kcchongnz blog
Do Your Investments Require Catalysts? kcchongnz
Look me in the eyes. Does your stock have a catalyst?
For every stock you buy, does it have a catalyst?
Catalyst, catalyst, catalyst. It is a buzz word in Bursa. Many investors are obsessed with identifying a catalyst; a quarterly earnings improvement, an earnings surprise, a merger and acquisition, a spinoff, procurement of a big job, a bonus and free warrant issues, sharks coming, syndicates going to goring (jack the share price up, not down?) etc.
Often when I write about stocks with fundamental value investing principles, people said:
- My selection of stocks based on uptrend and momentum is always better than yours. Your cheap stocks will remain cheap, no use, won’t go up in price.
- You wait sampai tua lah (wait until you get old) as there are no catalyst in your stocks.
There is certainly nothing wrong with spending time identifying, evaluating, and analyzing a catalyst if you have the skills, time and the information available, clout because you are a big investor to do that. But I have none of the above.
I follow the School of Value Investing. The father of value investing, Benjamin Graham wanted just one thing and spent his days with Walter Schloss searching for cheap stocks.
Walter Schloss built his exemplary track record of 20% returns for 47 years just on the foundation of buying cheap stocks.
http://klse.i3investor.com/blogs/kcchongnz/52280.jsp
Before you can say you are better than him because you made 100% for the past seven months, Walter Schloss had turned $100,000 invested in 1955 to $527 m in 2002!
He simply bought cheap stocks with low debts, with the idea that eventually, these lowly debts companies as a group will survive, and thus the stock prices would revert to the mean. In some instances, the businesses improved and that represented enormous upside potential for the stocks in his portfolio.
Warren Buffett, a student of Benjamin Graham, transformed himself from buying cheap stocks which he was also very successful in, to investing in one thing, awesome companies with reasonable prices.
That $US100,000 invested in 1964, when Buffett took over the company and shares cost just $US19, would be worth about $US1.2 billion dollars today.
Joel Greenblatt using his Magic Formula investing strategy, i.e. buying good companies with high return on invested capital at cheap price, or high earnings yield (ebit/Enterprise value),
http://klse.i3investor.com/blogs/kcchongnz/51631.jsp
The Magic formula outperformed S&P 17 out of the 22 years and achieved a compounded annual growth of 23.8% as compared to the 9.6% of S&P. $100000 invested 22 years ago in 1988 has grown to $10.9m by the end of 2009, even after the US sublime crisis in 2008-2009. This is by no means a small feat.
None of the above mentioned anything in any of their writings about seeking a catalyst such as a jump in profit in a quarterly report or two to make a successful investment. In fact, they told you the opposite,
“Just sit and wait”,
“Investing in a business is a long-term endeavor, not a short term speculating”.
The problem is that sitting and waiting is torture today. There has to be action. There has to be improved profit in the next quarter or two. There has to be fast moves up and if something doesn’t play out within a few days or a few months, it’s a dud and not worth keeping any longer. “Next!”
“Investors today lack assiduity”. That’s Charlie Munger’s technical term for sitting on your ass and doing nothing.
So what do I do? I generally follow one value investor, Joel Greenblatt; buy good companies at cheap prices, and just sitting on my ass, wait and doing nothing.
Good companies normally don’t come cheap in matured bourses. But in Bursa, there are if you know how to search for them.
Homeritz
I first wrote about Homeritz two years ago when its share price before adjustment is 43 sen.
http://klse.i3investor.com/blogs/stock_pick_challenge_2013_2h/40360.jsp
It was actually alerted by a course participant of mine after he learned about the Joel Greenblatt’s Magic Formula which I wrote in i3investor. Even now, I rely on my course participants to provide me with investment ideas and candidates. I teach them and I learn from them too.
The investment thesis for Homeritz was simply its high return on invested capital of 42% and high earnings yield (Ebit/EV) of 20%. No speculation of any catalyst was mentioned. None at all as I knew nothing of any.
http://klse.i3investor.com/blogs/kcchongnz/77997.jsp
If you have invested $100000 two years ago and sit on your ass and wait until now when the price is RM1.15, and the warrant price at 61.5 sen at today’s close on 22nd July 2015, you would have made 360%, while the broad market remains flat during this two years. Your RM100000 has become RM460000 now.
The same stories go to other multi-baggers in my portfolios; Pintaras Jaya, Prestariang, Jobstreet, Datasonic, SKP Resources, etc.
http://klse.i3investor.com/blogs/kcchongnz/78390.jsp
No, I am not advising you to buy them as their prices have gone up too much in such a short time which I did not expect. There are still some stocks (not many) still waiting and waiting for the prices to appreciate. But it is just two years and I still can afford to wait for a few more years as their fundamentals haven’t changed, and they are still cheap. I have no personal debts nor any margin finance, no interest or commitment fees to pay which can dictate my investing action.
Buying good companies is the first thing to do. If you must seek a catalyst, remember that being cheap itself is a catalyst. That’s the number one catalyst which always gets ignored because it’s so simple and boring.
You may say there were catalysts for all the multi-baggers above; those were bonus issues, share split, and free warrant. These “freebies” seemed to have “unlocked” the values of all those stocks. But in the first instant, I have never thought about these corporate exercises. I did not anticipate any of those stocks would have bonus issues and free warrants. “Share split”? What was the use of it?
If you properly identify good companies selling at cheap stocks, valuation often works as your tail wind, providing you with a built in catalyst.
Having a catalyst is good, but is it necessary?
“You make your money by waiting” Monish Pabrai
“Investing should be more like watching paint dry or watching grass grows. If you want excitement, take $800 and go to Las Vegas.”
– Paul Samuelson
K C Chong (22nd July 2015)
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Discussions
9 people like this. Showing 50 of 66 comments
Posted by tc88 > Jul 22, 2015 10:21 PM | Report Abuse
Not all stock can hold long term like your story KC. There is always a cycle for most stocks......up to a peak then will drop back. Those long term stocks like Coca cola, Wells Fargo and etc which Warren buffet own rarely can be duplicated nowadays......What stocks in Bursa Malaysia u think can hold for more than 20 years? Very few i think except Nestle, GAB, Carsberg and etc. I dont think KC can follow his teacher, hold same stock for 10 years, 20 years or more.
Did I say you must wait for 10m years or twenty years for any stock?
2015-07-22 22:30
KC, ur teacher invest for more than 10 years like Warren Buffet, can u follow? If not, what your time frame?
2015-07-22 22:32
kc, stock market not easy. Not easy. If I can border line pass, I contented already
Need to constantly learn and adapt
Thanks for sharing your thoughts with us
2015-07-22 22:32
Yeah, all fixed income mostly issued by those lsited companies in Malaysia. If fixed income con job, all listed company you buying also con job... See good examples Sendai. Don't u think you are self contradicting?
Use a bit sense, basic knowledge mah. If a company go into bankruptcy, fixed income holders get paid first, equity holders? Maybe never get any thing back, left with toilet papers!
2015-07-22 22:34
Go ask kc educate you a bit! Ask kc for help to teach u! He can teach you!
2015-07-22 22:36
Kc Chong. Please lah help educate these senseless people here! They need your help educating them. I don't have time.
2015-07-22 22:39
Kc, sorry for using your thread to teach this rude young man. I better leave u alone. Bye
2015-07-22 22:40
the whole day I am forced to read this lapsap paperplane's post. Why is he not banned yet. so annoying. what are the moderators doing?
2015-07-22 22:42
To KC,
Warren Buffet’s value investing principle cannot apply in Malaysia because we do not have well established companies like Coco Cola, McDonalds or Gillette Razor which have the competitive market advantage. As a result, they can produce consistently more profit and give out increasingly more dividend to the shareholders.
KYY
2015-07-22 22:49
I am making sensible comments, with facts.it is those like tkp1, icon8888 and kopipeng keep using vulgar languages. So who shld bebanned now?? Please think!
2015-07-22 22:49
It only show how low their level can be when they keep attacking me with baseless vulgar languages. They failed to answer risk concerns I have raised. So they turn to accuse me don't know stock, me novice, me only good at fixed income which is now phrased as conman job by icon8888..so?
2015-07-22 22:52
Icon, please answer if fixed income a con man job? U confirm? I may sent your comments to all fixed income fund management houses now, specially you mentioned Malaysia fixed income con man job. If you have guts post your real name, nric, contact here. They will be very happy to share views with you and maybe issuing you some lawyer letter very soon for making such comments openly in an investment forum so famous in MAlaysia. Your misleading and senseless comments is totally unacceptable!
2015-07-22 22:56
No catalyst is OK. But buy the stock with sufficient margin of safety. If my target return is 20% p.a and my margin of safety is 100%, I can wait 4-5 years for the value to surface. But if Margin of safety is only 30%, I can at most wait 1-2 years whereby beyond that time frame my annualized returns starts eroding... so in this scenario, catalyst may matter.... or I can only hope that I had been too conservative in my valuation...
2015-07-22 23:18
Come icon, show us your name, contacts, nric. I guess many fixed income managers in Malaysia interested to enlighten you more.
2015-07-22 23:24
lol... there is no need to show off your record, or your job, or somesort of other stuff to proof you are better than others.
and be advised,
Swimming in a pool and swimming in the sea is a totally different case.
You would not dare to ask a dentist to perform bypass operation, even they are all doctors, right ?
2015-07-22 23:27
Everytime I saw ks55, I know he is an experienced investor.
What he talks will make "no sense" to newbie investor, but in fact, it's what the matters the most in investing.
Investing is not about stock picking only. It's about portfolio management.
*pardon me for repeating all the shitty PM again. ahhahaha
2015-07-22 23:32
" Investing is not about stock picking only. It's about portfolio management."
I want to print this out and hang on the wall
2015-07-22 23:35
Agree! Wc and perwaja boss equally shityy. Maybe icon8888 interested. Someday I bet he sure come up with some articles relating parkson, perwaja saying turn around. Just watch
2015-07-22 23:44
Portfolio management woh. Icon8888 know meh? Don't act like expert, don't know say dunno loh. TWRR also don't know how to calculate said know portfolio management?
2015-07-22 23:46
Want me teach you how to calculate TWRR not? Stress testing? Or liquidity cash flow management?
2015-07-22 23:47
I charged cheap cheap. Just say sorry to investlah stock king will do mah
2015-07-22 23:47
I am not so free to tell you(or i3 forumers) each time I bought or sold a stock. Actually when Tenaga RM 5 plus I am not yet i3 member. Now I can see from i3 price chart.
Posted by donfollowblindly > Jul 22, 2015 10:16 PM | Report Abuse
Why always mention old stocks? Why no new stocks? I also bought Tenaga before at below RM6.
1) I only talked about stocks which were posted in the blog, what price they were at all have records to see and not just hearsay.
2) When did you buy Tenaga at RM6.00? Where have you posted your record?
3) You just can't comprehend anything I wrote about. Many people don't realize the stocks they have had may be the best stocks they have.
4) I don't owe you any stock picks, do I?
" The problem is that sitting and waiting is torture today. There has to be action. There has to be improved profit in the next quarter or two. There has to be fast moves up and if something doesn’t play out within a few days or a few months, it’s a dud and not worth keeping any longer. “Next!”
“Investors today lack assiduity”. That’s Charlie Munger’s technical term for sitting on your ass and doing nothing."
22/07/2015 22:28
2015-07-23 05:48
haiya u still following KC ah - not living up your to namesake donfollowblindly leh LOL
see u also 'good' wat spotted TNB at half the price now so why need new stocks all the way from NZ LOL
2015-07-23 06:24
hey donfollowblindly I think u must be still MAD at KC becoz u posted below
Jun 5, 2015 05:49 AM | Report Abuse
Agree with kiasutrader1. Furniture companies are no longer cheap to buy compare to say 1 year ago. Don't follow blindly what this article say how good is furniture companies.
One man's meat is another man's poison
seems u 'chow kai' on the furniture stocks n if u would have followed blindly u would have the meat instead of the poison LOL hence now u asking for new meats err new stocks LOL
If it makes u feel better me too also chow kai coz I have no furniture stocks :) :)
2015-07-23 06:41
Thank you for your sharing Mr KC.
Undervalued/ Margin of safety is indeed one of the most important criteria for stock selection.
I personally would avoid stocks that the price being chased up/ told will be "burst" soon. These type of catalyst is not for a value investor.
Share split= fake bonus, rarely has served it real purpose other than the otherwise.
However in the book Margin of Safety by Seth Klarman, he got mentioned a few types of situations that less people would "dare" or bother to consider. It may worth to give a visit to this book. (no charting in this book but i do ever wonder that is Seth Klarman a speculator or a value investor :)
Inactivity on good stock is difficult because “Investors today lack assiduity”. Deciding when to sell or buy will again depends on the investor's skills to access the intrinsic value of that particular stock in relation to its price.
Beside of difficulty to calculate intrinsic value, psychological misjudgments may also contribute to the lack of assiduity in some investors.
Value Investor is required to form own's view, calculation and most of the time need to be acting like a contrarian. Temperament control perhaps is the more difficult part once that people have IQ of 100-125.
2015-07-23 11:15
thanks KC.. there are many other quant investors who dont look for catalyst when buying a stock..i strongly agree with you !thanks and keep up the good work.. i learn alot from you every time you write a new article !
2015-07-28 00:33
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Posted by donfollowblindly > Jul 22, 2015 10:16 PM | Report Abuse
Why always mention old stocks? Why no new stocks? I also bought Tenaga before at below RM6.
1) I only talked about stocks which were posted in the blog, what price they were at all have records to see and not just hearsay.
2) When did you buy Tenaga at RM6.00? Where have you posted your record?
3) You just can't comprehend anything I wrote about. Many people don't realize the stocks they have had may be the best stocks they have.
4) I don't owe you any stock picks, do I?
" The problem is that sitting and waiting is torture today. There has to be action. There has to be improved profit in the next quarter or two. There has to be fast moves up and if something doesn’t play out within a few days or a few months, it’s a dud and not worth keeping any longer. “Next!”
“Investors today lack assiduity”. That’s Charlie Munger’s technical term for sitting on your ass and doing nothing."
2015-07-22 22:28