In my last article in the link below,

http://klse.i3investor.com/blogs/kcchongnz/127246.jsp

I strongly advocate that one should not speculate in the stock market for the sake of his financial health.

Just figure this. The stock market in Malaysia is made up of about 70% institutional investors, with the rest made up of innocent retail investors and big crocodiles such as syndicates and stock market manipulators. Where do you stand speculating in this zero-sum game?

In the above article, I have shown you some example of speculated stocks which I talked about them from 4 years ago. The portfolio of 9 speculative stocks lost an average of 54%, with 70% of them lost more than 43%, one up to a loss of 92% over the 4-yearperiod.

How can one recover from this type of losses? You can never.

Yes, there are many unscrupulous operators around, doing whatever they like, just for the sake of making money as proven in a comment below,

[Posted by stockmanmy > Jul 6, 2017 03:45 PM | Report Abuse
andrei
make money is only game here.
 

Andry007 > Jul 6, 2017 03:04 PM | Report Abuse
Thank you Mr. kcchongnz i respect people with principle but in Malaysian society respect is from how much money he has regardless of ill gotten or whatever means.]

It is that scary if you still wish to speculate in this zero-sum game. Below is my reminder to you this statement again in my last article on the peril of speculating,

“That was also confirmed by many of my friends. All of them had lost money. Most of them had lost so much that they just refused to talk about the stock market any more. Most of them know many of their friends and relatives who had lost a lot of money speculating in the stock market. None of them know anyone who had become rich speculating in the stock market.”

So, what can we do in order to build long-term wealth in this crocodile infested pond of investing?

I have mentioned before with an inflation rate of 4%-5% a year, if you place your money in fixed deposit in banks earning an interest rate of less than 3%, your purchasing power become smaller and smaller.

How to build long-term wealth with a negative real return like this?

Here is what you should do; you don’t speculate on a piece of paper, you invest in a company, taking buying a stock as akin to investing in part of the business of the company issuing the stocks. Your investment grows with the business of the company. Unlike trading of shares, it is not a zero-sum game.

But how to invest, which company to invest, when to invest, etc.?

It is simple. you invest in good companies. A good company has a good and durable business, a business which will last for a long time. It earns good return from the capitals they put in. It has proven good management which has been proven to increase the value of their investment. Its business is growing with proven increased revenue and profit, not necessary every year, but as a long-term trend.

Please note the emphasis, “proven”. It is hard to believe that a company which has not been making money, making return higher than its costs of capital, proven sharing with shareholders with increasing dividends, that the management has not proven to increase shareholder value etc. can suddenly able to do so in the future, just because the CEO says so. Would you bet on that?

In investing in a company, you must consider its risks too. You must consider if it has too much borrowings that it can’t pay its interest payment when there is a downturn in the business. It should be able to pay back its debt when there is a global financial crisis. You must make sure that it has adequate cash flows to service its interest, etc. Otherwise, if those events occur, the company could get bankrupt. You will lose everything as a result.

Why would you want to take the risk when there are many other proven better and successful alternatives?

So, is investing that simple? Not really.

Figure 1: Share price movement of CIMB

If you have bought CIMB shares about 4 years ago at the adjusted price of RM7.60, you will still suffer a loss of 14% as it closed at RM6.55 last Friday. However, if you have bought it at the adjusted price of RM3.77 in early January 2016, you would have made 74%.

Yes, the secret of success in investing is not only buying good companies, but buying good companies when they are selling cheap.

You won’t want to buy companies which have no proven success records, would you? Of course, unless it is selling at dirt cheap.

The secret of success in investing is not taking high risk, and (hoping for) high return! Why would you want to take high risk and lose all your money? Does high risk always come with high return? Stupid, isn’t it?

The secret of success in investing is to buy good companies, with little risks, but potentially high return!

How plausible is this! Can’t you fathom it?

I have shown you in many articles, with research and documented proof, that by doing the above, one can get very good return over a long period of time. One of them is here, “I always knew I was going to be rich”

https://klse.i3investor.com/blogs/kcchongnz/105247.jsp

A couple of my diehard “fans” always ridicule me.

“KCChongnz must show proof that he is a multi-millionaire”

“People top 3 shareholder in what what what, as I own millions of shares in which which which. Why never see your name appear in the top 10 shareholders in listed company?”

“someone drives Rolls Royce and what you maths teacher drive?”

It is true, I have nothing of the above to show. But is it necessary that he must be one of the above to qualify to educate the public, on avoiding the crocodiles in the market, on earning satisfactory return over the long term?

Is our society such that only the rich and wealthy can publish article, giving critical comments, and share knowledge and experience?

But I do have something to talk about, quite often actually. I have published a few portfolios of stocks in i3investor since a few years ago, and hence with documented proof. One of them is the “GE13 Stock Watch”, on 21^st January 2013. It was published by another regular contributor here, Tan KW, who asked me what stocks did I own then, for sharing in i3investor. The portfolio of stocks and their return up to date are shown in Table 1 in the Appendix.

Please note the purpose of this discussion is just to show that the investing strategy of buying good companies when they are selling cheap did work for me in Bursa, and it worked extremely well.

Return of GE13 Stock Watch

Table 1 in the Appendix shows the performance of the stocks and the portfolio for the last four and a half years’ investment period for “GE13 Watch” up to today on 9^th July2017, a reasonably long period.

During this period, the average return of the portfolio of ten stocks is 151%, or a median return of 95%, widely out-performed the gain of the broad market KLCI of just 19.1% and the FTSE Bursa Small-Cap Index of 58.2%. The compounded annual return of the portfolio (CAR) is high at 25.8%.

As a reference, the only closed-end fund, icap.biz, returns only about 15% during the same period.

All the 10 stocks in the portfolio have positive total returns which varies from 9.6% for Plenitude to 376% for Prestariang. There are 3 other stocks returned more than 100%; SKP Resources at 330%, Pintaras at 283%, Jobstreet, which had sold its core business, had an estimated return of 200%.

There are only two stocks which under-performed the market, but just; Plenitude at +9.6% and Kfima at +16.4%. This shows the low risk of following this buy-good-companies-at-cheap-price strategy.

“Heads I win big; Tails I don’t lose much”

“Take care of the downside; the upside will take care of itself”

The total return is equivalent to a compounded annual growth rate (CAGR) of 25.8%. RM100000 invested less than four and a half years ago has grown to RM281000, about two and a half times that of invested in the broad market.

So, you see, investing in good companies when they are selling cheap did work and it worked extremely well. It is basically a low risk, but proven high return strategy.

Conclusions

You have seen in my previous article that speculating can cause you to lose your pants as you are just a patsy, or a sucker, for the market syndicates and manipulators. I have shown you that, instead of speculating, you must cultivate the mindset of investing for long-term, in order to build long-term wealth.

The pertinent question is, how can one identify a good company, and how to determine that it is selling at reasonable price, or even cheap.

Teaching people to carry out investing following the “right path”, i.e. avoidance of losing big and the investing strategy of buying good companies has become my passion. If you were in our two-days Port Dickson Retreat and Seminar just a couple of weeks ago, you will understand why I find this pursue of mine is so satisfying and rewarding, non-financially.

How lucky am I that I can do something I love to do, at my own time, and at my own place too.

Here are some of those numerous compliments I treasured, just recently,

“Mr. Chong, by teaching me value investing you didn’t just teach me how to value the company but also how to add value to my life.”

“I am delighted the NAV broke the RM1m hurdle, both Foreign &Local Portfolio return more than 41%. Thank you for the continued good performance of the portfolio. Please feel free to call me for either lunch, breakfast or dinner.”

“Well done KC, Pleased to have made the PD trip and to have met up with you. The growing fellowship inspired by you is testament to your efforts in promoting FA, particularly benefitting the young but still not too late for the old guys like me. Keep well.”

If you are interested to be another of my fundamental value investing online course participant, at the same time get some investment ideas, you may contact me at

ckc14invest@gmail.com

KC Chong

Appendix

Table 1: Return of GE13 Stock Watch as on 7^th July 2017