Noted, thx

Hi Mr Tan, I realised that my SNTORIA-WA cost has breached RM30k, should I readjust the number of shares downward?

http://klse.i3investor.com/servlets/pfs/98778.jsp

If the interest rate in the US was 2.3% 20 years ago, they might have seen 20% inflation back then; today they are having 2.3% interest rate but inflation is only 1.9%.

Not saying that inflation will not eventually go up, but we are living in a tech-driven low inflation era. Unless inflation rate shoots up substantially, we are going to continue seeing low interest rates (Fed's long-term target is 3%).

Tech-driven low inflation is a huge topic that is too big to summarise here. Even Buffett himself is surprised with the low inflation.

I notice there's no single mention on Anasuria or North Sabah in this article. It's like saying Apple is a bad stock without talking anything about iPhone and Macbook.

Just a suggestion, try compare the productions on a year-on-year basis. TDM's FFB productions actually dropped at double-digit rate in 2016. That said, the rise in CPO prices should be more than enough to cover the drop.

u have your point (and nice infographic btw) but it is actually quite hard to list. There have been countless of companies pulled out from the tedious IPO process simply because the management cannot handle the stress from SC. SC is, for lack of better word, very harsh nowadays to the small-to-mid cap companies seeking to list.

Always love your view Ricky, I don't see many philosophical investors here like you. Pls write more :)

factfinder that is not a "fact" about the psc, that's just a general statement which shouldn't cause u to immediately jump into conclusion about the deal.

factfinder where do u find the "fact" of breakeven cost at 80?

Mr Koon, hope you are reading this.

1) Sir, I have huge respect for your philanthropic effort. You have set a great example here for many future successful persons to follow. Salute!

2) Defying the conventional thinking of your followers, I actually support your decision NOT TO WRITE ANYMORE in i3. Reasons being...
(o) While I truly believe your intention is noble, I still think it is a conflict of interest to publicly promoting a stock that you have invested in, especially when you have the influencing power.
(o) Moreover, there were times when you say you are still accumulating the share and the price already started running after you promoted it. So there's even more reason to not write about it.
(o) Based on my experience of reading your articles, sir you have recommended BOTH winners and losers. While I know that you always end your article with a buy-at-your-own-risk caveat, I think there have been many novice investors who blindly bought into your idea(s), either too late or picking the wrong stock, and lost money (I don't care those who made money). It is a social responsibility to ensure no one loses money due to your articles, especially when you don't have an investment adviser license.
(o) I strongly disagree on promoting share investment via margin financing. It is a tool ONLY meant for sophisticated investors and it's very risky even for skillful investors. Many novice investors will blindly follow your advice and fall into debt trap.

3) Most if not all famous investors like Warren Buffett don't share their trading activities publicly, but they never "kedekut" in sharing their wisdom and philosophies. I hope Mr Koon you would continue writing on your investment philosophy without naming any share. Readers will still be benefited.

I wish you a good health and all the best in your philanthropic and investing life.

Thats a good one cheoky XD
I hardly see any good sarcasm here nowadays

ewawa, no worries, just wanna clarify, thx :)

ewawa, I don't mean to nitpick your sharing, but I just want to clarify -- your cousin worked at TS for 6 years, but TS only started its solar venture since 2014. I presume your cousin is not a solar guy for TS, quite weird to get retrenched now if solar is really doing badly.

Just want to share a few thoughts here on the subject of 'mistake'.

Coastal: This is a classical not-investing-based-on-your-own-circle-of-competence mistake. Coastal was a great company in numbers - strong balance sheet, growing earnings, low P/E, etc - but how many of us actually truthfully understand shipbuilding business?

Aemulus: Depending on what price CH bought at, I don't think this is a stupid mistake (unless he bought at 60c). Aemulus is in the right field with tremendous growth potential and has a great business model. Again, does he understand the business?

Xingquan: This one is really hard to judge. Although we all know the rule of "don't buy China companies that listed in Malaysia", Xingquan's numbers WERE just too good to ignore, somemore we got a prominent figure came out to publicly endorse the company, it confused people. Again, did he know what he was buying?

Titijaya: Again, whether this is a idiotic mistake or not is highly dependent on what price he bought at. I don't think it is a mistake if he bought cheap. However, although property development business is much easier to understand compared to the above 3, it is actually not THAT easy. I like to think that many people actually bought into property counters thinking that "aiya property business sure make money one no problem one!", they are just trying to get their ass kicked.

Lesson: Know the edge of your circle of competence; invest in companies that you truly understand. :)

Unlike other famous value investors, Mr Miller has high tolerance for mismanagement in companies and uncertain type of business models, which is why he willing to invest in Valeant, Bear Stearns and airlines. His bad performance in 2008 wasn't an accident.

I thought Tren Griffin has a new post on Howard Marks XD
Thx for sharing anyway, great one :)

aiyoyoyoyoyoyo

hahahaha (just passing by)

Ricky Yeo - "how do you reconcile the above two facts?" - I dont have to answer for what others paid.

Nice Ricky, you sum everything up :D

While I generally agree with your views, especially on opening up the data for a better investment environment, I need to correct you on one thing...

Bursa Malaysia is not a regulatory body per se. It is a bourse/ stock exchange/ for-profit organization. Bursa is in fact a public-listed company. So it's their every intention and right to sell the data listed in their website.

That said, it's very narrow minded for them to not open up the data source. You rightly pointed out that by opening them up can attract more investors and trading volume.

Why Parkson Has Already Been A Value Trap For Many Years

Totally agree that valuation should be made simple, but I think many people misunderstood DCF.

Most DCF users out there (including the finance professionals) don't understand the gist of DCF, they just get the theory from business schools/CFA, then create the spreadsheets and fill in the blanks, ta da... the valuation is $xxx.xx million! So powerful!

Anyone realise that the terminal value calculation in DCF is effectively P/FCF or P/E? Ya I know formula wise it is {FCF(1+g)/(r-g)/(1+r)^t}, but it is actually the fxcking P/FCF!

To simplify it, terminal value is normally FCF/(r-g). So 1/(r-g) is how we all get our multiple on P/E or P/FCF. Say r=10% & g=2%, you get 12.5 times multiple; say r=10% & g=4%, you get 16.7 times multiple. It's actually a very simplistic thinking.

The essence is to actually understand r & g (not the biz school/CFA way, but the logical way).

As Ricky Yeo rightfully pointed out, r is opportunity cost. We should value the next idea based on the r of our best idea, it's not rocket science (as Charlie Munger put it).

g is "long-term" growth rate, so don't jump the gun and impose a 8% LT growth rate because no company in this world can grow 8% "perpetually". 5% is the max I give, and I only give it to Coca-Cola.

When you understand (r-g) deeply, the world will become so simple.

Favco is always dubbed as a great company - strong global brand, high cash pile and high return on capital.

However, I'd be cautious on factoring +ve growth into DCF valuation. Favco may have negative growth in the next several years due to the slowdown in O&G. The slowdown is reflected in their orderbook size, it used to be at >RM1.0b in the past few years.

Nonetheless, Favco will come back in long term (maybe even short term) as Muhibbah has been managing it very well.

Anyway, at market cap of only RM560m (RM259m ex-cash), you don't need a DCF model or even a calculator to know that the margin of safety is high.

Have to agree that free cash flow (FCF) yield is one of the best valuation yardsticks for any investor. In fact, it forms an important part of the famous discounted cash flow (DCF) valuation method. However, it has no less of drawbacks.

Valuation is a forward-looking exercise, so the key is to estimate future FCFs (contrary to historical-looking like many investors do).

While estimating EBITDA is pretty straight forward, the estimation of changes in working capital (WC) and capex is typically beyond the knowledge of investors (even for the best fund managers). Without any solid guidance from the insiders, we can only make very risky guesses, at best.

WC changes and capex rely heavily on management decisions, and they can be very volatile. Some years the management may want to pile up inventories, some years they may want to pay out the creditors more, some years they may want to invest into new projects (capex) and some years they may want to cut down capex. The uncertainty of these components makes FCF-yield valuation difficult and risky. If you are wrong in your valuation in a big way, your potential permanent loss of capital can be significant.

Of course, there is an oversimplified way of estimating FCFs, i.e. imposing a growth rate on the historical FCF figure. There nothing wrong of making estimation this way but the assumptions should be as conservative as possible. At least, if you are wrong, you already gave yourself some margin of safety.

There is another over-oversimplified way of estimating FCFs, i.e. imposing a discount (sometimes premium) on the net profits. Normally, management spends more capex than the depreciations, so this way might work as well.

Anyway, FCF yield is still the way to go, if you know how to do it. :)

Calvin,

Agree with everything you said. The thing I like the most about value investing is: you can have 10 value investors in a room and you get 10 different investing approaches/philosophies, and yet all of 'em are profitable and make a lot of sense.

Still, like you said, 80% of the population would disagree with them.

That's why, I love talking to value investors. You get to learn all sorts of wisdom, but you don't get to find them easily.

It is said of value investing that either you get it or you don’t. Much of value investing has to come from within and in many ways it has to be an extension of your life philosophy.

Warren wrote: “The very term ‘value investing’ is redundant. What is ‘investing’ if it is not the act of seeking value at least sufficient to justify the amount paid?"

Long-termism cannot be trained, it comes from blood, and (un)fortunately most people don't buy it. People often look for ways to generate, say, 2% return per month, but not many people actually try to think on how to generate 72% return in 3 years, when both actually deliver the same results.

They say information technology makes value investing more difficult, I say it will become more difficult when most Wall Street analysts starting to ignore quarterly results and focus on long term strategy. Fortunately for the value investors, this day will never come.

Hi Stocksbaby, great effort! Keep it up.

Few comments from me:
1) I presume your 10 rules of thumb for growth companies are entirely based on historical facts rather than estimation of future. Warren once wrote in his classic GEICO article that "the investor of today does not profit from yesterday's growth". This simple sentence has forever shaped my thinking in investment.

You set a pretty high bar of >15% CAGR and I guess you must be hoping the growth to continue in most cases. That can be backfired. Sometimes historical numbers don't tell everything, if not Kodak & Nokia wouldn't have gone down (they had their >15%-growth days). Understanding the business is SUPER crucial.

2) On your discounted EPS model, using a discount rate of ONLY at risk-free rate is, at least to me, too aggressive/optimistic. Your intrinsic value on any company will likely be very high. I normally discount back at 10% because the stock market delivered 10% return a year (including dividends) in the past, so my valuation is tend to be lower, more conservative and sensible.

3) I think your discounted EPS model is wrong. You only discounted 10-year earnings without a terminal value, you should have one.

Intrinsic value = [sum of 10-year discounted earnings] + [(EPS of 10th yr) x (1+{LT growth rate}) / (r - LT growth rate)]

Anyway, the terminal value calculation is widely available online. You can google them.

4) Actually, valuation can be made simple. Like 3iii said "Benjamin Graham wrote you don't need a weighing scale to tell that this person is fat." This Ban Graham quote also inspired me a lot in valuing companies. There shouldn't be any precise intrinsic value on companies, we should always value them in range.

Actually, it doesnt matter whether it's called EBIAT or NOPAT or PATBI, important is getting the common sense right, which is why I gave up pursuing CFA at level 3, you don't need one to be successful in investment.

shinado, thanks for your response. (Reading back my own comments, I feel I sounded a bit rude, hope you don't mind :D)

Glad to hear that you are long-term investor, I don't see many nowadays. Keep it up!

Yes, I think DCF valuation is fun to do but really impractical to use unless you are to buy up a controlling stake of a company. Many people try to seek comfort in using DCF because it normally gives a higher value than P/E or P/Book or whatnot.

I like EV/EBIT too, but I tweak slightly to EV/EBIAT as tax is NOT what you get. P/FCF is basically 1-year DCF valuation (or 0-year DCF if you use historical figure).

Most importantly, it's the cap rate (r-g) that matters. My way of playing with (r-g) is (a) fixing the discount rate at 10%; and (b) determining the g within the range of 0-5% based on qualitative factors.

Honestly, I don't like Graham formula because I cannot understand the essence of it. Luckily, i dont have too. :D

On Hup Seng, I think 5% FCF 5-year growth is appropriate and conservative enough for valuation. Better be safe than sorry.

I'm new here btw. Look forward to more posts like this in the future. :)

Also, I think one shouldn't use 5-year DCF valuation (or 10-yr or 20-yr or whatnot) if one isn't willing to hold that investment for that specified period. I've seen many people valuing companies using 10-year DCF but hold the stocks for only 9 months.

Hi Shinado,

1) There's a mistake on your calculation of perpetuity value (though the answer is correct)

You mentioned: Perpetuity Value = 33788.11 x 1.05 / (8%-5%) = 1737604

It should be: 49645.82 x 1.05 / (8%-5%) = 1737604

Nothing major here, it just confused me for a minute

2) The subject that I want to talk more is: Discount Rate

I personally very particular (and sticky) on determining discount rate as it is super sensitive to the final results of valuation.

I stubbornly think that 10% is the perfect discount rate to apply, simply because the stocks market returned approx. 10% a year (including dividends) over the long past. To perform at least in line with the market, 8% isn't enough, to me at least.

If you realise that the capitalisation rate you used in your terminal value calculation, i.e. (r-g), was merely 3%, or in other words, you are valuing Hup Seng's EV at 33.3 times FCF at year-5 (even before adding back the 5 years discounted FCFs), that sounds a bit too much to me.

If you up your discount rate to 10% as I suggested, (r-g)=5%, or 20 times FCF, still high but more reasonable. (Note: I personally don't easily put a '5%' LT growth rate to a normal company. Growing at 5% p.a. PERPETUALLY is too crazy if you imagine it properly, probably only Coca-Cola can do that feat. For Hup Seng, I would probably use 3% or 4% (max), which gives me a cap rate of 7-6% (14-17 times FCF))

3) On Enterprise Value (EV), yes Hup Seng has no debt, but you cannot ignore the cash in Hup Seng's balance sheet, i.e. RM120m. You shouldn't compare 'EV' of RM1.70 to 'equity' price of RM1.28, that's a mismatch.

In fact, to your good news, your equity value is actually even higher at RM1.85 [(1361458+119964-0=1481422) divide by 800m shares]

4) If I use your forecast 5-year FCFs but my own discount rate (10%) and LT growth rate (reluctantly using 4% for illustration purpose), my equity valuation is at only RM1.03 per share. Hup Seng seems overvalued at current price unless its FCF can grow at double-digit rate in the next 5 years.

5) Anyway, value is in the eye of beholder. Everybody can have their own valuation. I'm glad that you brought this up. Let me know your thoughts :)

Happy investing!

Mr Koon, thank you for your comment. I believe that for airline business to eventually become viable, the cost of producing aircrafts has to come down first. Currently, the aircraft manufacturing business is dominated by 2 giants, i.e. Boeing and Airbus, who enjoy high returns on equity (partly because they borrowed so much money!) and have no incentive to reduce production costs. Will there be a third force out to disrupt them (somebody like Elon Musk)? We shall wait and see, hopefully in my lifetime.

Actually I think Mr Koon is right on one point. For-profit education institutions are destroying the education system. Maybe Mr Koon wanted to stop enriching this bunch of profit-seekers. I hope he would found a not-for-profit school that relies on the returns of endowment fund to sustain operations (since Mr Koon himself is a legend in investing).

Plus, the value of universities and colleges will deteriorate significantly in near term as the E-education is getting viable and, of course, cheaper. Khan Academy is definitely a good example to follow.

griezmann, I can understand your comment, I actually advocate the 'hiring w/o judging on academic qualification' policy but we can't deny that education is still EXTREMELY important to all of us. Education shaped Bill Gates, Mark Zuckerberg and Steve Jobs, just that they didn't care about finishing the course and getting the paper at the graduation ceremony.

To the poor, education always seems like a luxury. They can't even afford to have a computer/iPad to learn from YouTube or Khan Academy.

"there are more effective and impactful ways... ", I hope there are.

Mr Koon, I don't understand. I thought your scholarship programme is meant to help the poor. Are you implying that the poor should now stay away from getting education, just because the job market is getting competitive?

My humble 2 cents

Doctor/engineer CAN easily learn the skills of accountant, but NOT vice versa.

and with due respect, NO, money is not the most important. It is THE THING YOU DO THE BEST AND ENJOY THE MOST that is most important. Wang Leehom and Kobe Bryant didn't study medical/ engineering/ accounting, but yet they still make a lot of money.

Mr Koon, I've been reading your blog for awhile with an objective mind. I have mixed conclusions with your views, but mostly I kept to myself.

However, I have few arguments on your post today:
1) It is contradictory to say "we should be a contrarian investor" and "we should buy when a company announced a sudden jump in profit". As Mr Koon rightly pointed out that "I have not seen any share drops in price when it announces increased profit", it means we can't buy any cheap share AFTER it announces positive jump in profit. I understand that there are times when we can buy companies with increasing profit at knockdown prices, but I don't see them often.
2) WB achieved 19.4% p.a. over 50 years while most people can't even get 15% p.a. in 10 years, because most of us don't know how to protect our capital in downturn. S&P 500 has had 11 down years in the past 50 years, while WB only has 2 down years in book value. I'm merely speculating but I like to think that Mr Koon has more down years then WB.
3) For Mr Koon to say "I also do not buy undervalued stocks eg Jaya Tiasa..." is very misleading, especially to the new readers. Anyway I don't want to dwell on the subject.
4) I doubt the strategy of "buy when profit increase, sell when profit decrease" can outperform WB's returns. "Buy before profit increase, sell before profit decrease" sounds more likely, but it is super difficult to execute.

Nonetheless, I believe Mr Koon has been making great returns from the stock market in the past 32 years by being a contrarian investor, but, again my own speculation, that Mr Koon didn't do as great as WB (WB achieved 23.8% return p.a. in 1996, the 32nd years since he took over Berkshire).

Agree wholeheartedly with Mr Koon. Be passionate and be the best (the latter will not happen without the former).

I always consider myself lucky for discovering my passion at young age. Many people don't, even in their forties/ fifties. I believe parents and friends play an important role in such discovery, but many don't bother.

Parents should start helping their kids, at very young age, to discover their natural-born passion. Whether it is in arts, music, maths, science, study or some even like to do business at young age, parents should discover their passion as soon as they can and help them to exploit their talent in such field. Human do things best when they are passionate.

Sadly, 90% of the parents follow the path of "must get good grades in school" and disregarding their children's passion (only good for those who like to study). While education is still a very important part of life, it is impossible to force someone, who doesn't like to study, to get straight As in study.

Friends, especially those who had discovered and pursuing their own passion in life, should help others in discovering their passion. Don't just agree with them when they complain about their job is, knock their head and encourage them to jump out of the comfort zone, do something they really passionate of and be the best of it.

I have never seen any successful people who doesn't like what they are doing, ZERO! Name me one if you can.

Sir, your Azmin-Zaid-Muhyiddin strategy sounds like a good plan from political point of view, but from policy-making point of view (if they win), such team-up makes a terrible combination. It is just another New UMNO.

While I think voting out BN is still the main priority in GE14, the suggested leadership will not lead the country into greater heights. I would vote for BN again in GE15.

Airline business is, and will remain as, the worst business for investment in the world simply because it has extremely high intensity of competition in the turnover and super speculative cost structure that eats into the bottom line, and it will not change in the next 500 years. Everything is unpredictable in an airline business -- passenger load, fuel prices, forex fluctuation, you name it. And worst still, by taking that kind of risks, the return of investment is terribly low.

Mr Koon is absolutely right that MAS is operating as a national pride, not a business. There is no commercial reason for MAS to exist regardless of how capable Mr Mueller is. The most reasonable target for Mr Mueller is: (1) achieve return on investment (ROI) at slightly higher than government-bond interest rates, and (2) preserve and enhance the branding of MAS, which is hard enough to achieve.

Hi Mr Koon, in my opinion, there's no short of qualified candidates, but I think it is very hard to get one who is willing to work in Ipoh. Plus, the community in i3 is very niche (many investment professionals don't come here), you might want to consider posting in other platforms like Jobstreet and whatnot.

I personally pass all qualifications, except that I just turned 30 and not willing to work in Ipoh.

Anyway, if anyone willing to work in Ipoh and has interests/knowledge in investing, this job is a no-brainer. What's more you want if you can work with the co-founder of IJM?

Mr Koon, I hope you can find your assistant soon. Cheers. :)