In my latest article “Jaks and Some Twisted arguments on Share Margin Finance” in the link below,

https://klse.i3investor.com/blogs/kcchongnz/168850.jsp

Someone posted a non-related question in the comment section as below

“Posted by Jhau65 > Aug 12, 2018 10:50 AM | Report Abuse

Anyone know what kc roi for 2018?”

Thanks for the concern. The broad FBMKLCI Index lost about 1% year-to-date. That is not too bad. However, the Bursa FBM Smallcap Index lost a lot more of 12% year-to-date.

You refer to results for the 2018 i3investor Stock Pick Challenge up to end of last month as shown in the link below,

https://klse.i3investor.com/blogs/stock_pick_2018/167668.jsp

The results were not pretty as most of the participants are pickers of small capitalized stocks. The results show only 5 out of 78 made money so far. 96% of the participants were in negative return, with a median return of -18.5%. More than 10 of them lost more than 30% and the worst, more than 50% loss.

I too am a small capitalized stocks picker. I have deliberated why I choose to be in this playfield in my article, “Investing along the forgotten and beaten track”, in the link below,

https://klse.i3investor.com/blogs/kcchongnz/120190.jsp

Basically, the reason was that as a value investor, I look at the forgotten and beaten path, trying to find values where others, i.e. the fund managers, institutional investors are not interested in because of the sheer size of their fund under management, and have no mandate to invest in.

As Bursa Small capitalized stocks were not doing well in 2018 with a drop of 12% this year, you would expect my results would be poor too. Investing is not easy as professed by many. It is really not easy to even make a positive return like those 5 in the 2018 i3invstor stock pick competition, unless one is very skilful, or lucky. Looking at the stocks the 5 winners picked, I tend to believe they have some good skills in investing.

How do we determine if a certain outcome of investing was due to skill or luck? How would we know we would be lucky and our outcome in investing in the future, an endeavour filled with uncertainties, would be great all the time? How would we know we could double, triple the value of our investment in 2 or 3 years’ time? We won’t know obviously.

Hence, instead of focussing on the outcome, let us focus on the process in investing. A good, plausible and proven successful investment process would likely yield good outcomes.

My Process of Investing

A value investor like me look at investing in a stock as akin to investing in part of a business. A plausible process would be analysing the business, if it is a good business. A Good business general must meet some or all the criteria below,

1. The business must be durable and be able to last for a long time to come
2. It has a record of stability of earnings and cash flows
3. It earns return higher than the cost of its capitals to be shareholder value enhancing, otherwise why do the business, or buy the stock? Unless it is selling dirt cheap.
4. It has a good growth prospect, with the business expanding and earning more and more money.
5. It is not overly geared as to face the bankruptcy risks during economic and financial crisis.
6. It must have a smart and capable, forward looking, credible and honest management who would take care of the interest of minority shareholders.
7. Other attributes of a good business

I have deliberated this at length in my previous article, “Stock Market Investing strategy: Buying good companies” in the link below,

https://klse.i3investor.com/blogs/kcchongnz/161473.jsp

A good business may not be a good investment, if it is selling at too high a price. I have shared some simple market valuation techniques in my article, “The Most Important Thing in Investing: Price versus Value” in the link below,

https://klse.i3investor.com/blogs/kcchongnz/162226.jsp

The common comparable valuation methods elaborated in the above link are summarized below,

1. Price-earnings ratio
2. Price-to-book ratio
3. Dividend yield
4. Price-to-cash flows
5. Price-to-sales
6. Enterprise value to Ebit or ebitda

I have also introduced some absolute valuation techniques such as the discount cash flow analysis or net present value in the link below to estimate the intrinsic value of a stock and compared to the market price and see what the margin of safety is,

https://klse.i3investor.com/blogs/kcchongnz/166106.jsp

Were there any evidences that the process works? What have been the outcomes using this process?

Performance of my portfolios

I have two portfolios set up in i3investor about 5 years ago with the stocks selected basing on the above process as described in my recent article, “Investing in Bursa for 5 years: 5 年的等待”in the link below,

https://klse.i3investor.com/blogs/kcchongnz/138098.jsp

I have shown that the portfolio of 10 stocks named “GE13 Watch” established in i3investor on 21^st January 2013 returned 146% against the return of the broad market of just 20% in about 5 years.

In the same link, I have shown that my second portfolio of 11 stocks named “2013 2H Stock Pick Challenge” also selected using the same process as established in i3investor on 1^st August 2013 and as shown in the link below, “Search for The Holy Grail in Investing: The Magic Formula” returned 175% in about four years against the return of the broad market of just 10% during the same period.

https://klse.i3investor.com/blogs/kcchongnz/127825.jsp

The process of the investment was deliberated at length and published in i3investor too. This process of value investing had certainly provided great outcomes in my investment.

However, those were the good times in Bursa. What is the return of kcchongnz’s investment in 2018 when the small capitalized stocks were beaten down? Does the process work too during bad time?

I have selected 4 small capitalized stocks in 2018 in my ongoing stock pick service following the same process, and one with a different theme. The 4 stocks return an average of 4.4% year-to-date as on 13^th August 2018. Three of the 4 stocks have positive return so far, with one negative return of just -4.8%. With a proper investment process, I an quite certain that they will do well in the long-term.

I will elaborate in more details of my investment process for these stocks for sharing purpose in my next article.

I have no complain about the outcome of my stock pick in 2018.

Conclusions

The process of buying a good company when it is selling cheap will give you high probability of good return. With a sound process, the outcome in the long-term would be generally satisfactory.

This I have shown from the published portfolios in i3investor during the good time with many times the return of the broad market. Even during a bad year such as that of this year with negative return of the broad market, the return on investment on the stocks picked following a proper process is still satisfactory.

I have recently some enquiries on my next stock pick service, and also on the course on fundamental value investing. Anyone else interested may contact me at

ckc14invest@gmail.com

KC Chong