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Value Investing by Sebastian Chong

Alvin Chow
Alvin Chow

Sebastian Chong has 30 years of personal investing experience and he started his own financial training services, Financial Info Analysis Pte Ltd, and shareowl.com. He is a value investor and in this book written in 2003, “Value Investing“, he shared his insights and experience primarily in the Singapore market.

One advantage of individual investor over the institutions

The big advantage is retail investors can hold cash when the market is crashing as he rightfully pointed out, “The Straits Times Index peaked at the beginning of 2000. With hindsight, December 1999 may have been an excellent month to sell off most of your stocks. A retail investor can even sell off all his stocks at any time if he wishes to. An individual can choose to hold cash for as long as he likes until he perceives the next investing opportunity. Most fund managers are, however, not expected to hold more than 20 to 35 per cent of a fund in cash at any one time.”

Insured sufficiently before investing

Cover your downside is always a sound financial advice. Sebastian encouraged everyone to be insured and also take it as a form of disciplined saving, especially for young people beginning their first stage of financial planning.

Do not wait for general consensus

For retail investors who are not experienced enough, we tend to wait for more affirmations before committing to buy stocks. The problem is that, it may be too late for the brokers or media to agree on the prospect of a particular company as prices would have already gone up.

Invest in what you understand

Once in a while, we get tempted to invest in stocks that we do not understand the industry it is in. We may not have the edge to properly evaluate the business. The best way, as he suggested, is to “avoid it”. “Or just make it a minimal part of your portfolio if you can’t resist the feel-good factor about holding a glamorous tech stock. At least the nominal investment provides some incentive for you to research it further to satisfy your curiosity about the stock.”

Make your own investment decision and be responsible for it

Do not blame others if you have made a mistake. “Whether you do your own analysis or read brokers’ reports or do both, the decision to buy or sell a particular stock is yours and yours alone.” “[I]t is important for serious retail investors to develop their own skills and experience for stock evaluation.”

Evaluate both past and future

Annual reports tell you how well a company is doing in the past. You may also refer to the Chairman’s foreword to gain some insights to the intended plans for the future. Following up with news and announcements of the companies is important. However, the most important conclusion to draw from these is how it actually impact the company’s profitability? The question has to be answered. If not, winning a large contract may not be significant if the price offered is so low that little profits can be gained from it.

These are some things that Sebastian would look out for:

  • Company’s industry and geographical segments, and their outlooks
  • Financial performance for past 5 to 10 years (1) amount of excess return from its weighted average cost of capital, (2) compare to other companies in the same industry (3) integrity and quality of management, and changes in appointment
  • Accounting policy as compared to others in the same industry

Evaluating management is an important investing principle

Preached as much as Warren Buffett, Sebastian placed great emphasis on good management – “If I think the company’s profit uptrend is due largely to industry wide conditions and not capable and nimble management, then I would rather invest in other companies in that industry that are better managed. But of course, even the best managed companies are not always worth investing in. It depends on whether their shares are undervalued or overvalued in the market at a particular time.” Sebastian found that the best managed companies tend to maintain net profit margins around 7-8%.

Main areas to examine in annual reports

  • Read the most recent annual report, company announcements, news and brokers’ reports
  • See what the management has done in the past and the plans for the future
  • Look out for non-recurring gains or losses as they may affect the book value
  • Examine the performance of major products and the markets of the company (how much resources were dedicated in these segments and the profits/losses from each of them)
  • Compute (1) percentage return on assets employed (2) net profit margin as a percentage of sales (3) revenue to assets ratio
  • Take note of the various operating and non-operating items contributing to the net profit

Diversify but not too much

Sebastian recommends one to invest not more than 15 companies at any one time. “Protect yourself against unexpected business failures or even frauds. You usually need to diversify your investments in shares. But do not over diversify or else you will have a tough time trying to keep track of the news and research that affect the numerous companies in your portfolio. If you have invested in a large number of the SGX-listed companies, you are unlikely to beat the Straits Times Index or the tracker funds.”

Read analyst reports with a pinch of salt

Research firms are less likely to write negative opinions on companies that give businesses to them. Recommendations may be made with polite words like “hold”, “long-term buy” or “neutral”, where the truth may be to sell. Doing your own homework would be more trustworthy.

Pay attention to cashflow

Cash is lifeline for every business. “In well-run companies, gross operating cash flows from selling goods and services should usually exceed gross operating cash outflows, including income tax.” As such, it is important to see a positive net operating cash flow as a sign of a healthy company.

A good time to buy Blue Chips is…

Just after a crash and during the early stages of recovery, Blue Chips tend to perform the best. This is because institutions and funds would buy the respectable and steady large cap stocks first, as they may receive less blame for any error. “It is only after blue chips have nearly reached fair value will the market switch its attention to the smaller cap stocks with earnings growth potential.”

Alvin Chow
Alvin Chow
CEO of Dr Wealth. Built a business to empower DIY investors to make better investments. A believer of the Factor-based Investing approach and runs a Multi-Factor Portfolio that taps on the Value, Size, and Profitability Factors. Conducts the flagship Intelligent Investor Immersive program under Dr Wealth. An author of Secrets of Singapore Trading Gurus and Singapore Permanent Portfolio. Featured on various media such as MoneyFM 89.3, Kiss92, Straits Times and Lianhe Zaobao. Given talks at events organised by SGX, DBS, CPF and many others.
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6 thoughts on “Value Investing by Sebastian Chong”

  1. Attn.Sebastian Chong
    Digging for gems to identify potential multi baggers ahead of the mob, like Best World (vested)
    Like your emphasis on managemt( competence , integrity) and Cash Flow as well as Free cash flow)
    As well as outlook not just history.
    PGL
    P.s. Where can I buy your book? (To ship to Europe)

    Reply
  2. Sound!
    Like Sebastian Chong`s emphasis on
    -Management (Competence, Integrity,Shareholder friendly) and
    -Cash Flow(P/CF, CF growth equal of greater than EPS growth)
    May consider adding “Qualify the Auditors” in particular for S.Chips.
    As the song goes (Yankee Doodle) keep it up (and with the girls be dandy).
    PGL
    P.S. How does SC explain Best World`s negative Cash Flow after working capital changes in the first quarter,
    a bit of Channel Filling in China?

    Reply
  3. To Sebastian Chong

    Just read you “value” E book.
    Great and concise.
    Two suggestions.:
    What about adding
    – the acid test : tax charges.generally an increase in taxes paid will be a good indicator, if it is not a sign of incompetent tax optimization.
    – a link showing where best to fing substantial insider purchases. pGL

    Reply

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