First Person: A value investor’s journey

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on April 13, 2020 - April 19, 2020.

Kenny Yap/The Edge

Ho avoids industries that are subject to a lot of uncertainties and require heavy capital expenditure, such as airlines

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Ho Kok Mun, an engineer and the author of How to Make Money From Your Stock Investment Even in a Falling Market, has been a staunch value investor for the past two decades. He has been able to build a meaningful stream of passive income by adhering to this investment strategy. 

Ho’s book was first published in 2004 while a revised edition came out this year. More than 35,000 copies of the book have been sold over the years.

In his book, Ho shares his knowledge on and experience in value investing to educate the general public on why they should take a long-term view when they invest in the local stock market and how they could potentially profit from it. 

Ho did not expect the book to sell so well. “It has an evergreen title. Each year, the book ends up being one of the best-selling books in some of the well-known bookstore chains in the market,” he tells Personal Wealth. 

“I added more case studies to the revised version of my book. I also refined some of the calculations that I had made previously so that readers can better understand my investment thoughts and ideas. The price of the book [RM55] has been kept low so that more people can buy it and benefit from it.”

Ho, who started dabbling in the stock market in 2001, wrote the book believing that his investment journey would benefit retail investors. However, it was not all plain sailing as he was just in his twenties back then and was unknown to publishers. 

It was only later that a small company agreed to publish his book. “I was very excited as I never thought it would happen,” says Ho, who is now 43 years old.

His book includes all the basic information that retail investors should know before putting their money in the equity market. He also describes his approach to picking good and undervalued stocks as well as how retail investors should evaluate the nature of a business before investing in it. 

Ho has received requests from publishers to write about other asset classes such as gold and property, but he has declined to do so. “I invest [mainly] in stocks. So, it is only right that I write about the things I know,” he says. 

Although Ho has lost money in three separate years,  his portfolio has generated an average annual return of 10.93% from 2001 to 2019, after considering paper profit, capital gains and dividends. Stocks that have contributed positively to his portfolio over the years are those with strong brands such as Carlsberg Brewery Malaysia Bhd, Heineken Malaysia Bhd (previously Guinness Anchor Bhd), Magnum Corp Bhd and Berjaya Sports Toto Bhd. 

Ho says these so-called “old man stocks” had already established a long-term track record when he bought into them in 2001. These companies had been profitable for more than a decade, with improving return-on-equity ratios. Their cash flows are good and debt levels low, which he believes has made it possible for them to withstand adverse market conditions compared with many other companies.

Being a buy-and-hold investor, Ho is particular about debt. He does not invest in companies with a debt-to-equity ratio of more than 0.5 times. “Heavily indebted companies will have difficulty serving their loans in an economic downturn. They may not survive,” he says.

Ho likes sin stocks because they are very defensive counters. In his view, the demand for these products and services will never cease, which makes them perfect candidates for buy-and-hold investors like him.

These stocks are subject to sin tax and their prices suffer when the government increases the tax rate. But the impact is usually temporary, says Ho. 

“Every time the government increases the rate, these companies increase the price of their products. People will buy less of these products in the short term, but will come back to purchase even more,” he observes.   

Ho emphasises that he bought into these stocks, along with some blue-chip counters that he still holds today, when their prices were still low. “I did not buy stocks at all from 2011 to 2017. They were very expensive compared with their price points in 2003 or 2008 [when the global financial crisis struck]. For instance, Public Bank has traded at more than RM20 per share, whereas I accumulated some shares when the price was RM3 to RM6.”

While the environmental, social and corporate governance (ESG) investment theme is becoming popular among investors, Ho believes these investments are primarily about profits and returns. “ESG is not my thing and I am not shy to say so. These companies [such as Carlsberg] are legal businesses and there is nothing wrong with them selling their products and services. Ultimately, it is a person’s choice whether to indulge in these things or not,” he says.

“However, this does not mean I will shy away from ESG-compliant companies, as long as they have strong fundamentals. For instance, a renewable energy company could be profitable and have [good] fundamentals. If it makes money, I will buy the stock.

“For me, investing is about businesses. If you want to do charity, you can donate your money to non-governmental organisations to help the needy.”

Adhering to a stringent screening process 

Ho attributes the positive performance of his portfolio over the years to his stringent screening process and conservative approach. “In hindsight, I have lost some opportunities to buy good stocks. The share price or debt level of some of these companies just never fell beyond the level that I wanted,” he says. 

“However, I have also avoided many instances in which I could have lost money by using this approach.” 

In general, Ho only invests in companies with a track record of at least 10 years. He wants these companies to have return on equity and earnings per share growth of about 15% year on year. A strong cash flow and attractive dividend yield are plus points, he says. 

Ho does not subscribe to any products or services to help him screen stocks that fit his investment criteria. “Contrary to the common belief of my readers, I am not a full-time investor. I am an engineer with a local oil and gas company. I do not subscribe to software and I do not visit Bursa Malaysia’s website every day to look at companies,” he says. 

“I read financial news. From time to time, news about a company will trigger my interest. Then, I will spend some time researching the company to understand its business and financial performance.”

Ho avoids industries that are subject to a lot of uncertainties and require heavy capital expenditure as well as conglomerates that own many businesses. For instance, he does not like airline stocks. 

“My reasons are simple. If you look at the cost of a flight from Kuala Lumpur to Bangkok, for instance, a one-way trip cost about RM750 about 20 years ago. Today, you can get a round trip for the same price,” says Ho.

“As a shareholder of the company, I would expect the business to increase its prices when the cost of doing business goes up each year. If you lower prices, it means that you are providing consumers a commodity rather than a unique product or service [that can command a higher profit margin]. This hurts the company’s earnings.”  

Also, airlines can be affected by crude oil prices, wars, natural disasters and diseases that are beyond the control of the company’s management. The MH370 incident and ongoing Covid-19 pandemic have been bad news for airlines, he points out. “A management team, no matter how good, can only do so much when these events happen.”

Ho does not like telecommunication companies (telcos) either, even though they have been enjoying attractive profit margins in recent years. “Just like airlines, telcos are required to incur a lot of capital expenditure, which may cause them to take on a lot of debt. They will take time to be profitable and pay off their loans,” he says. 

“Whenever a new technology comes out, such as the evolution from 2G to 5G, these companies will need to invest a huge amount of capital to upgrade their capabilities.”

Also, these companies cannot command higher prices when the market is a mature one, says Ho. “Twenty years ago, my post-paid package cost me RM60 a month. Every minute of a phone call cost me 30 sen and I paid 15 to 20 sen for every SMS I sent. Today, you can pay a flat rate for everything. Prices [in the industry] have gone down. I don’t like it. 

“If you look at the country’s mobile phone penetration rate today, it is more than 100%, which means everyone has more than one phone on average. How many more phones can these companies sell? That is why telcos are moving into enterprise businesses and Internet of Things (IoT) solutions, among others.” 

Conglomerates that operate businesses in various industries are another category of stocks that Ho does not invest in. “The businesses and companies of these conglomerates could offset each other. And their financial performance can be hard to understand,” he says. 

“Sometimes, these companies can shift their funds from one company to another. Even analysts cannot wrap their heads around these things.” 

Be patient and don’t rush to deploy your cash

Years of experience have taught Ho a few things about investing. First, a value investor needs to be patient and wait for the right time to enter the market. When an investor has cash in hand, it does not mean he needs to deploy it immediately, he points out. 

“Here are two things to remember. First, do not invest simply because you have cash. Instead, make sure you buy into a good company that you like at your desired price level,” says Ho.

“Do not buy stocks just because your friends are buying them, or if the price moves 5% or 10% in a day. There are a lot of opportunities out there. There is no need to feel bad if you miss out on some of them.”  

Second, it is imperative that investors only use money they can afford to lose. So, when the markets go down, they can sleep well at night, he adds. 

Ho understands what it feels like when an investor’s emotions are so tied up with market movements. He recalls the days when he was still a management trainee at Mesiniaga Bhd, a provider of IT products and services. 

“I was young and invested in the stock market mainly based on rumours and speculation. I made some money in good times and lost some in bad times. More importantly, I was very affected by market movements and could not focus at work,” says Ho.

“In good times, I was in a good mood and smiled at everyone at work. When the market went down and I lost money, everyone in the office was like my enemy. It stressed me out and I did not like it.”

That experience led him to learn about value investing, which teaches investors to buy and hold stocks instead of actively trading in the market. He read books by renowned investors such as Peter Lynch, a successful investor and fund manager in the US. These books have taught him the importance of only investing money he can afford to lose. 

“After the bad experience I had, I wanted to invest in a way that would let me sleep well at night even when the market falls,” says Ho.