14-04-2012, 11:15 PM
I have gotten a lot of good investing ideas from Valuebuddies and this article represents my way of giving back to the community.
First off, some background history, I been doing this intensively for about 2 years now, ever since I had the fortune of picking up a copy of Warren Buffett's biography, and then the Intelligent Investor. Since then, I have been consistently reading, studying and testing my ideas.
I started out focusing more on quantitative factors as dictated in The Intelligent Investor, than moving on to more qualitative factors as a result of Buffett's influence, and then coming a full circle back to Benjamin Graham, reaching a similar conclusion that Benjamin Graham did towards the end of his life.
Although I have the utmost respect for Warren Buffett, I think many investors do not realise that they do not have to invest like he does. The chief most reason is that Berkshire has in recent years, reached such a size that the universe of companies he can invest in is greatly limited. It is also one of the reasons why he stresses in his annual reports that going forward, investors should not expect a rate of return that he has managed to achieve in his earlier days.
Investment funds or unit trusts in Singapore face a similar problem. The universe of companies that they invest is much smaller than what the average investor can invest in. As such, you will realise that most of these funds have a great number of overlapping holdings.
Although I place value on the qualitative factors of businesses, I think that investors must maintain a healthy level of scepticism of their appreciation and appraisal of such factors as they are extremely hard to quantify, and more importantly, extremely prone to emotional misjudgement. Buffett likes to maintain a much higher level of concentration in a few select companies that are within his circle of competence.
From personal experience, the problem with this ideology is that the number of companies that are genuinely within a person's circle of competence, as opposed to his supposed circle of competence are few and far between. Furthermore, the average investor must realise that Buffett, aside from his high intellectual capacity, has spent close to his entire life studying and reading about companies in order to amass his knowledge. I think it is safe to say that the average investor does not even come close to equalling his ability.
Another way this problem manifests itself is through us making incorrect inferences.
For example, let us assume we look at Company X, which we find has a low profit margin or ROE. A typical discussion might go like this:
Company X has a low profit margin or ROE -> Thus according to what I learnt from Buffett, it's not a good company to invest in.
OR
Company Y has shown an increase in account receivables/inventories, which is a worrying sign.
The problem is that the average investor probably does not have the luxury of spending enough time to accumulate the amount of knowledge to make a qualitative judgement.
I think it may be interesting to many readers that towards the end of his days, Graham was very much against the ideas put forth in his early work, Security Analysis as much more in favour of buying a group of stocks that fulfilled 2 - 3 of the following criteria.
To me, this includes placing too much emphasis on excessively breaking down factors such as operating expenses, operating margins etc. Effectively, I believe that the level of detail you should be looking at can be aptly learned from The Intelligent Investor.
The first 5 are effectively valuation constraints, and the last 5 are safety criteria.
1) An earnings-to-price yield at least twice the AAA bond yield.
2) A price-earnings ratio less than 40 percent of the highest price-earnings ratio the stock had over the past five years.
3) A dividend yield of at least two-thirds the AAA bond yield.
4) Stock price below two-thirds of tangible book value per share.
5) Stock price two-thirds net current asset value.
6) Total debt less than book value.
7) Current ratio greater than two.
8) Total debt less than twice “net current asset value.”
9) Earnings growth of prior ten years at least 7 percent on an annual basis.
10) Stability of growth of earnings in that no more than two declines of 5 percent or more in the prior 10 years.
His own research, which was successively back tested and confirmed by others was that a portfolio of 30 stocks would consistently outperform the averages buy a large margin over a long period of time.
Like Graham, I am now generally in favour of such an approach for the average investor, which removes a big component of what I feel impairs investment returns, the human and emotional component.
Unlike US equities, I rarely discuss my holdings in Singapore as some of the companies I look at are highly illiquid. However, I would like to make the following observations:
1) For the investor willing to take the effort, I believe that there is a high probability that returns in Singapore will significantly exceed that you will get in more developed economies such as the United States.
This is unlike the US or UK where many of these opportunities have been arbitraged away, this has as of yet not happened in countries like Singapore. The number of investment opportunities in Hong Kong, Japan, and Korea are also significant.
My own thesis is that Graham has not had such a significant influence on these nations (especially non English speaking countries).
2) I recommend looking at smaller capitalization companies i.e. below 200 million. My own personal view is that the large cap companies are effectively fairly valued at current market prices.
I found a significant number of net-nets in Singapore selling at a considerable margin of safety, whereas I could find close to none in the United States.
To summarize:
1) I no longer believe that detailed fundamental analysis will benefit investors more than let's say buying a group of stocks bound by 2 - 3 criteria.
2) There are considerable investment opportunities among companies below 200$ million market cap.
Admittedly I have not strayed far from Benjamin Graham and his ideology, and your mileage may vary accordingly.
Cheers
First off, some background history, I been doing this intensively for about 2 years now, ever since I had the fortune of picking up a copy of Warren Buffett's biography, and then the Intelligent Investor. Since then, I have been consistently reading, studying and testing my ideas.
I started out focusing more on quantitative factors as dictated in The Intelligent Investor, than moving on to more qualitative factors as a result of Buffett's influence, and then coming a full circle back to Benjamin Graham, reaching a similar conclusion that Benjamin Graham did towards the end of his life.
Although I have the utmost respect for Warren Buffett, I think many investors do not realise that they do not have to invest like he does. The chief most reason is that Berkshire has in recent years, reached such a size that the universe of companies he can invest in is greatly limited. It is also one of the reasons why he stresses in his annual reports that going forward, investors should not expect a rate of return that he has managed to achieve in his earlier days.
Investment funds or unit trusts in Singapore face a similar problem. The universe of companies that they invest is much smaller than what the average investor can invest in. As such, you will realise that most of these funds have a great number of overlapping holdings.
Although I place value on the qualitative factors of businesses, I think that investors must maintain a healthy level of scepticism of their appreciation and appraisal of such factors as they are extremely hard to quantify, and more importantly, extremely prone to emotional misjudgement. Buffett likes to maintain a much higher level of concentration in a few select companies that are within his circle of competence.
From personal experience, the problem with this ideology is that the number of companies that are genuinely within a person's circle of competence, as opposed to his supposed circle of competence are few and far between. Furthermore, the average investor must realise that Buffett, aside from his high intellectual capacity, has spent close to his entire life studying and reading about companies in order to amass his knowledge. I think it is safe to say that the average investor does not even come close to equalling his ability.
Another way this problem manifests itself is through us making incorrect inferences.
For example, let us assume we look at Company X, which we find has a low profit margin or ROE. A typical discussion might go like this:
Company X has a low profit margin or ROE -> Thus according to what I learnt from Buffett, it's not a good company to invest in.
OR
Company Y has shown an increase in account receivables/inventories, which is a worrying sign.
The problem is that the average investor probably does not have the luxury of spending enough time to accumulate the amount of knowledge to make a qualitative judgement.
I think it may be interesting to many readers that towards the end of his days, Graham was very much against the ideas put forth in his early work, Security Analysis as much more in favour of buying a group of stocks that fulfilled 2 - 3 of the following criteria.
To me, this includes placing too much emphasis on excessively breaking down factors such as operating expenses, operating margins etc. Effectively, I believe that the level of detail you should be looking at can be aptly learned from The Intelligent Investor.
The first 5 are effectively valuation constraints, and the last 5 are safety criteria.
1) An earnings-to-price yield at least twice the AAA bond yield.
2) A price-earnings ratio less than 40 percent of the highest price-earnings ratio the stock had over the past five years.
3) A dividend yield of at least two-thirds the AAA bond yield.
4) Stock price below two-thirds of tangible book value per share.
5) Stock price two-thirds net current asset value.
6) Total debt less than book value.
7) Current ratio greater than two.
8) Total debt less than twice “net current asset value.”
9) Earnings growth of prior ten years at least 7 percent on an annual basis.
10) Stability of growth of earnings in that no more than two declines of 5 percent or more in the prior 10 years.
His own research, which was successively back tested and confirmed by others was that a portfolio of 30 stocks would consistently outperform the averages buy a large margin over a long period of time.
Like Graham, I am now generally in favour of such an approach for the average investor, which removes a big component of what I feel impairs investment returns, the human and emotional component.
Unlike US equities, I rarely discuss my holdings in Singapore as some of the companies I look at are highly illiquid. However, I would like to make the following observations:
1) For the investor willing to take the effort, I believe that there is a high probability that returns in Singapore will significantly exceed that you will get in more developed economies such as the United States.
This is unlike the US or UK where many of these opportunities have been arbitraged away, this has as of yet not happened in countries like Singapore. The number of investment opportunities in Hong Kong, Japan, and Korea are also significant.
My own thesis is that Graham has not had such a significant influence on these nations (especially non English speaking countries).
2) I recommend looking at smaller capitalization companies i.e. below 200 million. My own personal view is that the large cap companies are effectively fairly valued at current market prices.
I found a significant number of net-nets in Singapore selling at a considerable margin of safety, whereas I could find close to none in the United States.
To summarize:
1) I no longer believe that detailed fundamental analysis will benefit investors more than let's say buying a group of stocks bound by 2 - 3 criteria.
2) There are considerable investment opportunities among companies below 200$ million market cap.
Admittedly I have not strayed far from Benjamin Graham and his ideology, and your mileage may vary accordingly.
Cheers