Popular Investing Book Written by Dr Michael Leong

Alvin Chow
Alvin Chow

Dr Michael Leong is mostly known as the founder of ShareInvestor. He is also a successful stock investor and in his first book, “You First $1,000,000 Making It In Stocks”, he shares his investing philosophy and methods.

A Fundamental Analyst and Value Investor

Primarily, he uses fundamental analysis for stock investment, while at times, he uses “tikam strategy” to play speculative stocks. He opined that fundamental investing is more risky than short term trading, as long as the latter has an exit system to cut losses below 10%. However, he believed fundamental investing is where most money is made as the returns can be several times the capital outlay. At times, the lure of short term trading does seem irresistible, and he says, “I set aside money for fundamental investing and also some money for speculating. The money for speculating keeps my adrenaline flowing, but I know that I am not going to be financially independent just by speculating. Having speculative money also prevents me from itching to interfere with my longer-term fundamental counters.”

Most of the homework is done prior to buying a stock. He spends a lot of time researching and only holds 5 good fundamental stocks. When he buys a stock, he sets a price objective where he will exit to prevent himself from getting greedy and get caught in euphoria. If the fundamentals changed, he would exit too, even with a loss. On the other hand, if the fundamentals remain sound and if the market corrects, he may even average down the stock.

What to look out for in a stock?

A company has to efficiently deploy excess capital – Buying a business that is outside the core competency of the company is undesirable. Buying back shares is better but it is not sustainable, as the demand is supported by the company itself. The best is when the company can invest in it’s own business and grow future profits. If the company cannot find a better use for the excess capital,  he prefers the company to distribute them to shareholders. This is on the premise that shareholders know best how to allocate the money.

  • Look for companies with higher profit margin and not higher revenue – A $10 million company having a profit of $1 million yields a 10% margin. A $100 million company earning $2 million of profits yield only 2% margin. Hence, in difficult times, the company with the bigger margin can withstand a drop in profits better than one with a smaller margin.
  • Look for “free” business – Buy stocks that have more net cash in their bank than their market capitalisation. “This means that for every dollar that I invest in these stocks, the company must have at least a dollar in the bank and ideally, the company does not have any borrowings. This also means that the business of the company comes to me as the investor for free. My next assessment is whether this ‘free’ business is sound and is not bleeding too much cash. To do that, I look at the company’s cashflow statement. I am fine if the company declares large losses, so long as these losses are non-cash related. The key is to find ‘free’ businesses that will survive the downturn, so that when the economy turns around, these businesses can regain their former enviable positions during good times.” “Firstly, I much prefer companies that keep their cash in a Singapore bank, as I have more trust in the banking system here. Secondly, cash to me comprises real cash and fixed deposits only. I don’t believe in cash equivalents as this can mean many things, including bonds.”
  • Low liquidity is good news – A trader should look for shares with good volume, so that he can liquidate when needed. On the contrary, an investor should look for undiscovered gems, and not attractive to many buyers. They are likely to be undervalued as the demand is not high. As he said, “If I am right in my judgement and the stock does well, other investors will climb in later and will create the liquidity to allow me to liquidate my positions.”
  • Seek capital appreciation, not dividends – “I do not put too much value on dividends when I look at a company, unless of course, the company has a monopoly or has such a strong brand name that they can increase their pricing without affecting the demand.” “It is capital appreciation that is much more important to me than dividends when I invest in shares.”
  • Margin of Safety – The concept of Margin of Safety is initiated by Benjamin Graham. Most people who practised it use discounted cashflow projections, and forecast 10 years in advance. However, Dr Michael reckoned that given the dynamic nature of businesses, it is even difficult to forecast cashflow of a business for a following year. He uses Net Tangible Assets (NTA) as a measurement yardstick. He defines NTA = cash + Singapore properties, and prefers stocks in a company whose market capitalisation is less than NTA. In this way, the existing business is as good as free to the investor. This is the margin of safety that he looks out for. He will also visit the properties.

What to do when market cycles change?

  • Spot megatrend to buy low and sell high – “A megatrend is a trend of the general market that could last for years. One example is the bullish megatrend that started in early 2003 and ended in late 2007. In between these periods, there were a number of mini-trends, which can go up or dowwn daily, weekly or even monthly. Fundamental investors are mainly interested in the megatrends.” Investors must be able to spot megatrends; buying during a dip or correction, and selling when market becomes euphoric or hit exit price. An investor has to be patient and hold onto the winners during the bull run.
  • Keep some cash for opportunities – “In the event that I cannot find any company with good fundamentals, I will be just as happy sitting on cash and waiting for the next downturn. The market opportunities will always be there if you have money.” “When the market is bearish, I keep on accumulating for my fundamental stocks. As always, I know that my timing is never good. Hence, I have a habit of collecting stocks slowly and I always make sure that I set aside enough funds to keep collecting over a long period of time. As such, I am seldom fully vested in terms of fundamental stocks.”
  • Use warrants for hedging – Dr Michael uses warrants to hedge against his shares, when he anticipates a market correction. However, it may become a crash and as an insurance he will buy deep out-of-the money warrants, which in this case, he will only gain when the market collapses. Otherwise, the warrants will expire worthless. In fact, he hopes for the latter.

Specifically for IPO stocks

“With IPO stocks, the major shareholders are usually under moratorium for 6 months to a year, meaning that they will not be able to sell their shares during these post-IPO periods. As a result, the free float during these periods will be limited to the number of IPO shares offered for sale. In many cases, this will amount to just 20% of the total number of shares. As supply is limited during these 6 months to a year, the post-IPO stock price can rise sharply if demand is high. But when the moratorium is over, there will be a lot more potential supply of shares, as the major shareholders can then sell theirs. This is the reason why most IPO shares perform well only in the first few weeks of trading, only to fall back to their IPO prices within 6 months of their launch.”

Word of advice

“Investing successfully requires a combination of experience and foresight. It is very tough to get all these experiences when you are young. I always encourage those who want to be successful in the market to excel in what they are currently doing first, as every occupation teaches you something in the university of life. Thereafter, they should try their hand at running businesses. Only after that should they consider investing as a career, as I don’t think you could learn life’s experiences by clicking your mouse and clacking on your keyboard.”

“Wealth will come when you have the experience. Experience only comes when you work on the job. Reading does not, and will not, imbue you with experience. However, there will always be the young who think they are special and know it all. They will be the first causalties in any stock market correction or crash.”

“If you seek financial freedom, you have to put to risk a large chunk of your capital. To reduce the risk on this capital, you have to do your homework and believe in yourself and your selection of stocks.”

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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56 thoughts on “Popular Investing Book Written by Dr Michael Leong”

  1. Read the book by Dennis….hmm….concepts are good but content wise abit lacking…sorry….

    Hi Raymond,

    Well I have been fairly conservative with my investments over the past five years hence I made some money 10-15% type….if I had been more aggressive could have easily made 40 to 50%….oh well….trying to be content with my lot…that’s life…yes keeping 50 to 100K as e fund as well as opportunity fund to see if got any opportunities or in case market turns south…this is what Dennis’s book advocates….need some strikers right….been focusing too much on defence and mid field ….. the issue now is that I really don’t know what to invest in now…with interest rates at all time lows don’t think it’s good to invest in bonds and market money….equities there is some risk of a double dip…or most likely a prolong recovery…..singapore property already bought a one million property and do not wish to over stretch myself anymore….unfortunately I intend to shift in one year later and spend 30K on reno to get married…

    Reply
  2. good article.

    The key to investing in homes

    by Colin Tan 05:55 AM Aug 27, 2010Most of us have heard it all before from the experts. Investing in homes is one of the safest and surest forms of investment. If you cannot re-sell the property for a good profit within a couple of years, you can always hold it for the long term because it will always appreciate.

    But if everyone follows this advice, will it still work? Surely it is a recipe for disaster. If everyone is going to earn it the easy way, who will do all the hard work?

    Given today’s price levels, the vast majority of Singaporeans who own their homes are sitting on large paper profits. Many are paper millionaires; for them to become real millionaires, they would have no roofs over their heads.

    Nevertheless, it is hard to argue against such a track record. In fact, the earlier the property was purchased, the greater the capital appreciation.

    Most of us have bought our homes to live in, rather than as a get-rich-quick investments. When you buy for owner occupation, you have a guaranteed tenant – yourself. Instead of rentals, you are paying monthly mortgage payments.

    It is a vastly different scenario when you are buying for investment. You do not have a guaranteed occupier. If you are not able to sell your property before its completion, you will have to look for tenants.

    You will need to look at the yields and compare that with other forms of investments. You will need to assess the overall housing demand-and-supply situation. You will need to know how the economy is doing – now and in the future.

    This means that you will need to do your homework and not go by herd instinct. The herd never gets it right all the time – hence economic and property cycles.

    When an owner-occupier times his purchase right, he has one fewer big worry in life.

    When an investor gets it right, he gets a windfall and lives the good life, but it never stops there, does it? The euphoria of earning big in a short few months or over one to two years what he could not earn in 10 or 15 years is intoxicating, to say the least. The profits will be re-invested in, what else, but property.

    We read of success stories of people starting with a single property and having a string of them within a decade or two. How do they do it? We see many advertisements these days offering courses that will teach us how to make it big by investing in property. It is not a big secret: It is called leveraging – using other people’s money to work for you.

    When the value of your home rises significantly, as they always do during an up-cycle, you can secure a loan from banks by pledging your home as collateral. This is because your property’s market value is much more than your outstanding loan.

    You can use this loan to re-invest in property. In Singapore, buying a property under construction allows the investor to maximise his leverage. Since only a 20-per-cent down payment is required upon purchase, the investor can, in theory, play with an asset which is worth five times his initial capital.

    Some people can own a number of properties in a short time because they are fully invested and fully leveraged. Profits are almost immediately re-invested. Like a person who buys his furniture on hire purchase, it looks like he is the owner, but the furniture is not yet fully his, even though no one else knows that.

    This brings me to my last point. When an owner-occupier mis-times his purchase, he spends his whole working life paying for it. When a fully-leveraged investor gets it wrong, like in the real estate board game Monopoly, he becomes a bankrupt and retires from the game.

    The writer is head of research and consultancy at Chesterton Suntec International.

    Reply
  3. This part is my favourite:

    “Wealth will come when you have the experience. Experience only comes when you work on the job. Reading does not, and will not, imbue you with experience. However, there will always be the young who think they are special and know it all. They will be the first causalties in any stock market correction or crash.”

    Reply
  4. Let’s have a situation. We have a property market crash. Not sure is realistic.

    Property Price -40%.
    Interest Rate up 300% against outstanding loan.
    Rent income disappear for 6 months with foreginer leaving singapore.
    Rental income reduced by 50% on the 7th month.
    Hit 50s and Jobless for 12 months.
    Found a job later at 50% of previous job.

    To able support above scenario, what’s the good debt amount in % we can leverage ?

    Cory

    Reply

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