22nd April 2015 : How to invest, individual stocks or mutual funds kcchongnz Author: kcchongnz | Publish date: Wed, 22 Apr 2015, 03:54 PM

	kcchongnz blog Author: kcchongnz   |   Latest post: Wed, 22 Apr 2015, 03:54 PM This a kcchongnz blog

How to invest, individual stocks or mutual funds kcchongnz

Author: kcchongnz   |   Publish date: Wed, 22 Apr 2015, 03:54 PM 

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I have written a four-part series on the stock market crashes in the United States and at home as shown in the links below.
http://klse.i3investor.com/blogs/kcchongnz/73543.jsp
http://klse.i3investor.com/blogs/kcchongnz/73675.jsp
http://klse.i3investor.com/blogs/kcchongnz/73859.jsp
http://klse.i3investor.com/blogs/kcchongnz/74057.jsp
The articles describe how the stock market ran up during which investors had accumulated huge amount of wealth and then almost all lost what they had made, or more, during the market crashes which inevitably followed the previous euphoria.
The final article below deliberates how an individual investors could have capitalized the market cycle using the example of the most recent crash during the US Subprime Mortgage Crisis in 2008 to build long-term wealth. It was shown that a portfolio of stocks using established fundamental investing strategy had make extra-ordinary of compounded annual growth rate of 35.6%, more than twice that of the broad market of 16%. On the other hand, speculating basing on hypes and fads can result in heavy losses during the same period.
 http://klse.i3investor.com/blogs/kcchongnz/74098.jsp
So one may be tempted by the good return from the stock market for building long-term wealth and for retirement. What are the investing choices he has in Malaysia?

Individual stock investors
New investors looking to invest for in the equity market are usually faced with two main options - mutual funds/exchange traded funds or individual stocks. First we will look at the performance of individual stocks picking by retail investors.
Brad M. Barber and Terrance Odean  in their paper “The behaviour of individual investors” in the link below shows that individual investors trading on their own under-performed the market due to information asymmetry, overconfidence, sensation seeking and action chasing, failure to diversify, easily influenced by rumours, tips, media and internet forums etc.
http://faculty.haas.berkeley.edu/odean/Papers%20current%20versions/behavior%20of%20individual%20investors.pdf
Another study by a Boston based consulting firm, Dalbar Financial Services in its 2005 report, “Quantitative Analysis of Investor Behaviour” shows that an average equity investor earned over 9% less annually than the S&P over the last twenty years. This huge chasm was attributed to investors’ trying to time the market and thus failing to keep their money in stocks for the entire time period.
Below shows a chart in JP Morgan’s 1Q 2014 Guide to the markets.

 
Based on their analysis, the average investor had a 2.3% annualized return over the 20 years from 1993 to 2012, way underperformed the market return of 8.4% during the same period. This return is not even enough to pay for the annual interest rate if one engages in margin financing investing in the stock market.

Managed or Unit Trust Funds
Among the benefits of investing in unit trust funds mentioned are:

1. Unit trust funds provide full-time, highly qualified and skill professionals who conduct economic research and fund management which otherwise may not be available to the ordinary investors. The fund manager has instant access to real market information, coupled with the funds’ research facilities, experience and investment skills, the fund manager is supposed to be in a better position to make more informed investment decisions.
2. Shareholders benefit from a level of low-cost diversification, and hence reduction of investment risk made possible by the amount of pooled investment dollars that most individual investors would not be able to achieve.
3. Unit trust offers investors a simpler, more convenient, less time-consuming method of investing in securities than trading individually. You will be relieved from the burden of administrative paper work, investment research and analysis of the investment portfolio. All administrative work is done by the manager and does not require any active participation on the part of the unit holder.

The Return of Managed Funds
Michael Jensen (1968),, a top finance academic researcher examined the performance of 115 mutual funds in the United States found no evidence that on average, they were able to predict security prices well enough to outperform a buy-the-market-and-hold policy. It also mentioned that there was little evidence to show that any of the individual fund was able to significantly better than that was expected from mere random chance. The interesting thing was that the conclusions hold even when they measure the fund returns gross of management expenses, meaning that the funds were not even successful enough in their trading activities to recoup even their brokerage expenses. Other academic research such as Grinblatt and Titman (1989), and Burton Malkiel (1995) which comprehensively evaluate fund performance, provided the consistent conclusions that managed funds do not outperform broad market benchmarks as evidenced by their negative risk-adjusted excess returns.

Given the benefits of investing in managed funds as discussed above, especially the full-time, highly qualified and skill professionals who scour the markets for stock-picking opportunities, and the fast and abundant information plus other resources they have, how come they fail to deliver and consistently under-performed the market?

The underperformance of mutual funds/unit trusts
There are a host of reasons why the vast majority of funds are destined to continue their underperformance in relation to the broad market as detailed below.

1. Market efficiency

The inability of the fund managers as a whole to beat the market is best explained by the efficiency market hypothesis which postulates that in an efficient capital market, current market prices reflect all available information about a security and the expected return based upon this price is consistent with its risk. As a result, it is impossible for an investor to consistently beat the market and profit from it.
In US, there are thousands of well qualified and experienced professionals watching over the market every second. As a consequence, any market mispricing would have been quickly arbitraged away by eagle-eyed professionals in a matter of seconds; low price stocks bidden up, and high price stocks sold down almost instantly. Hence in an efficient market, it is hard to find bargain stocks and harder for anyone to outperform.

2. Management fees and expenses

The under-performance of the mutual funds/unit trusts can be mainly attributed to the costs of investing in them. The following link is a very good read and an eye opener for anyone wishing to invest through mutual funds/unit trusts.
http://www.forbes.com/2011/04/04/real-cost-mutual-fund-taxes-fees-retirement bernicke.html
The article explained in detail about the six different costs involved in investing in mutual funds: expense ratio, transaction costs (brokerage commissions, market impact cost, and spread cost), tax costs, cash drag, soft dollar cost and advisory fees. The total cost per year, according to the author, can add up to about 4% per annum, which is equal to 40% of a long-term return of equity investment. How could one manage to get a reasonable return after all these exorbitant costs?

3. Agency problems

Career risk

For a fund manager to try to beat the market, obviously he has to do something which is extra-ordinary and something different from what other fund managers are doing, like investing heavily in a stock which he thinks will rise sharply in price in the future but others don’t see. Well if he is proven right in his decision and actually outperformed the market, he probably will get a praise from his boss or his investors, well done, and that is what you are expected to do, right? But what if he is wrong and the fund loses heavily? You will be quite sure that he will get fired or his investors will desert him..

Closet indexing and over-diversification

Another reason for the underperformance of managed funds is closet indexing and over-diversification. Many managers exhibit similar qualities to lemmings. They will follow each other off the cliff rather than risk being different and thinking independently.

A concentrated portfolio of the best ideas for only ten to twenty stocks can do well above average, especially the fund manager can analyze them well. But, unfortunately, it can also has the chance to do well below the average, especially for the short term. In this aspect, short term can even mean a period of two to three years. In this case, most investors would have run away from the fund.

Asset under Management

What do you think it is better for the fund managers; to make extra-ordinary return for the investors by doing something extra-ordinary and risk desertion of investors or get fired if the outcome is below expectation, or to increase their fund sizes and hence the total amount of asset under management by pleasing the investors and following the crowd?

4. They’re human

One would expect fund managers are emotionally calmer as they handle other people’s money, not theirs. But that has been proven often untrue. They are human too and influenced by the sentiment in the market. They tend to follow the crowd and chase hot stocks of the day too with the aim of beating the market, or simply to join in the fun. Cash holdings are always low during market euphoria and very high at market lows, fund managers are as prone to panic as anyone and most are too spooked to dive in during times of panic.

But surely there must be individual fund managers who could beat the average of the market. Unfortunately, several research studies tracked the investments of these large, “professional” managed fund allocators such as foundations, endowments and pension funds and analyzed their decisions to hire and fire investment managers. Most fund managers were hired due to good recent performance and those who were fired had recent underperformance of the market. The results weren’t pretty.
In the years following hire and fire decisions, the recent fired managers significantly outperformed the market while the recently hired didn’t show any performance at all.
Individual investors make even worse decisions. A research shows the best performing stock mutual fund in the 2000s made 18% annually compared to the S&P of minus 1%. Yet the average investor in the same fund managed to lose 11%per year over the same period. Why?
After every period in which the fund did well, investors piled in. After every period in which the fund did poorly, investors ran for the exits. The average investor managed to lose money in the best performing fund purely by buying and selling the fund at just the wrong times.
What about the performance of unit trusts investing in Bursa? I do have some interesting results which we will discuss in the next article.
For questions and discussions, please contact me at
ckc15training2@gmail.com

KC Chong (22^nd April 2015)

2nd March 2015 - OTB

http://klse.i3investor.com/servlets/pfs/41947.jsp

(OTB TOP Pick 2015)

http://klse.i3investor.com/servlets/pfs/41601pub.jsp

(Manybank TOP Pick 2015)

2nd March 2015 - KCChong

http://klse.i3investor.com/blogs/kcchongnz/71783.jsp

1st March 2015- Growth Price and Value kcchongnz Author: kcchongnz | Publish date: Sun, 1 Mar 2015, 06:24 PM

his article is for learning, sharing and discussion purpose. It does not constitute a buy or a sell call.

In my previous article, I have discussed about how to identify quality growth stocks.

http://klse.i3investor.com/blogs/kcchongnz/70874.jsp

In summary, a quality growth stock must have good growth in profit and cash flow in tandem with its revenue growth achieved internally like that of Pintaras Jaya. Pintaras Jaya’s net profit grew at a compounded annual rate (CAGR) of 18.5% for the last 10 years from RM9.9m in 2004 to RM54.2m in 2014 without having to ask a single sen from its shareholders and borrow any money from the bank.  Instead it has been distributing hefty and ever increasing dividends from 5 sen eight years ago, up to 30 sen per share in 2014 based on the original share capital of RM80m.

In contrast, although London Biscuit revenue has been growing at a CAGR of 20% for the last 10 years, through high price acquisitions, increasing assets utilized with increasing borrowings and new shares issues. Despite of that, its net profit hardly moved. As the number of shares issued have increased substantially, earnings per share (EPS) has dropped by 57% from 20.5 sen 5 years ago to the latest 8.8 sen for the financial year ended 31^st December 2014. Dividend, paid using money from right issues and increasing borrowings from banks, has decreased from 15 sen in 2006, to just 1 sen for the last few years.

A high quality growth company like Pintaras also produces plenty of cash flow, in particular free cash flow after spending money on capital expenses for growth. A poor quality growth company like London Biscuits doesn’t have any cash left after capital expenses. In fact, it put up its hand to ask additional money from shareholders and banks all the time in the name of growth. In actual fact, its high growth is a huge destroyer of shareholder value instead with its return on capital of 4%, way below its cost on capitals estimated to be about 12%.

It is hence easy to identify a quality growth company as opposed to a shareholder value destroying growth company. However, being able to identify that is only the first level thinking. One also needs to analyse if a good quality company is not expensive, and a poor quality company is cheap to invest.

Valuation: Back to the Past

Let us go back to the past of 5 years ago to reflect if Pintaras was worthwhile to invest in, and if London biscuits was clearly a lemon to avoid at that time. I know some readers will not be happy as I am using the same examples most of the time to illustrate my points. However, for those who are patience, we may all learn something very useful from these two excellent examples here.

London Biscuits

When London Biscuits announced its final 2010 financial results ended 31^st December at the end of February 2011 with earnings per share (EPS) of 15.7 sen, LonBis was trading at RM1.00 apiece. At that price, the P/E ratio was just 6.4, a very low value, and hence very cheap indeed, so it appears to. That is how most investors rely on when valuing a share, the simplistic PE ratio, including almost all professional analysts and investment bankers. PE ratio is alright for some companies but often it presents a whole lot of problems. You can refer to the following link of what I am talking about.

http://klse.i3investor.com/blogs/kcchongnz/63417.jsp

To summarise, the E in this P/E ratio is an accounting number which can mean anything. For many poorly managed companies, almost all the E reported are dodgy numbers as discussed in the appended article here.

http://klse.i3investor.com/blogs/kcchongnz/45373.jsp

Hence I prefer to use another not-easy-to-manipulate metric in times Enterprise value (EV) over its earnings before interest and tax (Ebit), or operating profit as discussed in the same article in PE ratio above, especially for those companies which has substantial debts and minority interest like LonBis. Please refer to the appended link to understand what EV is and its importance in valuation.

At an enterprise value of 12.3 times its Ebit 5 years ago, or a before tax earnings yield of 8%, LonBis at RM1.00 was not exactly cheap, considering its poor return on capital, which was at 6.1% then and trending downwards, way below its cost of capital of about 12%.

Price-to-book wise, LonBisc appears to be cheap at o.4 times. This it deserves it due to its low ROIC.

Its price of just two and a half times cash flow from operations is deceivingly cheap as its CFFO consists of substantial depreciation write back. Not until you consider its free cash flow which is most of the time negative the few years before 2010 because of the management “playing with” the buying and selling of property, plant and equipment all the time! Table 1 in the Appendix shows its “Purchase of PPE” is all the time substantially higher than the CFFO. What kind of business is it when the company needs to spend more upgrading its PPE than the cash it receives, every year consistently without fail? Yet the management wasted away more money in acquiring shares of other public company such as Lay Hong, Khee San at high price resulting heavy losses in investing activities.

For other valuation techniques, please refer to the link below:

http://klse.i3investor.com/blogs/kcchongnz/54664.jsp

Hence I would not invest in LonBis 5 years ago by considering its low return on capital lower than its costs which is a huge shareholder value destroyer, and its dodgy management actions in manipulation of PPE, empire building and further aggravating its already persistent negative free cash flow.

Pintaras Jaya

When Pintaras announced its final 2010 financial results at the end of June 2011 with earnings per share (EPS) of 26 sen, it was trading at RM1.60 apiece. At that price, the P/E ratio was just 6.2, very low and not forgetting that it has a huge amount of excess cash amounting to RM1.22 per share then. Its enterprise value is also extremely low at just 1.2 times its Ebit. Its cash flows were also very healthy with FCF positive all the years. With the abundance of FCF, management has been increasing dividend payment and investing in equity funds earnings higher return from its cash. How could one go wrong investing in Pintaras then?

The question is a good high growth company of Pintaras at a pre-one-for-one bonus price RM8.70 now, after rising more than 4 folds in share prices in just 5 years, too expensive any more to invest? And a poor growth company of London Biscuits at 80 sen now, after dropping by 20% since 5 years ago while the broad market rose by more than 50% during the same period, a value buy?

Price Vs Growth and Value

Pintaras at the adjusted price of RM4.35 after the bonus issues is trading at a PE ratio of 12.8 and an enterprise value of 8.2 times its 2014 Ebit. It is certainly much more expensive than before. However, with its high return on capital of 30%, healthy balance sheet and cash flow, and the huge increase in job in the coming one year and hence potential for future growth, I believe it is still not expensive at all. A quality high growth company deserves a higher valuation.

On the other hand, LonBis at 80 sen, is trading at a PE ratio of 9.1, and an enterprise value 11.5 times its Ebit. This I consider very expensive considering its low and declining ROIC of just 4%, heavy borrowings and huge negative FCF of RM25m. I still won’t touch it with a ten feet pole.

Knowing how to identify a high quality growth company and what is a poor quality growth company, and their price versus value relationship will certainly improve one’s investing experience. I am certain that Pintaras and LonBis are not the exceptions. Please refer to the link below.

http://klse.i3investor.com/blogs/kcchongnz/63777.jsp

Investing, as opposed to speculating and gambling, is not a game of hope, luck and chance.

“An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operation not meeting these requirements are speculative”         Benjamin Graham

For those who are interested to gain some valuable knowledge in identifying good growth companies, and most of all, buy them cheap, please contact me at ckc15trainig2@gmail.com

K C Chong (on the 11^th day of Chinese New Year 2015)

Appendix

Table 1

Year	2014	2013	2012	2011	2010	2009	2008	2007	2006
CFFO, thousands	12128	18452	50211	-19566	39043	27692	24950	7311	13764
Purchase of PPE	-41439	-22012	-91679	-29421	-47696	-32396	-24930	-38515	-21514
Disposal of PPE	4455	8500	0	16382	15532	19107	11548	7988	6317
FCF	-24856	4940	-41468	-32605	6879	14403	11568	-23216	-1433

1st March 2015 - RICH Slowly and Steady Author: Mr Wealthy4321 | Publish date: Sun, 1 Mar 2015, 10:59 AM

 

 

Many investors hate the idea of getting rich slowly in the stock market. I know this to be true because it happened to me when I just started out investing seriously in 1990. Everyone I knew in the market wanted to get rich quickly so why should I be the fool and opt to get rich slowly? Back then, the stock market was booming and many millionaires were made every month.

Unfortunately, the good times did not last very long and the stock market broke in 1997. Stocks fell like a stone, the decline sharply accelerated by the financial storm that engulfed the country.

When I began to turn my financial life around, it dawned to me that trying to get rich quickly was NOT the right strategy to employ investing in the stock market. This was because the “get rich quickly” mentality caused me to do irrational things that would ultimately lead me to lose a lot of money in the stock market.

Important Reasons For Getting Rich Slowly In The Stock Market.

1) In The Long Term, Stocks Produce Good Returns

They may fluctuate in the short term, and make us emotional about investing, sometimes they may even decline by 30%-50% in a single year, but historically, they yield an average annual investment return of 10%.

2) Eliminating Emotions When Investing In The Stock Market

Emotions (greed and fear) can do a lot of damage to your portfolio if you are on the wrong side of the trade. It can cause you to hold on to a stock that is dropping much longer than you should and sell away a rising stock much earlier than you should.

In short, emotions can be a very destructive force when you attempt to get rich quickly in the stock market. But when you decide to get rich slowly, emotional investing lose much of its destructive power over you because you are looking at a 10 year, 20 year even 30 year horizon.

3) Treating Stock Investing Like A Business

When you decide to get rich slowly, you are treating stock investing like a business. Does a business owner aim to make millions overnight, a few weeks or a few months? Definitely not! Only a gambler has such ideas.

A business owner invest for the long-term; making money slowly and steadily. People who enjoy success in the stock market say that is how stock investing should be operated, much like a real business!

4) Less Market Risk

When you decide to get rich slowly rather than quickly, you tend to reduce your market risk. You also have more time to look for a stock, plan your trade and conduct proper analysis and evaluation. All this actions will help towards reducing your market risk – risk of picking a bad stock, risking of making a bad trade, etc.

How To Get Rich Slowly In The Stock Market?

 

1) Keep To Investing, Not Trading

Keeping to investing, instead of trading, is one sure way to get rich slowly and steady in the stock market.

When I began to turn my financial life around, it occurred to me that trying to trade and time the market and hoping to get rich quickly was NOT the right strategy to apply in the stock market. The only sure way of winning is by investing long term and to get rich slowly.

2) Buy Fundamental Good Stocks, Keep For The Long-Term

Buy fundamental good stocks that you want to keep for 10 years, 20 years or even 30 years in horizon. If you cannot keep the stock for such a long period, forget about buying it. You will probably NOT benefit from holding the stock because however good the business, they will need a long time to grow and prosper.

3) Practice Dollar Cost Averaging Strategy

No one can predict where the market is going at any given time, so why even try? Putting ALL your money in an investment all at once – thinking it will only go up – can be a very risky idea.

By buying a fixed dollar amount on a regular schedule, your focus is on accumulating assets on a regular basis, instead of trying to time the market.

With dollar cost averaging, you take a lot of the emotions out of investing because where the market goes in the short-term is far less important to you, as long as you stick to a regular investment plan.
 

Conclusion

The get rich slowly investing strategy is a strategy that is ideal for investors with a lower risk tolerance and someone who has a long-term investment horizon. This strategy also makes the most sense when used over a long period time with investments that are volatile and unpredictable in nature, such as stocks, Exchange Traded Funds or mutual funds.

Source: http://ongmali.blogspot.com/2015/02/rich-slowly-and-steady.html

25thDec2014 - KZChong Furniture Stocks

http://klse.i3investor.com/blogs/kcchongnz/66908.jsp