Singapore stocks: Once bitten, twice shy

[Wildreamz]

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Predicting the future is way more difficult than it is made out by course sellers or random internet commenters. But that is what most businesses and investors are trying to do; figuring out the next hot thing is and trying to get in before everyone else.

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I find lately, that it's quite satisfying reading long threads like this. But also unsatisfying sometimes, when you have many questions and comments, but find it cumbersome to ask them all in a forum post. Wish we can have a conversation over coffee some day.

So I will just comment that, no matter what investment style you choose, you are very likely still attempting to predict the future. In fact, for the most part, having a clearer sense of where the future is heading than the market, is generally where most of the alpha is generated.

If you are buying US treasury bills, you are making predictions about USD inflation and US government not defaulting.

If you buy a corporate bond, you are predicting that future bond payments are going to be intact (no default). 

If you are a conservative value-oriented investor buying a low PE company in a mature industry that got beaten down, you are likely predicting that the company is financially sound, and demise is overstated, and the next few quarters their earnings is going to stabilize/rebound and the market is going to revalue it accordingly.

If you are a growth-oriented value investor buying a higher PE company today. You are predicting that the companies growth is more durable and that the company's profitability at maturity is much higher than what's baked-in in the market price, and it's worth the risk to invest in the company today.

There is no escaping predicting the future in the world of investing. Whether or not the goal is to predict the "next hot thing".

Have a nice weekend.

[karlmarx]

Coffee? Sure why not. But I must warn you that you will be probably disappointed at how little I know about most things.

Indeed, it is a game of predictions. Which is probably why investing is often associated with gambling. To win you must only make guesses on things which you know the answer to, or are sure of. But unfortunately, we often do not realise that we know too little about the things we are guessing on.

[Choon]

Coffee? Sure why not. But I must warn you that you will be probably disappointed at how little I know about most things.

Indeed, it is a game of predictions. Which is probably why investing is often associated with gambling. To win you must only make guesses on things which you know the answer to, or are sure of. But unfortunately, we often do not realise that we know too little about the things we are guessing on.

I remember maybe 20 years ago, there was a website call ShareOwl. And the forum members would from time to time meet up (organised by a NUS Prof) to discuss about investing and stocks.

It may be interesting to organise a meet-up among VBs. But if its a sizeable group, then agenda would have to be set in advance.

Alas COVID.

[Wildreamz]

Thanks for sharing. ShareOwl still seems to be active, another potentially good resource.

[dreamybear]

While reading the piece by Prof Mak and pondering over some recent posts in this forum about privatisation issues, I am of the view that it is more worthwhile in identifying and investing in companies that are likely to offer revenue & more importantly earnings growth(based on the due diligence) rather than undervalued companies(e.g. based on NAV or low valuation awarded by the mkt)

I am pretty sure these have been expounded in this forum already - certain issues for such undervalued stocks include stock may continue trading consistently at a discount to NAV for a long time, mgmt rewarding themselves with high compensation, etc. A retail investor's capital may be stuck a long time before receiving any significant rewards(and which may or may not happen). This is excluding the considerable effort to monitor the company / industry / competitors day in day out till that windfall comes.

Personally, I do not really buy the idea simply that mgmt has substantial shareholdings("skin in the game") means that their interests are aligned with opmi; I think there are contexts to be considered and both parties' interests are unlikely to be fully aligned e.g. owners/mgmt strive for a sustainable long term company(and can pay themselves well in the meantime while the cash in the company accumulates) whereas retail shareholders are probably more interested in the returns relatively. Perhaps this cld be one of the reasons WB like to buy entire businesses - the CEO will align with the investor-owner's interests. 

Granted that long term value investing is also about patience, but I think it has to be set in the right context. Investing in APPLE and reaping the rewards as the company grows from strength to strength over the years is different from investing in a company hoping for a high exit offer or high dividend payout from its cash holdings(although such incidents do happen in real life). 

It is unfeasible to expect to be able to spot the Googles(Alphabet) and Amazons AND invest a notable amt at the super early stage but I think as long as one is reasonably sure(based on due diligence and WB's idea of competence which I have come to interpret as deep in-depth knowledge*) that the earnings of a target company(possessing sound financials e.g. balance sheet) has a more than fair chance to be able to X (dependent on individual expectations) times within the next 5-10 years(ideally long runway but may not be realistic given the rate of change in our world today), it would likely be a fruitful investment not least because the mkt will likely to reflect its valuation accordingly.

*young WB had an executive in Geico explaining and teaching him abt the insurance bizness & I wld imagine that is just the start of the build-up of his superior industry knowledge

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Time to reset corporate governance in Singapore ?
https://governanceforstakeholders.com/wp...-p6-15.pdf
"....It is clear that the "comply or explain" approach has not worked as well as we had hoped. One of the reasons is that our environment is different from the UK, where institutional investors play an important role in challenging corporate governance disclosures and practices of companies. Shares of UK listed companies are mostly held by institutional investors and therefore such investors have considerable influence there.

This is not the case in Singapore. There has also been little pressure on institutional investors here to exercise their stewardship role, notwithstanding our adoption of a stewardship code.......

The other significant change over the past 15 years is the increase in proportion of companies listed on Catalist since it was launched. These are generally smaller and lower quality companies, with little institutional investor following and regulated under the sponsor-based regime. I am skeptical about the sustainability of the Catalist regime and believe that it should be reviewed. To be it bluntly, I do not see sponsors looking out for the interests of public shareholders in many cases..."

Forum: In-person AGMs with shareholders and board present needed
https://www.straitstimes.com/opinion/for...ent-needed

[LionFlyer]

I am of the view that it is more worthwhile in identifying and investing in companies that are likely to offer revenue & more importantly earnings growth(based on the due diligence) ..

Consistent earning growth is a proxy for a management who knows what they are doing. Low valuation is how the market values and percieves the company.

IMO, a true undervalued company is one where the market has mispriced AND the management is able to demonstrate positive CAGR.

[ghchua]

I am pretty sure these have been expounded in this forum already - certain issues for such undervalued stocks include stock may continue trading consistently at a discount to NAV for a long time, mgmt rewarding themselves with high compensation, etc. A retail investor's capital may be stuck a long time before receiving any significant rewards(and which may or may not happen). This is excluding the considerable effort to monitor the company / industry / competitors day in day out till that windfall comes.

Hi dreamybear,

I think you have misunderstood the basic tenant of buying undervalued stocks trading at a discount to NAV - i.e. You are essentially buying the company's assets. Business performance is secondary.

Which means, you do not actually need to monitor the company / industry / competitors closely. What you need to make sure is those assets in the company are hard assets (i.e. cash or property). If they are receivables or inventories, give a discount on its holding value. I would also give a zero value on goodwill as well.

After that, sit back, relax and wait for the share price to move towards its NAV. The business can continue to lose money, but as long as the NAV is stable or drops a bit and the discount is still there, keep on holding or add a bit if the discount is wider. 

To minimize capital being stuck for a long time in a stock, you can buy a diversified portfolio of stocks. Or, have a time frame like switching to another undervalued stock when it did not reach its NAV after, say 3 years.

[dzwm87]

After that, sit back, relax and wait for the share price to move towards its NAV. The business can continue to lose money, but as long as the NAV is stable or drops a bit and the discount is still there, keep on holding or add a bit if the discount is wider. 

P&L and balance sheet are linked. A business losing money on either cash or accounting earnings will reduce NAV. You might be referring to deep asset value where businesses may own a stake in non-core assets (e.g. investment properties, equities, etc). A wide NAV discount also need a catalyst to realize its discount gap. I think people generally underestimate the opportunity cost of "waiting" and "adding" when discount is wider. Of course, it's always good to be paid to wait (e.g. paid an attractive dividend yield).

[ghchua]

P&L and balance sheet are linked. A business losing money on either cash or accounting earnings will reduce NAV. You might be referring to deep asset value where businesses may own a stake in non-core assets (e.g. investment properties, equities, etc). A wide NAV discount also need a catalyst to realize its discount gap. I think people generally underestimate the opportunity cost of "waiting" and "adding" when discount is wider. Of course, it's always good to be paid to wait (e.g. paid an attractive dividend yield).

Hi dzwm87,

What I am saying is that your margin of safety is wide enough to withstand those losses. As I have said earlier, I have already given a discount to inventory holding value in the balance sheet. Yes, those inventories can be sold at a loss, but my discount already handle that.

Maybe I am not clear about the process. Let me try again. To implement this strategy, what I am saying is not to take the company reported NAV at face value. Do a discount on inventories, receivables, goodwill etc and then compute your own RNAV. After that, see whether the share price is trading at a decent discount from your computed RNAV.

The opportunity cost, as I have mentioned earlier, can be resolved by holding a portfolio of these stocks. Also, have a time frame on holding one of these stocks. If value could not be unlocked after say, 3 years, switch to another stock with similar characteristics.

We can't control whether value could be unlocked in these stocks. But we can modify our process and make our chances higher.

[Corgitator]

I think as investors we need to appreciate that there's many different investment approaches. These different approaches can all work as long as you use them correctly, and you have the right skills + temperament + investment horizon for that approach.

Just because you failed to generate good returns using an approach doesn't invalidate the approach, as there could be others that managed to find a way to make the approach work for them.

It is important to self-reflect and figure if a particular approach works for you, but this process is very personal. So while it's great to have figured out what works or doesn't work for you, it's also important to acknowledge that the insights leading to your conclusion may not be applicable to everyone else.

I know of two friends, both of which started investing by buying companies with assets at steep discounts (the typical net-net stuff). 10-15 years on. One of them is still crushing the market doing the exact same approach (only difference is that she has to go beyond Singapore to look for opportunities). The other has given up and instead opted to buy cashflow-generative businesses whenever sentiment is pessimistic, and that has worked better for him.

There are many possible paths to the same summit.