Value Investing - The Investment Philosophy That Works

(This is the unedited version of the article that appears in the Personal Money magazine, March 2008 issue)

I can’t remember when I actually started investing. It must be a few years after I’ve started working because what I earned the first few years was just enough to make ends meet. In addition, I bought a condo at the wrong time i.e. just before the Asian Financial Crisis. Due to the soaring interest rate, I was forced to borrow from my father to reduce the loan amount and negotiated with the bank for a fixed monthly payment.

However, I bought my first insurance policy during my first working year. It was not sold to me. I literally bought it i.e. I took the initiative to approach an insurance agent to work out a plan for me. Although I didn’t really have any dependants at that time, I felt that if something were to happen to me and it doesn’t result in death, I didn’t want to be a burden to my family.

Coming back to investments, I started off by buying unit trusts. I thought investing in unit trusts was a great idea. People pooling their money together and diversifying their risks through professional management. After a while it’s doesn’t seem to be moving anywhere. I made some money. I lose some money.

Then I started reading books about investments. John Bogle, the founder of Vanguard, the 2^nd largest mutual fund in the US revealed to me what was wrong with my unit trusts investments. Cost. It was really costly to invest in Malaysian unit trusts then. Your investment will immediately go down by 5%-7% upon purchase of an equity fund. The unit trusts industry is now moving in the right direction by cutting its sales charge.

I started to invest directly in the stock market in 2001 after reading Peter Lynch. One of the tips he gave on how to pick stocks was ‘Visit the shopping mall’. See what kind of products people buy or what shops were always full with customers. Link them back to the companies that own these products or shops. I noticed Jaya Jusco in 1 Utama was always full of people during the weekends. It’s the same at the Jaya Jusco in Melaka whenever I visited my sister. I checked its market price. Low PE. There was little or no coverage by analysts. Another tip given by Peter Lynch was look for companies that are not covered by analysts. So Jaya Jusco was the first stock I bought at around RM3.00.

One more advice from Peter Lynch was to look at companies that are not glamourous or doing boring business but profitable. What could be more boring than a company producing nuts and bolts? That was why I bought into TONG HERR in 2003 at less than RM1.50. I don’t think there were many analysts covering the company at that time.

I began to slowly catch on with the concept of value investing having read Ben Graham and books about Warren Buffet. Value investing is really an investment philosophy. Lawrence Cunningham says it’s partly a state of mind and it is characterized by habitually relating the price of a stock to the value of the underlying business. I also subscribe to the Tan Teng Boo’s investment newsletter iCapital. Tan is one fund manager that practices value investing. iCapital.biz, a closed end fund managed by Tan has given investors a 160% (as of 31^st December 2007) return since its IPO in Oct 2006. I never believe in subscribing to IPOs but iCapital.biz was the only IPO that I’ve subscribed to.

Value investing is not an easy investment philosophy to follow. It demands a lot of patience, discipline and faith. Sometimes it doesn’t appear to work. But my faith in value investing paid off in 2007 after my portfolio made a return of 66.96%.

Lastly, let me share my IDEAL way of investing in the stock market. I – Ignore the madness of the crowd D- Disregard those Modern Finance Theories e.g. Modern Portfolio Theory, Efficient Market Hypothesis, beta etc E – Examine business, not markets A – Avoid market timing L – Look for diamonds in the rough, companies ignored by analysts. The above ideas are not original but the acronym is. I must admit there were times when I didn’t follow my own IDEAL. That was when I got into trouble. IDEAL + PATIENCE + DISCIPLINE = INVESTMENT SUCCESS Well, I still consider myself a novice when it comes to investing. No one can claim to be an expert unless he/she has gone through a stock market crash and survive.