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Post by oldman on Oct 19, 2013 8:18:50 GMT 7
If I have one sentence to truly describe investing, it is that investing is simply about managing risks. If you manage your risks, your rewards will take care of itself. Another way of describing this is that if you manage your downside, your upside will take care of itself.
Risks and rewards go hand in hand. Luck can influence rewards but luck seldom influence how you manage risk. Managing risks is a science that you can learn. Nevertheless, very few people successfully manage risks well because it is not in our nature to be truly pessimistic to ourselves.
Like it or not, managing risks is managing the downside. The downside is the worst possible scenario for the investment. For me, the downside is that the business collapses and all goodwill is lost. What is left are cash and properties. This is where I usually start when I look at any stocks. I strip the assets to the bare foundations of cash and properties. I give no value to any existing businesses or management.
I do not like company loans as banks can recall loans and if this happens, all assets can then be exposed to a fire sale and this then can lower the intrinsic value of that stock.
Once I quantify the downside, this is used as the baseline from which I put a value to the company. From thence on, it becomes an art because I do invest in some companies that take loans especially if their business fundamentals are strong.
Risk has nothing to do with the share price of a company. If a company had been trading at $1 and is now 5cts, this does not mean that the risks are lower. To me, managing risks is looking fundamentally at a company and not at its share price as share price has nothing to do with the fundamentals of a company.
Yet, many investors still use a low share price as a method of managing risk. This is dangerous as risk has little to do with share price unless you are simply gambling that the share price is more likely to go up because it has gone down so much. To me, this is speculating rather than investing. One's odds are at best 50-50 when one speculates or gambles.
Fundamental investing is aimed at increasing the odds of winning for the investor. To increase the odds, one has to manage risks in such a way that in the worst case scenario, there is still good residual value in the stocks.
Warren Bufett would rather use the term, margin of safety. This to me, is similar to managing risks. As an investor, you want a big margin of safety..... a ridiculous margin of safety is even better. This margin of safety describes the margin that you need in order to invest safely. The margin is the difference between the fair value of the stock and the price at which you can buy the stock.
If you can buy a stock at 10cts when its fair value is 20cts, you have a 10ct margin of safety. The difficulty in working out the margin of safety is in calculating the fair value of the stock. You have to decide yourself how you calculate the fair value. For me, I base fair value on net cash and properties. Yes, to many, this is already at a discount to fair value. But to each his own.
I am just a very kiasu investor and hence, my margin of safety sometimes borders towards a ridiculous level! This is how I manage my risk... buying stocks with a very high margin of safety so that in the event, a company collapses, chances are that I can still recover most, if not all, of my initial investment. If a company does well, the market will revalue the company and the share price is likely to rise to that fair market value price.... and the difference will be my profit.
If you now take a step back and re-read what I have written, you will realise that I am actually not a big risk taker as I protect myself with a ridiculous margin of safety. But yet, as I am looking for multiples of my investment, I look for high rewards.
In a nutshell, I am actually a low risk, high reward investor.
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Post by me200 on Oct 21, 2013 16:36:43 GMT 7
Hi oldman, Judging from your margin of safety is mainly base on NTA (Singapore assets and Cash), would you agree that your MOS is somewhat similar to Walter Schloss investment strategy?  www.bloomberg.com/news/2012-02-20/walter-schloss-superinvestor-who-earned-buffett-s-praise-dies-at-95.htmlUnlike Buffett, Schloss does not invest based on earnings. He invest in companies which are asset-rich with low debts. Essentially, low P/B companies. He has a reason for it and he said,
“Try to buy assets at a discount than to buy earnings. Earnings can change dramatically in a short time. Usually assets change slowly. One has to know how much more about a company if one buys earnings.” |
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Post by oldman on Oct 21, 2013 16:50:23 GMT 7
Hi oldman, Judging from your margin of safety is mainly base on NTA (Singapore assets and Cash), would you agree that your MOS is somewhat similar to Walter Schloss investment strategy? www.bloomberg.com/news/2012-02-20/walter-schloss-superinvestor-who-earned-buffett-s-praise-dies-at-95.htmlUnlike Buffett, Schloss does not invest based on earnings. He invest in companies which are asset-rich with low debts. Essentially, low P/B companies. He has a reason for it and he said,
“Try to buy assets at a discount than to buy earnings. Earnings can change dramatically in a short time. Usually assets change slowly. One has to know how much more about a company if one buys earnings.”Spot on. However, as the years go by, I feel that I will no longer invest in such companies unless there is also a clear indication of transformation around the corner. This may be the result of a change in the majority stake or the company is moving into a business that I see great potential. My strategy changed a little after the General Magnetics saga. The shares at 6cts were fully covered by the cash. Company has no debt and they have a few properties. The key one being the General Magnetics building in Toa Payoh valued at easily another 25cts. It also has 320,000 sq ft of land in the Senai Industrial Estate. Problem was that the company then delisted through a SGX loophole and made no exit offer. I have learnt that we as minorities will always be at the mercy of majority shareholders. So unless the ownership changed, it is unlikely that the management will wake up one day and do something different. |
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Post by Retropbz on Oct 21, 2013 21:50:39 GMT 7
Dr Michael so u mean u do not fully judge a company only on dicounted value by use ((cash+property) - debt) VS market price am I right? It will be grateful if you could guide us through your knowledge and experience |
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Post by oldman on Oct 22, 2013 4:40:37 GMT 7
Dr Michael so u mean u do not fully judge a company only on dicounted value by use ((cash+property) - debt) VS market price am I right? It will be grateful if you could guide us through your knowledge and experience Retropbz, my margin of safety is based on cash and properties. This does not mean that I only look at these as I am also very interested in the businesses that the company has and its management. I must feel confident that the business is sound or that it will recover. And of course, I must feel confident with the management. One example was my investment in Ellipsiz. When the harddisk sector was depressed, the share price of Ellipsiz fell drastically to below book value. As this is a cyclical industry, I invested in it when it dropped from 90cts to 3cts. Within a year, it went up to 15cts and I divested as I felt then that it has reached fair value. I will only invest when I am comfortable that if the company has to be liquidated, I should at least get my money back... ie, I put no material value to its businesses or management. If I did, I would have bought Elllipsiz probably when it fell down to 15cts as this would have included the value of its business even though it was loss making at that time. And if I did buy instead at 15cts, I would still be holding on to this share 4 years later as the share price has been hovering around this level since then. The key to being a successful fundamental investor is to buy at a ridiculous margin of safety. The more ridiculous, the better as this will cap your downside. Of course, it then becomes very very difficult to find such stocks. Like Warren Buffett says, you don't have to swing at every round. Just swing when you feel that everything is in your favour but when you swing, do swing big. Hence, it is critical that you look after your downside very very carefully. The key to consistent wealth creation is not to lose money on any investment.  Another way of looking at it is that I have 2 calculations when I buy a stock. I calculate its intrinsic value and this is the fair value of a stock. Then, I calculate its safe entry value which is my margin of safety in case all hell breaks lose on the company. I will only buy when the stock hits the safe entry level. Do also read this posting: pertama.freeforums.net/thread/91/buy-sale |
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Post by oldman on Oct 22, 2013 7:33:38 GMT 7
Retropbz, you may be interested in this book that I read in Feb 2013:
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Book: The Value Investors by Ronald Chan
Quite an inspirational book especially for those of us who may want to go into fund management. The book highlighted 12 fund managers and most of them went into fund management only later on in their lives.... and made a success out of it.
For me, my investment style is most similar to the first fund manager interviewed.... the late Walter J. Schloss. I like the following paragraphs about Walter Schloss:
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Unlike many fund managers who like to talk to management and understand a company’s business, Schloss’s sole interest was in looking at the statistical side of a stock. Doing so meant “focusing on the downside and not losing money,” he explained. “When a stock trades below its working capital, the investor begins to get protection.”
Schloss elaborated: “I always like to find companies with no to low debt because debt complicates things. I also like to see whether management owns enough of the company’s stock to serve in its best interests. But you often have to keep track of management’s actions, digging into the footnotes of financial statements to see if they are honest people.
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When it comes to investing,” Schloss advised, “my suggestion is to first understand your strengths and weaknesses, and then devise a simple strategy so that you can sleep at night! Remember that a share of stock represents a part of a business, and so you need to understand its financials before making a judgment. When you have made a sound decision, make sure you have the courage to stay true to your convictions and not let the market affect your emotions. After all, investing should be fun and challenging, not stressful and worrying".
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Post by me200 on Oct 22, 2013 15:43:28 GMT 7
I did a quick check on Ellipsiz; the NTA during that period (2009) was $0.27. Wow, your margin of safety is really ridiculously high at 89%!  |
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Post by oldman on Oct 22, 2013 15:54:26 GMT 7
me200, the 27cts was the company's definition of its NAV. This included machinery, goodwill and stocks which I will discount to zero value. Yes, I am a very picky investor.... but this is the best way of reducing one's risk. It is fair to say that I was then looking at all the listed hard-disk related companies on SGX as I felt that the industry is cyclical and will definitely turn upwards again if one had the holding power. For this investment, it was a top down approach on an industry rather than a bottoms up. I then had to select one listed company out of all those listed ones and I decided on Ellipsiz because of its asset backing and its potential as a multi bagger. Hence, for Ellipsiz, I selected the business first before looking for the bargain stock. |
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Post by me200 on Sept 15, 2014 9:04:02 GMT 7
Hi Oldman,
Quote from your book "My exit price is usually already at a premium to the fair market value of the stock."
Appreciate if you could share how you determine the intrinsic or fair value of a stock.
Will you use existing NTA (Net cash & property) when you buy a stock as a benchmark of fair value of 1X, then add your desire premium to be the exit price?
Let's say a company that you invested with high MOS. Over the years, despite the company profitability has improved but the net cash is decreasing, which resulted lower NTA (cash & property) and thus the MOS is lower. Does it affect your fair value price and you will revise it downward?
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Post by oldman on Sept 15, 2014 15:21:10 GMT 7
If you buy a stock because of its NTA, it is relatively easy to calculate its intrinsic value. For situations like this, you are hoping for Mr Market to revalue the stock. For such situations, frankly, I am happy taking a discount off its fair market value.... after all, there can be many permutations even if the properties are sold.... for example, management uses the cash to buy something 'silly'... which not surprisingly, happens all the time. But again, management is usually smart and one has to read in between the lines. If you buy a stock because you like its business and it so happens that it is also trading at a discount to market value, and the shares then run. In situations like this, my exit price will certainly be at a premium to the fair market value of the stock. Frankly, for such stocks, I rather hold on tightly than to sell at a premium. Yes, nowadays, most of the stocks that I buy fall into this category. For situations like this, I want to ride on the upside of its business rather than just riding on its asset base. If the business does well year after year, I really don't see any reason in rushing to sell the stocks, even at a good premium. If on the other hand, its core business is not doing well, I then need to relook at its business model and if I am still bullish, I will continue holding on. But if I don't like what I am seeing, then, I will not hesitate to offload, regardless of its market price. After all, I am buying the business and not the assets. Of course, to make things more complex, I too look at the world markets in general and if I think the bear is around the corner, as I do now, then, I am more likely to sell into the strength of the market, regardless of the intrinsic value of the stock. For stocks that I have bought because I liked the business but the shares have yet to perform, I am more likely to hold on to the baby and let it develop through another market cycle. Yes, I too don't have a crystal ball and with hindsight, I should have waited. But this is the life of an investor.... sometimes you are right, sometimes you are wrong. If you are wrong with your timing, you can still make it right but you need holding power and the ability to buy even more shares at lower prices. This is why I always encourage folks to use their own cash to invest in fundamental stocks and not use margin accounts. Hi Oldman, Quote from your book "My exit price is usually already at a premium to the fair market value of the stock." Appreciate if you could share how you determine the intrinsic or fair value of a stock. Will you use existing NTA (Net cash & property) when you buy a stock as a benchmark of fair value of 1X, then add your desire premium to be the exit price? Let's say a company that you invested with high MOS. Over the years, despite the company profitability has improved but the net cash is decreasing, which resulted lower NTA (cash & property) and thus the MOS is lower. Does it affect your fair value price and you will revise it downward? |
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Post by web on Jan 26, 2015 15:55:36 GMT 7
Dear oldman,
I am now slowly reading the posts in this forum. I find your post and reply in this thread very useful. It helps to reaffirm what I have learned from your book and writings elsewhere.
I cannot remember when I communicated with you at SI. Though I roughly knew about your investment strategy from your postings at SI, the description in your book is much more complete and more enlightening. I wish I have read your book earlier. BTW, I made a mistake in my 1st post in the Welcome thread. Your book that I read was the 2009 (first edition) edition and not the revised edition. I am still trying to get hold of the revised edition.
One question that is always in my mind is how do you deal with the transaction cost when you buy illiquid counters? It is quite annoying when one only manages to buy a few lots that cost few tens to few hundred dollars while the minimum commission is $20+ dollars? I am aware that Standard Charter does not impose minimum commission but the shares bought with Standard Charter has to be kept in Standard Charter's nominee account. I have not fully assessed the potential risk of leaving the stocks in the nominee account and thus have not used Standard Charter.
The second question that has been bothering me is that since it usually will take a few years for the stocks you bought to appreciate in value, the market may enter another bear cycle before your stocks reach your target prices. From what I read, you would normally sell out when you sense that the megatrend has turned bearish. Did the stocks you buy normally reach your price targets before the megatrend turns bearish?
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Post by oldman on Jan 26, 2015 17:36:18 GMT 7
Good questions. Firstly, please read the second edition of the book as I have almost completely revised it. The first edition was rushed out by an external editor. I really did not like it and so I decided to totally revamped the book and really turned it upside down. By right, it should have adopted another title given the drastic make over. Transaction cost is a real problem for which I have no answer. Sometimes, I am thrown 1 lot and have to pay more in commission than the price of that one lot. This is especially true for penny stocks and the theoretical lowest price is 0.1ct per share and this translates to just $1 for one lot. Now, SGX has reduced 1 lot to just 100 shares instead of 1,000 shares and hence, the theoretical lowest price for one lot is now 10cts! Minimum commission for that 1 lot is now at $10 instead of $20. But really, this is much worse than before for investors like me. To reduce the pain of this transaction cost, I now queue much lower than before. Hence, if I wanted to buy a share at 5cts, I rather queue at 4cts just in case I get thrown that 1 lot of 100 shares. Also, I try not to be the first one in the queue to buy and also, would prefer to put in a buy queue only when I see a reasonable sell queue quantity..... meaning that if someone threw me that one lot, I can still buy from the sell queue a reasonable quantity of shares. Yes, I ride the megatrend. If it is turning negative or is likely to turn negative soon, I am usually a net seller. But I do have a problem in that I usually like to buy a sufficient quantity of shares and this usually translates to quite a bit of shares and it is then not easy for me to sell the shares even if I wanted to. Hence, nowadays, I tend to be even more careful and have changed my strategy a little bit such that I now prefer to buy into a company that is likely to be transformed rather than just buy into asset rich companies. I have learnt that many asset rich companies have management that rather take care of themselves rather than the minority shareholders. Hence, one may be counting chickens that are unlikely to be hatched. Dear oldman, I am now slowly reading the posts in this forum. I find your post and reply in this thread very useful. It helps to reaffirm what I have learned from your book and writings elsewhere. I cannot remember when I communicated with you at SI. Though I roughly knew about your investment strategy from your postings at SI, the description in your book is much more complete and more enlightening. I wish I have read your book earlier. BTW, I made a mistake in my 1st post in the Welcome thread. Your book that I read was the 2009 (first edition) edition and not the revised edition. I am still trying to get hold of the revised edition. One question that is always in my mind is how do you deal with the transaction cost when you buy illiquid counters? It is quite annoying when one only manages to buy a few lots that cost few tens to few hundred dollars while the minimum commission is $20+ dollars? I am aware that Standard Charter does not impose minimum commission but the shares bought with Standard Charter has to be kept in Standard Charter's nominee account. I have not fully assessed the potential risk of leaving the stocks in the nominee account and thus have not used Standard Charter. The second question that has been bothering me is that since it usually will take a few years for the stocks you bought to appreciate in value, the market may enter another bear cycle before your stocks reach your target prices. From what I read, you would normally sell out when you sense that the megatrend has turned bearish. Did the stocks you buy normally reach your price targets before the megatrend turns bearish? |
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