When we talk about investing, most of the time we are referring to stocks. It is true that stocks are one of the best asset classes to own for the long run. But before we go deeper into the topic, let’s take some time to ask yourself an important question.
Can You Tolerate the Volatility of Stock Prices?
Stocks are attractive investments because they are volatile. You can make a lot of money from stocks but you can lose a lot of money too. Most investors lose money because they buy with greed and sell in fear. You must have heard this many times but to my surprise, a lot of people still commit the same mistake over and over again. It is simple to understand but difficult to do. We all know that keeping slim is about exercising more and eating less. Many people understand this but few do it. Similarly, many people understand buying low and selling high is the way to make money, but most end up doing the opposite. If you cannot tolerate the drawdown on your investment capital, do not bother to read the rest of this post.
Growth investing is about recognising companies with potential to be the big corporations in the future. In BFP, we do not really subscribe to this style of investing because we know the difficulty in finding the next big thing. Most often than not, a nascent industry will have many competitors. Remember those days before Google became dominant as the top search engine? There were numerous companies like Altavista, Excite, Lycos, AskJeeves, Yahoo! and more. They are now mere shadows of their original selves (if they are still alive). Who knew that Google will become the biggest search engine during those days?
We are the strong proponents of value investing, which we believe most people can implement this strategy. Value investing is about buying stocks below what they are worth, and in anticipation of selling them when the stocks are rightly valued. The key is to know how to value the stocks appropriately.
Sebastian Chong wrote a good book which gives a good overview of value investing – Value Investing by Sebastian Chong.
One of our favourite and most overlooked value investing book is by ShareInvestor.com founder, Dr Michael Leong – Your First $1,000,000 Making It In Stocks.
How to Determine the Value of a Company?
There are many ways to value a company. Our preference is to use financial ratios – 8 Key Financial Ratios That Value Investors Absolutely Must Know
Joel Greenblatt has a quantitative and systematic way of ranking stocks in terms of their valuation – The Magic Formula to Stock Investing.
Aggregate Fund Management also have similar investment philosophy of screening stocks via financial ratios. We did an interview with them – Interview with Aggregate Value Fund Managers.
Eric Kong, the fund manager for Aggregate, has written a fantastic article for BFP about a simple value investing strategy for retail investors – A Practical Approach for the Time-Challenged Layman Investor.
Another popular way to value company is to use the Discounted Cash Flow Method but we advise caution – 7 Reasons Why It Does Not Work.
How Do We Pick Stocks?
We use a very quantitative approach to pick stocks so that we can minimise our biases as much as possible.
We developed the Conservative Net Asset Value (CNAV) approach which focuses on buying companies with good assets, low debt and sustainable businesses. Refer to The Genesis of the CNAV Approach to know how this strategy came about.
We think that retail investors are better off investing in assets than earnings, because it is very difficult to accumulate sufficient knowledge and experience to carry out an accurate earnings projection. Hence, we believe retail investors are better off adopting the CNAV strategy which you can attend in this one day course.
Investment Wisdom From Warren Buffett
When it comes to investing, no one does it better than Warren Buffett. He has shown his wittiness and wisdom throughout his investment career. Berkshire Hathaway’s letters to shareholders are must reads for all investors. Lawrence Cunningham compiled the letters into a book and we did a summary of it – The Essays of Warren Buffett. You can access all the letters via Berkshire Hathaway’s website.
Warren Buffett has never written any book. All the books about him were written by others. Nonetheless, they are useful to a certain extent and we have summarised these books:
Warren Buffett recommended two books for investors: Common Stocks and Uncommon Profits by Philip Fisher and The Intelligent Investor by Benjamin Graham. We like Graham’s portrayal of “Mr Market”.
There is also a tongue-in-cheek book about The Warren Buffet Next Door.
Investment Wisdom From Peter Lynch
Peter Lynch is perhaps the most successful fund manager in history. His Magellan Fund was beating the market for many years and he quit at the peak of his career. He gave us many practical advice about stock investment.
Investment Wisdom From Jim Rogers
Jim Rogers traveled round the world two times. Once on a bike and once on a car. He documented his journey and investment opportunities in two books: Investment Biker and Adventure Capitalist. Both are entertaining and informative reads! Of course, he is also known for his bullishness on commodities – Hot Commodities. He also wrote a book for his children – A Gift For My Children.
Jim Rogers attended a Mandarin talk show and shared his investment tips with the audience – Jim Rogers 3 Keys to Investing
Alvin and Jon attended a seminar by Jim Rogers and penned their thoughts here: My Thoughts On the World Tomorrow and How Jim Rogers Sees it