Dear all my finance and investment course participants,

I am glad to say that I had a fruitful trip to Penang to meet some of you there. we have had some great discussions, and some good sharing from participants and good questions, about investing, which I would like to share with you here.

Fundamental investing and corporate finance

My first encounter in this trip is a lawyer turned entrepreneur, SK, who is a new participant of my online course. I took a ride in his car going to Penang. He joined the course, besides aiming to become a better investor, also to have a better understanding of the thinking of investors in the company they are keen to invest in, in term of how to create shareholder value. SK is keen to know how do investors think about capita allocation of the management; the dividend policy, reinvestment needs etc. In fact, SK has long-term view about his company, in term of structural growth for the company by building a great team of people, or carrying merger and acquisition, and have a better understand of the process and valuation aspect of M&A in the future. Thanks SK for the ride and the interesting discussions.

Deep value asset-based investing

We had breakfast in Ipoh with Ipoh chicken horfun in the original OldTown coffee shop, brought by another past participant of my course with his wife who live in Ipoh. Both are seasoned investors and a happily retired couple. They shared with us their not-so-good experience with some asset-based investing strategy. Yes, some of the major shareholders of these companies do not care about the minority interest, and they have no motivation to do anything about the deep undervaluation of their stocks. I agreed that this kind of strategy doesn’t seem to work in Bursa. One of their main activity in their retirement is spending quite a bit of time watching the computer screen on share price movement. Well they have plenty of time and can while away the time in front of the computer screen, no harm done as long as they are happy.

We met Nicholas at Queens Bay Mall. It is the first time we met although we “have known” each other pretty well for about four years. It was wonderful. He is one fine young man so passionate about investing, following me quite closely in investing philosophy and methodologies, and “have grown himself from blue to green, and better than blue”.

The “afternoon tea” with the char kuey teow at Lorong Selamat in Penang introduced by Dr Yeoh was wonderful, with nicely fried kuey teow with three or four big prawns worth every sen of the RM10 price tag, thanks Dr Yeoh for his recommendation.

Tap dancing to work

The dinner hosted by Dr Yeoh was great, not so much about the food, but the wonderful host and the company. Dr. Lim, a partner of Dr Yeoh, was such a joyous person and her happiness is contagious. Alex, the young court lawyer was sharp and he asked me this question.

“My dad said to me today that you are very good investor. But my question to you is why are you sharing your investment knowledge with such a small fee and not keep it to yourself?”

In my mind, what he is trying to say is “are you really that good that why aren’t you making big money?” Good question. Many of my critics used that on me too in i3investor.

I was thinking, first of all, having some good investment knowledge doesn’t mean one would be able to make big money, otherwise all the librarians will be the richest people around. On the other hand, if one has a lot of money, it doesn’t mean he is very good in investing. This is because investing, beside skill, also involves a lot of luck.

Anyway, I answer his question straight from my heart. For me, the motivation is to try to teach the next generation to follow a proper process to build long-term wealth through investing in the equity market. I have been there, done that, and know the peril of investing, rather punting, in the stock market, without having the proper mind-set, philosophy and methodologies of investing. I told him I have thirty years of investing experience, but only the last ten years is useful and beneficial to my long-term wealth. It is a jungle out there. This has become my passion, believe it or not.

Regarding the above, I am grateful that Dr Yeoh has chipped in to say that I have done a good job in writing a number of articles about the peril of using margin finance, which has been repeatedly propagated in the internet. That is a reward by itself for me on what I am doing now.

This was a full message I got from Dr. Yeoh this afternoon.

“It was wonderful getting to meet you in person and knowing you personally. Keep up the excellent work in educating a new generation of young investors”.

It is really heart-warming to get an encouragement from a senior of mine from university Malaya.

Alex, hope you understand why I do the things I am doing now.

Meeting with course participants

The next Saturday morning we had a gathering of the course participants at Coffee Bean at Gurney Plaza. I was very happy to meet some of them in Penang. I was particularly surprised to know Dr Ung, a senior doctor, whom all along I thought he is a young engineer. It was great to see Simon and Chee Wai again after Pulai Spring. It was a fruitful gathering which I would like to share with you.

Some ground rules in fundamental investing

In the meeting, I first present some of the ground rules in investing, which I have repeated many times about them, because of their importance.

Focus on your Career

Firstly, I share my view that as many of the participants are young, they should treat investing as a long-term endeavour, that they should only invest with the money they have saved from their career, that focusing in their career is of paramount importance. They should not allow investing to affect their work, for example, spending too much time looking at the computer checking share price movement, thinking about the share price movement, instead of doing their work. I was particularly amazed with Dr Poh’s investing mind set. He shared with us that he seldom looks at share price of the stocks he invests in, may be once in two weeks only he has a peep at them. He focuses on his career as a specialist medical doctor which he earns his living and save. He invests with long-term and follow strictly the principle that “investing is like watching the paint dries, or the grass grows”. Not good? He shows me his portfolio of stocks bought years ago; SKP Resources at 30 sen, Magni-Tech at pre-bonus price of RM2.00, Homeritz at pre-corporate exercise of 30+ sen etc. Check what their prices now.

I hope you can follow the investing behaviour of Dr Poh. Oh yeah Dr. Poh, thanks for the chee cheong fan your wife brought and the hot pot white curry mee at Rangoon Road. They were wonderful.

Rule number 1

I re-emphasize on the Buffett’s Rule on investing

Rule no. 1: Never lose money

Rule no. 2: never forget rule no. 1

I have repeated the above rules numerous time because they are of utmost important in our investing endeavour. But how to ensure that?

In order not to lose money, do not follow rumours, hypes and fads, like what the crowd does.

http://klse.i3investor.com/blogs/kcchongnz/89007.jsp

There ain’t no tooth fairy in Bursa

Always remember, there is no free lunch in investing, except may be in diversification. Money cannot fall from the sky.

http://klse.i3investor.com/blogs/kcchongnz/48946.jsp

Beware of all those corporate exercise and make sure you are not the last one scrambling for the last musical chair.

http://klse.i3investor.com/blogs/kcchongnz/79280.jsp

Use common sense in investing, be very sceptical. If something too good to be true, it probably is.

http://klse.i3investor.com/blogs/kcchongnz/80930.jsp

You often hear people boasting how much they have made in the stock market, especially using other people’s money, but you haven’t heard the whole story yet, believe me. When someone give you a sure-make-money tip, ask God for guidance first; “God, why is this given to me, and not others? Why am I so lucky?”

Be concern about risks, it is more important than your dream of high return.

Manage your down side, the upside will take care of itself

In public forums, you often hear shouting about share prices, but you must know the close relation of price versus value in your long-term return on investment.

You will be surprised that once the above are taken care of, high return often will come without you even noticing it, in the long-term, and surprisingly in the short term too.

 http://klse.i3investor.com/blogs/kcchongnz/98798.jsp

Play in your own field

Investing for you and me is a loser game. Just like playing badminton. When we win, often it is not because we give our opponent a hard smash right to the corner of the court, but our opponent put their shutter out of the court because they want to “kill” us by doing so. Datuk Lee Chong Wei, on the other hand, wins his point by smashing his shutter right to the corner, or “cut” his shutter just over the net. You and me lose because trying to do those things.

Who are our opponents in investing? In Bursa, more than 80% of the players are institutional investors, investment bankers, insiders, syndicates, manipulators. Speculating and trading in the stock market is a zero sum game; you win, I lose, and vice versa. Whom do you think will likely to be the loser, you or the big boys? If you do not know who the patsy is, sorry lah.

Fortunately, investing is not necessary a zero sum game, and not necessary you win, I lose case. I mean real investing, for the long-term, and at your own playfield.

In fact, if we follow a proper process of investing, like the fundamental way, we have higher chance of building long-term wealth.

http://klse.i3investor.com/blogs/kcchongnz/79050.jsp

I was glad every one of you nods your head in the meeting. You know what, most suckers out there don’t know.

Lawrence, a finance and accounting trained young man there has shared with us his few years’ experience trading on stocks, future and commodities. His experience mirrored what we are talking about above. He had a stressful life watching the computer screen, the charts all the time, but the results of his investing were far from satisfactory. Thanks Lawrence for your sharing.

Focus on the fundamentals first, and only use technical as an aid, if necessary.

Read, read, read

I have never heard of any super investor who does not read, and continue learning; Warren Buffett, Charles Munger, Howard Marks, Seth Klarmen, Joel Greenblatt, Mohnish Pabrai etc.

http://klse.i3investor.com/blogs/kcchongnz/88007.jsp

By the way, many investors out there may know who Warren Buffett is, but very rarely they know who others I have mentioned here are. I am glad that in the meeting at Coffee Bean at Gurney Plaza, everyone knows all these super investors, and most of you stick closely to their proven investing philosophies, methodologies, and process of investing.

I have in the gathering suggested you to read these books if you haven’t, or even read another time if you have read a few times. They are “The most important thing”, “Random walk down Wall Street”’ “Margin of safety”, “Conspiracy theory; the true Enron story”, etc. I have in fact given you most of the books above in electronic forms, and more, when you first joined my online course and along the course. And don’t forget about the letters to shareholders by Buffett, and Howard Marks. They are inspiring too. Forget about Robert Kiyosaky and the like.

Stanley, regarding your message below,

“Hope one day I can be as good as you.”

If you do the above, you will, even better.

After presenting my views on the above general topic, we went further to discuss a couple of specific investment strategies; dividend yield and the Magic Formula investing strategies. These topics are my favourite topics and I have written many articles about them such as this below:

http://klse.i3investor.com/blogs/kcchongnz/98798.jsp

A couple of stocks watch lists were distributed with the updated price and value information for discussion of the strategies in detail. There are some other important things we must look at using these strategies.

In questions and answers time, we dealt with a few interesting subjects.

When to sell

Claris brought this popular question out. It is a tough question, but basically one can follow the very basic principle of value investing; what is its price compared to its value. Sell if the price has gone above the intrinsic value. The topic on “Some simple valuation techniques” which you have learned in my course should be able to guide you through this difficult decision. If you had paid attention to some discount cash flow analysis (DCFA), and reversed DCFA, you may be able to make better decision, although those topics may not be absolutely essential. There are also other reasons of when to sell, such as those listed in the link below:

http://klse.i3investor.com/blogs/kcchongnz/56937.jsp

However, sometimes even if the price of a stock I have has risen above its intrinsic value, I may still hold on to it and let the winner runs, as there may be positive things that I do not know.

http://klse.i3investor.com/blogs/kcchongnz/86447.jsp

We also discuss at length about whether we should cut loss or not, or average down when the stock we have drops in price. Basically the answer revolves around the price versus value, rather than becoming fearful and follow the crowd blindly, not forgetting we may be wrong too in our assessmentsand be careful about keep on averaging down..

In this aspect, Dr Ung shared with us his confidence on NCB a couple of years ago when he averages down after making huge initial losses, and ended up with good positive outcome when NCB was privatized at a good price. Thanks Dr, Ung, another senior of mine from UM. Thanks for your message to day as below.

“You’re really a nice guy. don’t even talk about monetary return in holding this meeting. Salute you. Shall meet you again.”

Is the stock market going to crash soon?

Claris also raised the question of as the bull market has been around for some time and there seem to be some worrying signs now, whether we should exit from the stock market altogether now.

The above is really a tough question and my point of view, is as usual, hard to predict when the crash will come, even the highly respected sifu in Bursa, the fund manager of icap.biz also couldn’t do that well. In fact, he did that badly, very badly. History in fact, has shown again and again that it is very difficult to predict when the market will crash. For example, many people expected the crash to happen in the mid 1990 in the US market after a long bull, but the bull continued to charge much higher after that before the crash actually happened during the internet bubble in 2001. Those who exited in mid-1990, missed the golden opportunity big time and regretted for the rest of their life.

But the point is that my analysis showed that even if you have invested in some good companies say in 2006, and the market crashed in 2008-2009, if you have held them until now, you would still have made very decent return. So it appears that having a long-term in mind is better than every time worrying about when the market will crash.

However, if one is so worrisome about that and can’t sleep, maybe it is time to get out completely now.

How to be a good fortune teller?

The toughest question was from Dr Ung, how to see the future so that we can do better than just the normal value investing based on the past and now?

There are some chartists who seem to be doing very well looking at the future from the charts, actually charting is also basing on history, history of the past behaviour of speculators, and projecting that they will act the same when the same situation happens again. However, I mentioned that all these thingy can be easily modelled using the computer power now, but the vigorous academic research has shown that there is no statistically significant evidence showing using charts can provide consistent extra-ordinary return. Worse still, charts can be manipulated to deceive and they often do.

I kind of thinking that using some fundamental analysis may be able to predict the future a little better. For example, Opensys and MMSV reported poor quarterly results four months ago and their share prices plunged. Reading the management discussions, it seems that they were only temporary setback and they were actually already having high order book in the future, for example the good sales of cash recycle machines of Opensys, new jobs already secured by MMSV etc. that very likely their future performance would be better and their share prices would rise again. Magni, for example, suddenly had high inventories and is it because they are having high order book from Nike and their coming results will be very good? SAM’s management guided that they have already secured RM3.5b in aerospace contract which will keep them busy for years, etc.

One cleaver blogger in i3investor did use this strategy of what he called value trader, and he has done very well. Anyway, this thing is not easy.

Forget about chasing the share price when the announcement is made. In most instances, it has already been reflected in the share price due to insiders actions, unless you have done your homework and find that the stock is still way undervalued with the new information.

It was a fruitful meeting with all of you, in Pulai Spring, Kuala Lumpur and the latest one in Penang. I hope to meet more of you, and more often with you. Since you have also known your “classmates” now in your respective places of work and stay, you should also meet up with each other of likeminded people more often. I am glad that many of you have become good investors now.

Happy investing, and continuous learning. Adios.

Oop, almost forget about my passion in teaching. If you are interested in my course, please contact me at

ckc15training2@gmail.com

KC Chong