Cover Story: Spreading the wisdom of value investing

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on June 18, 2018 - June 24, 2018.
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When businessman Gary Yeow had saved enough money to dip his toe in the stock market in the early 2000s, he made some common investment mistakes — not having a plan and following the herd. These mistakes cost him a few hundred thousand ringgit. As a result, he avoided the stock market for many years after that.

“I trusted my remisiers and friends when they said they had hot tips. One of the stocks I was interested in at the time was priced at RM2. My friend said it could go up to RM5, so I believed him and bought a few lots,” says Yeow.

“Then it went down to RM1.70. The same friend convinced me that this was normal and an opportunity for me to buy more, which was exactly what I did.

“Not long after, the price crashed and I lost a lot of money — enough to make me resent investing. Why should I invest if I end up losing money? It is just like gambling, and that is not my style.”

Several years later though, he discovered something that would get him back in the saddle — value investing — an investment strategy introduced by influential investor Benjamin Graham and popularised by Berkshire Hathaway’s Warren Buffett.

In 2008, Yeow got acquainted with Singaporean Ken Chee when he attended Warrior Training Camp. Chee is a prominent entrepreneur and investor in the city state, having co-founded 8 Investments Pte Ltd at the height of the Lehman Brothers collapse. He subsequently transformed the start-up into a private investment business and eventually listed it on the Australian Securities Exchange in 2014.

“We did not get along at all. At every activity, we would always argue because of our opposing points of view. At the end of the camp, we agreed to disagree. I did not hear from him after that,” says Yeow.

“But in 2011, I reconnected with him and learnt that he had started a business teaching people value investing. I decided to give it a go.”

After attending the programme, Yeow’s attitude towards investing changed completely. Previously, he had no idea that he had the ability to determine the value of a company by doing his own due diligence and that investments could give steady returns over a long horizon.

After finding out that their goals were aligned, Yeow forged a partnership with Chee to establish 8VIC Malaysia Sdn Bhd, which operates Value Investing College in the country. They started running the Value Investing Masterclass (VIM) programme in the Klang Valley in May 2012. Back then, the team only ran four programmes a year, with an average of 30 participants per session. Today, the growing team is running two programmes a month, with an average of 60 to 80 participants each.

Apart from conducting various financial literacy programmes, the parent company — 8I Holdings — also undertakes investments in the public and private equity markets. Its portfolio of investee companies includes Velocity Property Group Ltd, Digimatic Group Ltd, CT Hardware Sdn Bhd and 8 MAD Group Sdn Bhd.


Estimating what a company  is really worth

Value investing is defined as a long-term strategy where investors look for stocks they believe are undervalued by the market. By looking at the business fundamentals, a value investor can estimate what the company is worth, regardless of what the market has priced it at. Value investors often conduct a discounted cash flow analysis in their attempt to assess the current value of all future cash flows of a business, based on a variety of operating and efficiency factors.

“The best example I can give to illustrate how value investing works is a property purchase. If a dealer tells me that the value of a property is RM1 million, I know I have made a profit if I managed to buy it at RM800,000. However, in the stock market, nobody would provide you such a valuation. This is the gap we want to fill. We want to teach people how to value businesses themselves so they do not have to rely on other people’s hot tips,” says Yeow.

8VIC’s programme focuses on the 3R concept — right business model, right management and right valuation versus price — to identify good companies. However, to determine whether a company has the right business model, investors need to have an understanding of how the industry or company operates. So, investors should grow their own “circle of competence”. This plays a significant role, says Yeow, who is 8VIC’s general manager.

“Each investor has his own circle of competence and within the circle are industries or companies they are familiar with. It is not wise for them to invest in things they do not understand. If they want, they can slowly learn about the industries they are unfamiliar with, grow their circle of competence and start investing when they are confident,” he adds.

The circle of competence concept is explained by Buffett in his 1996 letter to shareholders. He says investors do not need to be an expert on many companies, but they have to be able to evaluate companies within their area of understanding. While the size of the circle is not very important, knowing its boundaries is vital.

8VIC’s programme recommends that individuals invest in companies that have at least 40% of their shares held by management, says Yeow. “In fact, it is best if the listed company is their [the management] only business. That is because if anything goes wrong with the company’s performance, they will hurt more than us. The management cannot let this happen, so they will try their best to prevent it.”

The third “R” — the right valuation versus price — requires investors to learn how to use financial ratios in analysing a company’s fundamentals. The metrics used in this process include the price-earnings ratio (PER), free cash flow, PER-to-growth ratio and debt-to-equity ratio. The programme uses a layman’s approach to teach the concepts so that they are understood by investors of all ages, says Yeow.

“The best thing about being a value investor is peace of mind. We buy into 7 to 10 companies, monitor them quarterly or half-yearly, and exit the companies we think are not doing well. If our valuation at the beginning was correct, then we can hold the stock and let it grow for the next 5 or 10 years, or even longer, and wait to receive our dividends. This peace of mind is something that money cannot buy,” he adds.

Although it may not be the most tangible indicator of a good business, 8VIC also teaches participants to look at a company’s culture. It is often neglected by investors, despite being a common practice among prominent investors such as Buffett and Charlie Munger.

“Personally, I attend the companies’ annual general meeting and chat with the employees. I ask them how long they have worked with the company, whether it has an employee share scheme and if their bosses are treating them well. Most people will answer yes, but you can tell based on the conversation whether they are genuine,” says Yeow.

“Normally, if the work culture is good and the employees are happy, the share price will go up. For example, the employees of Hartalega Holdings Bhd and Hup Seng Industries Bhd love their founders very much because they visit the factories almost every day. And we can see that the performances of these companies are rock solid. This is something non-value investors would not see.”

There are a few programmes of this nature in Malaysia. But 8VIC stands out from the crowd by addressing the issue of investors’ emotional stability in the face of a fluctuating stock market as it is the most important element of a successful investor, says 8VIC’s head of operations Low Chern Hong.

“We realise that most investors — although they buy books, attend a lot of courses and know a lot of different tactics — still lose money. We believe this has to do with how they react towards market movements. So, we make an effort to address this by holding a money management class on Thursdays,” he says.


Never too early to start

When 8VIC started conducting its programmes, most of the participants were in the 40 to 50 age group. This changed when then 25-year-old Low joined the team. Before coming on board, he was a fresh graduate working as an auditor at Deloitte and he had used all his ang pow money to learn about technical analysis to fulfil his dream of becoming a successful investor.

“When I was a student, I used the 1Malaysia Book Voucher to buy books on technical analysis to learn about this investing technique on my own. Then, I opened investment accounts with eight brokerages and signed up to receive daily tips in my inbox. Within two weeks, my initial investment of RM3,000 grew to RM6,000. I was very happy. It boosted my ego and I felt like the ‘Wolf of Wall Street’,” says Low.

“It did not last long at all. For the next two weeks, I burnt almost all my money by following those tips and was left with only RM220. One day, I spoke to my good friend Alex, who despite sleeping in classes most of the time, made good money from the stock market. When he told me about value investing, I was curious. I had to give it a try.”

After attending 8VIC’s programmes, he did not want to stop there. He was determined to continue improving his value investing skills. He even went so far as to be certified as a trainer by the Human Resources Development Fund Malaysia in 2016, which allowed him to be the youngest trainer and speaker at 8VIC.

In the beginning, Low used his own money to invest. Then, when his parents saw his results, they gave him the responsibility of managing his family’s funds. “They no longer ask me questions like when I am going to get married. Instead, they ask me about the investments. Our conversations now revolve around which stock I bought, whether the share price has shot up, whether we can sell, and what we think the valuation of a certain stock is,” he says.

When the more senior participants of 8VIC’s programmes realised that it is never too early to start learning about investing, they prompted their children to attend the programmes. Yeow says the average age of its participants is now much lower than before. In fact, its youngest participant to date is a 13-year-old.

“This is good because value investing takes time to compound. Two of my daughters attended the programme when they were 17 and 21 respectively. Afterwards, they were more careful with their spending and invested whatever money they had saved,” he says.

“One of them, who is now in university, already has a portfolio of investments. She receives dividends every three months. She is not easily swayed by her peers to spend money on expensive coffee every day. When she finishes university and earns a fresh graduate’s salary of about RM2,500, she will get another RM500 from her investments, which means she is a step ahead of her peers. This is the kind of mindset we want to instil in the younger generation.”

People do not need a lot of money to start investing. Yeow says that in most cases, RM1,000 is more than enough. “In Malaysia, one lot is only 100 shares. There are even lots that cost as little as a few hundred ringgit. When they see the dividends come in, they will feel a sense of ownership and empowerment, which is very rewarding,” says Yeow.

If done correctly, value investing can be very beneficial for investors. Stocks can generate exponential returns over time as their earnings improve and they are accorded higher valuations by other investors. Yeow says value investing also gives investors an attractive risk-reward as value stocks are usually traded at fairly low valuations, which means that the downside risk is capped.

However, there are a few mistakes that investors can make in value investing. Yeow says the most common one is being overconfident. “Sometimes, because they trust their own abilities so much that they do not want to hear the opinions of others. When their friends tell them a stock is undervalued, they just brush it off because they think their calculations are accurate. In reality, their calculations are a bit off because they are not familiar with the industry,” he adds.

There is also the other side of the coin, when investors trust their friends to the extent that they piggyback their friends’ due diligence. To overcome this problem, investors will have to grow their own circle of competency and familiarise themselves with all the industries involved in the local stock market, says Yeow.

Every month, 8VIC holds a free class for previous participants, who can leverage these classes to increase their circle of competence and share their experiences. Those who are experienced in the food and beverage industry, for example, can come to a class on oil and gas companies. They can also share their knowledge when there is a class on F&B companies. Yeow says if they attend the classes often, they will be familiar with the entire Malaysian stock market within three years.   


The challenge of peer pressure

Value investing has its shortfalls. For one, investors need to buy and hold their investments for a long time, relying on the compound effect for better returns over the years. This may be a problem for a lot of beginners, especially in Malaysia where there are a lot of get-rich-quick schemes, which may lead them to believe that investments should generate good money in a short amount of time.

However, value investing is very relevant in the current investing landscape, says Low. He points out that while growth stocks do not give consistent returns over the long term, value stocks can provide consistent returns over decades.

“Additionally, we are buying into the actual business instead of on paper. In a short-term investing strategy, there is no way for you to assess whether the company is sustainable,” says Low.

“But in value investing, investors have this ability because they know what the business is all about. That is why we think this strategy will be very beneficial to investors over the next decade at least.”

8VIC recognises the need for investors to generate returns over a shorter period. So, it offers monthly classes on trading options in the US stock market, which can provide a return of about 2% a month. However, the company strongly suggests that investors allocate a maximum of 20% of their portfolio to this asset class due to the risks associated with options trading. It also advises participants who consider themselves to be very active investors to allocate a maximum of 10% of their portfolio to investments that bring them excitement, such as cryptocurrencies or foreign exchange trading.

Yeow says he may not be able to convince all investors that buy and hold is a good investment strategy, but they should be aware that get-rich-quick schemes do not last and will only harm an investor’s portfolio in the long run. “I am sure that most Malaysians have been scammed at least once in their lives — I know, I am one of them. Those who are in get-rich-quick schemes should ask themselves, how many times do I want to be in this cycle?

“I do not want to tell them that they can make millions in a matter of months. I want to teach them how to fish. Once they have perfected their fishing skills, they can go fishing anywhere on their own. They can have a lifetime of experiences as an investor. It pays to be patient.”

Another challenge in getting Malaysians to adopt this strategy is the fear of missing out, which is very apparent among local investors, he says. They tend to be envious of their peers’ instant success in investing, which may lead them to quit their investments very early, thinking it is a waste of time.

“A typical statement I hear is, ‘That person is so young. How can his investment returns be better than mine?’ Everyone has their own skillsets and experiences. If you keep comparing, you will only make yourself feel bad. That is why it is important to trust in your abilities and your own due diligence,” says Yeow.

8VIC frequently holds preview classes for potential participants. Yeow says it is common for the company to get feedback from investors who are reluctant to change their investment strategy, but are curious and sceptical. “They ask me how is it that my strategy is less stressful and less time consuming, but consistently delivers returns of 25% every year while their strategies require them to review their investments every week and still give them returns of only 15% to 20% each year.

“My response to them is, try to attend a programme first with an open mind. Then, try to implement what they have learnt. If it is better, then adopt it. If not, thank you for coming, we hope that they are successful in their investments. It is as simple as that.”

He adds that by joining such programmes, these budding investors can meet other like-minded value investors who can help them or share their knowledge — even beyond local shores. The VIC network supports more than 12,000 programme graduates, with a presence in Singapore, Taiwan and Thailand, so former participants can reach out to other graduates to find investment opportunities abroad.

A lot of investors choose to become value investors because they want to replicate Buffett’s success story. However, critics have argued that Buffett’s past successes cannot realistically be repeated today as the market dynamics have changed and it is almost impossible to find the kind of bargains Buffett found decades ago.

But Low disagrees. He says it is possible for investors to gain even more than what Buffett gained per year when the returns are considered in terms of percentage. “Investors are only looking at the number of zeroes in his returns. That is why they think it is impossible. Actually, Buffett’s returns are only about 20% per year. It is a normal percentage of return, not outrageous at all. In fact, today, if you say you are earning 20% from your investments per year, people will ask you why you are earning so little.”

There are still a lot of high-growth companies in Malaysia, says Low. He cites the example of Hartalega, which has grown more than 300% over the past four years. So, it is not impossible to find bargains even on our shores.

8VIC’s programmes in Malaysia are currently available in two languages — English and Mandarin. Yeow says there are plans to offer programmes in Bahasa Malaysia early next year to expand the financial literacy programme to an even wider audience.

In Malaysia, the programme costs RM6,500 per participant. It also allows participants to attend the programme anytime at any of the venues held around the world.

“We recently tied up with Universiti Teknologi Malaysia to co-create a programme endorsed and certified by the university. In the future, we want to offer a diploma in value investing too. Hopefully with this, we can spread the knowledge further,” says Yeow.