Updated: Jun 13, 2021
Value investing focuses on buying undervalued stocks of strong companies and holding them over a long period of time.
Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value. Value investors actively ferret out stocks they think the stock market is underestimating. They believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond to a company's long-term fundamentals. The overreaction offers an opportunity to profit by buying stocks at discounted prices—on sale.
Your believe in the business modal, management and financial status that the company will consistently do well in future, even the company is not recommended. Value investor see themselves as business partner of the company, their mind is sitting together with the management, they don’t aim for the short term profit. They believe the company will grow big in future. Their aim is to pick stocks that appear to be trading for less than their intrinsic or book value. Short term fluctuation in share price will not affect value investor to sell the share. By using fundamental analysis, focus on company business modal and financial to analysis, whether it is a glad company to buy or not.
Warren Buffett is probably the best-known value investor today, but there are many others, including Benjamin Graham (Buffet's professor and mentor), David Dodd, Charlie Munger, Christopher Browne (another Graham student), and billionaire hedge-fund manager, Seth Klarman.
Combine of technical analysis (TA) and fundamental analysis together (FA), it is more balance than purely use either one, both have different functionality. TA tell us what is the best buy and sell timing, while FA tell you what is the value of things. Combine both analysis it is call Hybrid Approach Analysis.
We want to highlight a important message here, there is a lot misunderstanding about value investor should not care about Technical Analysis, which we think it is very wrong. They do not focus on short term fluctuation in share price, does not mean they totally ignore technical analysis. We have read many of their successful story and news, they do buy share with a company share price has been drop a lot, and sell a lot of share when it is over value. If they ignore the technical of share price, how do they know about when to buy and when to sell. They are just believe understand company value and hold longer term, the return will be more consistent and more safe than try to catch the temporarily trend that no one can be predicted.
In this article, we will share about how a retail investor like us, with small capital, can invest like other successful investor.
A lot people think long term is slow in profit, and facing a lot uncertainty of market volatility. but there is other reason that why value investor still think long term investment is still the best investment ever. We walk along with the company, if they make profit, they will share profit in form of dividend. other corporate exercise that will benefit us is bonus issue, free warrant and so on. We also understand if a company continue make profit, share price will continue to went up, then you will have your capital gain. This is why Fixed Deposits and Bonds will not have this kind of return.
Below is the 7 important point that you need ask yourself when you prefer planing a long term investment for yourself
Invest like how you save your cash
Make your own ledger of your trade
Study and invest the company you understand
Fundamental of the company
Management- The Decision Maker
Future of the company
Best timing to buy
Always question yourself
1. INVEST LIKE HOW YOU SAVE
Financial planning come at first place when you start your investment. Investment has risk, you must always remember your capability, level of risk you can take, amount of fund you can invest and won’t affect your daily living.
The idea is from your salary, after deduct all your expenses and a amount that you save for emergency use, with the extra cash, you invest into your share. We will discuss more how to select stock.
The reason of doing this is, Do not expose all your cash in market at once, we cant predict the direction of market, so the best is we buy batch by batch. Buy by catching lowest price of the month, and you can choose to sell when it is highest of the month or just do nothing, only continue accumulate the share.
2. Make your own ledger
A lot investor never record how much they have invested, cost of total purchase, return from dividen and period of holding. Without such record, many investor will not know their actual return with the time of they holding. Time value is important when come to investment, if you holding more than a year, and the total return is only 2 % , it is rather invest your cash in Fixed Deposit or bonds or change your share to another company.
3. Invest in the company you understand
If you ask around, how many investor know or understand the share they bought. i believe the answer will be surprise. Study a company is hard, it is not easily to understand the terms and accounting figure in financial report. This is why a lot investor only follow news, friends, blog or social media. It is very dangerous if you don’t know what is the current situation of the company, and you bought it.
When study a company, always start from news for the past 3 to 6 month, then continue with research paper from analysis. Once you have finish reading, you will get a rough idea, what is the company current performance. If you found out,there is very less news and very less analysis discuss about the company, it is not recommended to invest in the company. If you are new in share market, you can start from the industry you are working or related, it will help a lot for you to get start.
Here is another method to find your company, it is by using reducing method to filter out how many company in Malaysia that can be invest in it. Then just focus on those company. Imagine how many company Berkshire Hathaway, you will realise there is not much and many of the company is really a glad company, they are large cap and unique and have a totally monopoly power in the market. Not easy for other company to challenge them. Example like coca cola, amazon, APPLE, Gillete, Well fargo, bank of america. Then you can Imagine in malaysia what other company can have this kind of quality.
There is few company in malaysia worth a look, example like
1. glove maker Hartalega, Topglove,
2. Semiconductor- Inari, penta,
3. Banking - Maybank, Public bank
4. Goverment related - Tenaga and Bursa
Of cos there is other company in malaysia Top 30, KLCI index, take your time and slowly study them, maybe there is more you can put in your list
4. FUNDAMENTAL OF COMPANY
Below is some financial ratio use to analysis a company financial. We choose few ratio, that always use, so when you read news or financial report, you will easy to understand.
The three main categories of ratios include liquidity, profitability and leverage ratio. Knowing the individual ratios in each category and the role they plan can help you make beneficial financial decisions concerning your future.
1. Current ratio - current asset/ current liabilities
2. liquidity ratio - c.asset-inventory/c.liabilites
3. Net tangible asset - total asset-intangible assets- total liabilities
operating profitability ratio
1. Price to earning ratio (PE RATIO)
2. Price to book ratio (P/B RATIO)
3. profit margin = revenue - cost / revenue
4. Return on Equity (ROE)= 15 and above
Leverage risk ratio
1. Debt to equity ratio
2. Debt to cash ratio
3. Interest average ratio
4. Debt Ratio = total liabilities / total asset
Financial ratio is like a medical checkout report for a company, to diagnosis whether they are sick or which part need to be cure. Below is some guidelines that a healthy company should have.
Return on Equity (ROE)= 15 and above
Debt to equity ratio= less than 5
current ratio= 1.5 and above
liquidity ratio= 1.1 and above
PE Ratio = 20 and lower than peers
P/BV- lower than share price
Interest coverage ratio= 6 and above
Above is example of best fit for a healthy company, but there is more other factors need to consider. There is not certain all company must follow above ratio. This is why Ratio is best to use to compare with same industry company. Profit margin, high Cash flow and low debt is Important for a business , and also business consistent grow and not sunset industry, it is very best to invest.
Every quarter report or annual report, it will have article of company's Director “Review on company performance”. It is recommended to read, it will help you easy to understand the whole report with some extra comment direct from Director and their forecast of company future. Especially for beginner and investor with no accounting background.
We are encourage you to join our Coach Programme of FUNDAMENTAL ANALYSIS, learn all THE KNOWLEDGE, so you analysis company into more detail and find your own best stock to invest.
5. Management- The Decision Maker
How we know a management team is focus on their business than just focus on manipulate share price and fraud the company account. Many director like to manipulate their share by pull and push the share price from their own company share, because the return a lot more attractive than business profit. Or issue corporate exercise to dilute share holder holding, Example like right issue, free warrant, share consolidate
We must learn that when a company listed, the company is no belong to the founder, it is belong to share holders. All important decision need to get approval from share holders. Management team and CEO will be awarded with a salary, Director fee. If company is perform good with high profit margin, company will award to all share holders with dividend, warrant and so on. Company also will award staff with free share based on their performance.
As you can see from here, Director is probably founder and employee for the company and share holders. Company account have to be audited by quarterly and yearly, All important corporate action and decision have to get approval from BURSA and make anoucement. Once your company is listed, your freedom is restricted, every decision must be legitimate and protect share holders benefit.
But when there is ungrateful director in the company, they will start aiming their company share. Example Selling block of share to outsider and push the share price, to trap innocent investor at high price, or issue free warrant to sell in market, right issue or share split to take more money from investor and dilute their share. There is a lot more tricks that we hard to list all here. So how do we avoid them, we can see from few circumstances.
Director share holding
Motive of corporate exercise
Salary of directors
How director protect share holder benefit
Above is a checklist when survey a company. If a company director keep sell their share, frequently issue corporate action, High salary, issue new share for ESOS, do you think this kind of director or management team is worth to invest your cash with them. Malaysia is famous with Sapura energy Berhad, a loss making company, but director is receiving a very high salary, which accusing by share holder.
other than that, We also can study management team's their background, career history, and experience, whether they has the ability to bring the company to another level.
It is encourage to attend company AGM, this is the only chance, you can meet up and communicate with the management team. You can ask what is their future and up coming plan. Attend AGM will help you to understand company more, and you can directly feel whether they are really know their business well and bring the company to another level.
6. Future of Company
When people refer to Warren Buffett as the Oracle of Omaha, it’s not because he knows that when he drops a potato he knows it’s going to hit the ground. Warren Buffett has earned his nickname because he’s proven time and again that he has an eye for predicting how markets will change and which companies will succeed in the aftermath.
Have you ever wished you could predict the future—and be right? What would it be like if you could clearly see critical changes in the months and years ahead and use those glimpses to shape that future, instead of just letting it unfold by default?
First, You can start from question how much you know everything about the business. Second, how capable the management team overcome crisis. Third, is there any possible the business will become a sunset industry. By answering this three simple question, i believe you able to have some clue about the future of the company. Do you think is it too simple? but how many people willing to spend the time to do the research and study in-depth. You also can start study from yourself. The daily product you using, your gadget, clothing, toiletries, transportation, entertainment
Start from the product you use, and you buy their share. If you like their product, i think someone does too. Slowly from there you can try explore to other industry.
You can also start from sector, e.g. technology sector, health sector, construction sector. Then Start from government future development, the government policy - Yearly BUDGET), to see which sector government will plan to allocate more cash and develop, e.g.: 2021 clean energy , solar energy is one of it and health sector, Medical Tourism Malaysia. We also can see what is the Government body (EPF, KHAZANAH, PNB) or local and foreign FUND HOUSE hold what company, as a glad guideline for you. i am not saying those big institutional holding is a sure win, but it is a good reference for you, their invested fund come in a large amount, obviously they have done a lot study and found them room of profit.
7. Best Timing to Strike
Share price is determine by market, no one can predict when is the price going to drop or up, important we must not buy ALL SHARE AT ONCE, we must buy batch by batch. You can read our article from SHORT TERM TRADE . learn how to catch the best timing of buying share.
8. Always Question yourself
When you decide to buy a company, try to give yourself a 10 minute,
1. what is your reason to buy the company?
2. what is the risk?
3. how many cash you plan to invest in the company?
4. how long you are going to hold?
If you can answer question above. If you have a doubt, then better continue to monitor. Learn from buffett, "baseball analogy" Buffett says, is that you don't have to swing at every pitch.
"The trick in investing is just to sit there and watch pitch after pitch go by and wait for the one right in your sweet spot. And if people are yelling, 'Swing, you bum!,' ignore them." You dont have to have many stock in your hand, but you just need to hit the correct company.
Investing can be easy and hard too, just like warren buffett say you no need to have a high IQ or good in accounting or mathematic genius, "You only have to do a very few things right in your life so long as you don't do too many things wrong." . You just need to discipline yourself, do your homework, dont go greedy when everyone is greedy, continue your learning and talk to glad people around you
We will suggest you to attend our course, so you can have a glad start up on this journey. There is so little things we can share here, the investing world is too huge, from time to time it is rapidly change. AI is taking over the investing world too. Hope you can follow us, keep with us, we will succeed in one day too.