of experience, I have formulated my stock selection golden rule. I must make sure the company can make more money this year than last year and the projected P/E is less than 10, before I buy the share, because when the company announces a better profit the share price will go up. The reason I buy at P/E 10 is to avoid any unforeseen weakness that I have not checked.
By looking at the EPS in the last 1 or 2 quarters, I can estimate its annual profit. Do not buy if you are not sure it can make more profit in the current year than last year because when the annual result shows a reduced profit, the price will surely drop.
When I see the quarterly profit is improving I will buy more shares.
Invest like a businessman:
I must understand the business of the company before I consider to buy its shares. I do not worry too much about the audited accounts because it is a recorded history of the company. I look at the current quarterly result to estimate its future profit growth prospect. The future may not be so clear and straight forward but I am willing to take some risk.
Do not invest like an accountant
Statistics show that most Accountants and fund managers cannot beat the stock market index. They worry too much on the audited accounts which is a historical record. When they see the company has increased borrowing, they are worried. But as a businessman, I consider it a natural thing to borrow more money to do more business.
Bear in mind that the company needs more money to buy raw materials, more machineries etc. Moreover, more borrowing will be required due the delay in getting payment because it take time for packaging, shipping and long payment terms usually 90 days.
Bear in mind that the company needs more money to buy raw materials, more machineries etc. Moreover, more borrowing will be required due the delay in getting payment because it take time for packaging, shipping and long payment terms usually 90 days.
Not to be discouraged:
Accountants should not be discouraged when I said accountants cannot be super investors. On average accountants will earn more than average investors.
How to become a Super Investor?
Most of you can achieve average performance but very few of you can be super investors. Studies by investment psychologists have shown that your brain have to be wired at birth differently to be able to achieve above average profit. You must be able to react differently and you do not follow the general public.
You must be a contrarian. You buy when everybody is afraid and sell when everybody is buying as if tomorrow is too late to buy.
I do not think you can be trained to be a contrarian if your brain is not wired differently at birth.
It is easy to say that I can. The test of the pudding is in the eating. Did you buy some of the cheap shares when the stock market crashed in the few occasions? Or you were selling like most people?
How to use margin financing to leverage your profit?
You should use margin loan to buy more shares if you are confident that you can make money than the interest you pay. The current interest rate is only 4.8% pa. When the prices of your holdings are appreciating, your collateral value will increase and you can buy more shares.
When to sell?
I will sell some when I see reducing profit in one quarter to reduce margin loan. I will sell more aggressively when I see reducing profit in 2 consecutive quarters.
Do not sell prematurely:
3 people can buy the same share at the same time and even same price, each of them can get different result.
A small trader will sell when its share price goes up by 10-29%.
Most ordinary investors will sell when its price goes up by about 50% to take profit. They will not buy back at a higher price when the company announces increased profit.
A super investor will not sell if the company continues to make more and more profit. In fact he will borrow more money to buy more shares.
The benefit of Share placement:Many investors would feel cheated when the company places out 10% of the total issued shares at a 10% discount of the 5 day average price. They naturally think that their shareholdings are being diluted.
But they must consider that the company has expanded by 10% and has received a large amount of cash which can be used to reduce borrowing and also expand their business.
Moreover, the financial institutions who bought the placement shares will support the share price.
IJM Corporation has been doing that frequently and as a result the company can expand very rapidly.
Conclusion: I have used my golden rule to buy Latitude Tree, VS Industry and Lii Hen in recent years and became a substantial shareholder, owning more than 5% of the total issued shares of each company.
Latitude went up 800% with 26 months, VS went up 550% within 18 months and Lii Hen has gone 500% within 24 months.
