Where is the Value ?

Today, I received a phone call from a good friend, who commented on my blogs. I am grateful he did. Proved that he is reading my blog. (Thanks, man) He said that I have misled my readers. Reason? He knew that I have bought some covered warrants of Hong Kong stocks and these shouldn't even in my porfolio as it contradicted with what I have kept emphasizing in my blog that I am a follower of value investing. In other words, he thinks that Chinese stocks and their CWs shall be considered as sort of "devils" and highly speculative stocks, and shouldn't be owned by any value investor...

He did have a point. I believe many people would have thought the same. However, before you move your mouse pointer to the "X" at the top right corner, and decided not to come back for good while calling me a "cheater" for not walking my talk, please allow me to explain my reasons:

Firstly, let me share with you some write ups on Value investing, which I have directly copied from the Wikipedia:
"Value investing is an investment paradigm that derives from the ideas on investment and speculation laid forth by Ben Graham & David Dodd in their 1934 text "Security Analysis". Although value investing has taken many forms since its inception, it generally involves buying securities whose shares appear underpriced by some form(s) of fundamental analysis. As examples, such securities may be stock in public companies that trade at discounts to book value or tangible book value, have high dividend yields, have low price-to-earning multiples or have low price-to-book ratios.
Notable proponents of value investing, including Berkshire Hathaway chairman Warren Buffett, have argued that the essence of value investing is buying stocks at less than their intrinsic value. The discount of the market price to the intrinsic value is what Benjamin Graham called the "margin of safety". The intrinsic value is the discounted value of all future distributions.
However, the future distributions and the appropriate discount rate can only be assumptions. Warren Buffett has taken the value investing concept even further as his thinking has evolved to where for the last 25 years or so his focus has been on "finding an outstanding company at a sensible price" rather than generic companies at a bargain price, this concept is important as you are actually buying into a business."

In plain English, Value Investing is buying an asset cheaper than what it's worth.

Back to defending myself, and the future of my blog:
1) There certainly are no strict rules that limit what companies, industries or countries that we can choose from. Although, there might be some ethical preferences, like some people will not invest in companies that involved in the so called "sinful" businesses like gambling, cigarettes, alcohol, prostitutions (yes, there is one listed company in Australia that is in this business) and etc; or others who prefer not to invest in companies that are against the human rights issues, or those who are involved in genocide related issues and etc. I have nothing against these principles, afterall the technology today have allowed us the exciting opportunity to invest in tens of thousands of companies world-wide, why are we afraid of running out of choices? Why are we limiting our options?
One example that I like to use: if one see good future in the automobile industry, and decided to invest in it. Is Proton the only choice? Hell no!! You can easily invest in Mercedes, BMW, Toyota, Porsche (in fact, the share price of Porsche has been doing quite well in the past few months) or whatever brand name you can think of. I must clarify, I didn't say that Proton is not worth invest in, I am merely saying that there are many more other choices. Point is, invest in whichever that give you the best value. Period.

2) So, thinking down the same road, does investing in Chinese companies considered to be speculative in nature? In my humble opinion, not all of them. There are still many businesses that are considered to be undervalued. Allow me to give another example: a folk favorite, Public Bank (again, I have to clearify that I have nothing against this bank).

Public Bank has long been considered to be one of the bluest chips in our own soil. Anyone who invest in Public Bank will be considered as a super conservative value investor without doubt. Why? People will give reasons like: it is well managed la, consistent dividend la, nice track record la, share price keep going up la and things like that. So, these all make whoever that invest in Public Bank a value investor? How if it is selling at RM20 today? still value investing? or how if there is someone who tips you that Public Bank will go to RM20 in one week, and without doing further studies, you jump in and buy it at RM11 now still considered value investing?
See, my point is, it's not what stock you buy that make you an value investor, it's the reasons behind. If you buy it because its undervalued or you see the potential in its future growth, then yes, it makes you a value investor. As Warren Buffett put it, "the highest risk is not knowing what you are doing". And to show my appreciation of having you reading until this part: if you see good potential in banks or financial industries, I would like to tell you that there are other undervalued stocks in the China and Hong Kong market that are selling at cheaper valuations compared to Public Bank. If you like strong and steady, HSBC Holding is a good choice. If you like growth potential, take a good look at ICBC and BOC. They are still reasonably priced and in terms of valuation, are still considered to be cheaper than Public Bank, in some ways. And in other criterias like track records, management and dividend policy, they did as well, if not better... hmm.. I might try to share some of my more detailed analysis later.

Oh well, hope I have said enough to convince you that I do have my own reasonings for what I am doing and I did not do it based on mere speculation. (have I?)

Riding the China Wave

It has been more than a month since I last posted something here eh? What trigger me to write about the China stock market today? To make a long story short, I have been telling friends about investing in the Hong Kong and China markets few months back. But as the procedure to start a share trading account overseas is tedious, many have ignored my recommendations back then. Anyway, as these 2 markets have performed extraordinarily well for the past few weeks (and our market has lagged like dead fish), they are just too hard to be ignored anymore. Whether have these markets reached their peaks and due for correction is another debatable topic. Putting that worry aside, if one still see good future on these markets, there are at least 3 ways to participate in them:

(1) As mentioned earlier, open an overseas share trading account. I suggest those trading houses from Singapore or Hong Kong. They have very established trading platforms and payment systems which allow all transactions to be made through the Internet. Or, some local stock broking houses do allow share tradings in overseas counters. Please check with your brokers for details. I know Hwang DBS and OSK do provide such services.

(2) Buying unit trusts. There are plenty of unit trusts launched by investment banks recently that have exposure to the Chinese markets. This is an easier alternative as one don't have to worry about which stock or industry to choose from. Let the "experts" take care of your problem, but of course you need to pay them management fees. I must also clarify in advance, not that I am against fund managers (I am considered a small time, unqualified, fund manager myself anyway), but "most" funds underperformed the market, even without the management and loading fees. Why do they underperformed? That would be another long topic. Readers of books written by Peter Lynch, The Motley Fools and etc would understand why.

(3) The most risky but easiest alternative is to buy the covered warrants/structured warrants listed on our Bursa. Although the choices are very limited, the underlying companies are considered the stronger and more established ones. I would not recommend investing in these warrants until one have understand the mechanism and risks involved. Basically, it is a leveraged instrument that allow the holders to profit from an increase of the underlying share price. Of course, the downside risk is also relatively bigger compared to ordinary shares. The list of structure warrants and all their profile can be found at the homepage of Bursa Malaysia, here.

Good luck..

I-Capital - An Asian Berkshire in the making?

As this is my first blog on stock picking, I prefer to choose one that do not require alot of analysis and is easy to understand.

I-Capital (5108) is one of the only 2 close-end funds that are listed on the KLSE. For those that are not familiar with Closed-End Fund, it is a fund that has a fixed amount of shares outstanding, unlike mutual funds which are open-ended (allow new shares to be purchased). Similar to ordinary mutual funds or unit trust, they are managed by a fund management company. Closed-end funds behave more like stocks because they are traded on an exchange and the price is determined by market demand after an initial IPO process. Their main business activity is merely to invest in financial securities, making profits through Capital Gains and receiving of dividend/interest incomes. Unlike ordinary mutual fund, Closed-end fund does not necessarily trade at its Net Asset Value (NAV), but usually, not far from it. So what do I like about this fund? Simple enough.

First and foremost, I like the MANAGEMENT team running the fund, which is Capital Dynamics Asset Management Sdn Bhd (CDAM), helmed by Tan Teng Boo. Tan is a well-known figure in the financial market. His views, analysis and comments can usually be seen in many local and international financial medias, like CNBC, Bloomberg, Astro, TheStar and etc. I found that his views are daring and are usually against the crowd. But most of the time, they turn out to be right than wrong. Most interestingly, I sensed a few similarities between him and Warren Buffett. (Those who are familiar with the investment style of Buffett will understand what I mean after reading it's annual report here. Nope, the white hair does not count as one similarity).

Secondly, the investing style of the fund suits me confortably. Value growth orientated. Most of the companies it invested in are those I am happy to hold myself, including (past and present) Lion Diversified, UMW, Asiatic, Digi, F&N and etc. So, buying into I-Capital alone saves me alot of trouble, comparing to monitoring those 10+ stocks personally. If you feel like comparing his portfolio against yours, it can be found at its latest annual report here. Comparing this to Berkshire Hathaway? Although Berkshire actually owns many businesses and control some listed entities, most people still treat it as a fund managed by Warren Buffett himself. What's wrong for leaving your hard-earned money to someone whom you trust could manage it better than you?

Thirdly, its past record speak for itself. Average of over 20+% p.a. compounded returns since inception and beating KLCI and EMAS Index every single year along the way. If the fund can maintain that kind of returns going forward, every RM1,000 invested will turn to RM1mil in less than 40 years.
(side note, you might want to skip the following part, nothing important: if you considered 40 years too long, there are 2 way of getting there faster, 1. invest more up front, instead of RM1k, put in RM900k, you will reach RM1mil in less than a year; 2. put in more along the way, like an additional RM1000 every year; 3? go pray hard that he can do better than Warren Buffett. Even my idol, the greatest-investor-of-all-time returned a few percentage points better, what do you expect? 4? ok ok. Go ask your remisier, maybe he knows some syndicates that can do it faster; 5? I've run out of BS, told you there are only 2 ways, practically, haven't I? thanks for reading though!)

Fourthly, Closed-end Fund have more flexibility compared to ordinary mutual fund. For one, during market panic, when mutual fund holders opt to liquidate their position, like those we've seen during the sub-prime crisis weeks ago, these mutual funds have to liquidate their position in other assets to meet its obligation, albeit at an unfavorable price. As for Closed-end fund, its market price and NAV might fluctuate during panics, but as long as the fundamentals remain intact, it doesn't have the pressure to liquidate its holdings. For more comparisons, please visit I-capital homepage at http://www.icapital.com.my/.

Well, as I said in the first line, this is my first blog that I have attempted to write on stock valuation, I have picked one that is easy to explain and understand, and hence I-Capital fits the bill. My target is to buy whenever it is selling at or close to its NAV. Honestly, it has been doing quite well for me, especially last year when its NAV gains 46%!! Anyway, I am happy with an average of 20% annual compounded return.