There is nothing new in the book Value Investing in Growth Companies – How to spot high growth businesses and generate 40% to 400% investment returns by Rusmin Ang and Victor Ch’ng. That might sound negative, but really it isn’t. After all, as the old adage says – if it isn’t broken don’t fix it! Nowadays, investors and traders alike spoiled for options when it comes to making money – forex trading, palm oil growers scheme, commodity trading, property investment and the latest – binary options trading. Making money is one thing but it should also be sustainable. That’s why Rusmin & Victor have essentially distilled the methodologies of the top investing gurus of all time with proven track and sustainable performance – the likes of Benjamin Graham, Warren Buffett, Peter Lynch and Phillip Fisher.
If you are already a long term value investor, there are a lot of “AHA!” moments because the concepts just click in a concept known as The 4 Pieces Jigsaw Puzzle to Value-Growth Investing. As the authors put it – it is a quarter Science, a quarter Art, a quarter Quantitative and a quarter Qualitative. It is like when you’ve already achieved a certain degree of success in your business and career, and then you go to attend a session by an Action Coach on the topic of success and you realized – that you have been implementing all the strategies taught but never really give a thought on what you have been doing right all this while. It well written, reinforces on what you are doing right (or wrong) – you got the feel that the authors have “seriously pounded Singapore’s pavements in discovering the underdog companies before the crowds, then exiting profitably as mainstream investors move in and eventually pushing up the valuation”.
One core concept evident in the book is the concept of Value Growth as opposed to just Value. Here are the distinct differences and how they are “joined at the hip” as Warren Buffett once put it.
The content resonates with what have been said in Philip Cheng’s book – Taming the Money Sharks – on the part where one needs to exercise independent thinking and be emotionally stable. Else, how could we explain why there are so many losers in the stock market?
Also in synergy with what Prof Philip Cheng said about investing in your area of competence, in my previous interview with him – Warren Buffett also famously said this:
“You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.”
The other highlights and quotes of the book which I find interesting:
“Warren Buffett was once a trader who tried to master technical analysis, a technique he later found to be worthless, and that had cost him about eight years trying to master it”.
Scuttle butting by Philip Fisher – “Visit 5 companies in an industry, ask intelligent questions about the points of strength and weaknesses of the other 4 competitors and 9 out of 10, a surprisingly detailed and accurate picture of all five will emerge”
So in summary, if you are already doing well for years in your investment, this book may serve as a refresher. After all, you can’t teach old dogs new tricks, heh!
But if you are moving from the Dark Side to the Jedi world of Value-Growth Investing, then give this book a go. You could get it from bookstore but the easier way, of course, is to answer one question below.
TELL US HOW YOU ARE PRACTISING VALUE GROWTH INVESTING.
Post your answers below. Best 2 answers before 13 Oct will win this book, shipped to your doorstep FOC, courtesy of Wiley.
Winners this round – Teoh Giap Seng & Yang Kam Hau. Please use the CONTACT form above my webpage to give me your shipping address and phone number.
TELL US HOW YOU ARE PRACTISING VALUE GROWTH INVESTING.
For me, instead of having complicated formulas and going through text book explanation, I prefer LAYMAN and PRACTICAL way of practising value growth investing.
For me, consumer sector is a good sector to practise value and growth investing (much better as it is a defensive sector, unlike cyclical sectors). The consumer sector is set to enjoy growth with the growth of population, with the increase of disposable income from domestic consumption, and if companies can pass on the cost to the customer, the consumer sector companies is set to enjoy more revenue and profit growth in an inflationary economy. In other words, for consumer products companies, even by maintaining the same number of product being sold, when the product price increase (inflation as our friend here), the company sales would also increases. By investing in these consumer sector which can enjoy growth (due to abovementioned factors) year in and year out, the dividend yield would increase (with respect to our initial investing cost) when the company having more sales and profit, due to the expansionary economy.
To find value in investing, that can be broken down to quantitative and qualitative part. The quantitative part would be getting the companies which fulfill the financial yardstick and indicators. The qualitative part would be the determine the way a company is being managed, the way how the product is being market, the way how the management of the company handle product crisis, etc. As the consumer products are so close to our daily life, we would be able to sense if the companies are value buys when we continue to see the companies’ products being displayed at noticeable area in retail shops, and seeing them enjoying good market demand.
Sophistication in simplicity. Love it Teoh!
Investing is all about managing the risk and finding the one which has a high probability to success.
When looking for value growth stock, I will need to make sure that the DOWNSIDE is minimal as growth to a BIGGER company does not means it will become a BETTER company . That can be achieved by:
1) Invest in a stock which a high quick, current ratio, conservative debt, and preferably is in NET CASH position
2) Invest in a stock that has some moats and durable competitive advantages, MOAT can be classified as a) High switch cost b)Low Capex c) Intangible asset d) Network connectivity. Normally, these companies should have high ROE, strong operating cash flow/ Free Cash Flow. We also need to understand the business environment of the particular industry and analyze what is the BASE RATE for the industry to success, and what are the competitors are doing. This can be done by checking the IPO prospectus(Under RISK FACTORS) of the company. Please note that sometimes the BEST INVESTMENT RETURN is get from the company that is IN THE PROCESSING of building MOAT rather than it has STRONG MOAT already.
3) A good track record of EPS growth, less/no share dilution. It is best for a company to expand the business without MASSIVE funding requirements from existing shareholders like warrants, right issues, as it will increase the number of share outstanding and dilute the EPS. It is also better to see the existing financial performance is very good first before the company going to grow. That means, company must find a good business model that is profitable first before growing the business rather than growing the business rapidly first and then figure out how to make it profitable.
4) Checking on the Management side, it can be done by reading the Chairman/CEO statement, and check whether the key personnel in the company are holding a meaningful amounts of shares too, and check whether recently there is insider trading/share buyback in the company. In the insider trading segment, we can also check whether has such GOOD and REPUTABLE institutional fund holding/buying the stocks recently, this is called “Follow the Leader” as they can know more information than normal retail investor like us.
5) Reading the analyst report for that company. There may exists some useful FACT about the company in the analyst report which we dun know. The key thing is we need to extract the FACT from the analyst report. We need to differentiate between FACT and OPINION in the analyst report. Don’t follow blindly on what analyst said, as their opinion are based on different ASSUMPTIONS.
6) We also need to imagine what is the worst case scenario can be happen to that company, and how the Worst case scenario can impact the company, and what is the possibility that the worst case scenario happen. We also need to list down what are the assumption we made in the Value Growth stock investment, and how likely the assumption is correct.
Lastly, best to use a INVESTMENT CHECKLIST, that cater for both quantitative, qualitative, and even psychological factors before you makes your final investment decision.
Yang, are you an engineer or an analyst? Sure sounds like one indeed. Wow!
Ya, I am a software engineer, and have invested in MY and SG equity market as well. 🙂
I am strong believer of “Value Investing” and has been investing using this fundamental approach method which provides investment safety net and good potential future stock price growth. I have witnessed impressive stock price growth and investment returns via CARG thru the years based on the following investment criteria:-
1) Right business model to invest in.
2) Right management
3) Right price
2) Financial position of the company – Cash Flow, revenue, proft margin, assets & liabilities…
3) Company annual performance and growth rate.
4) PE ratio
5) ROI
5) Dividend yields and divdend payment cycle.
To me, there is few criteria when it comes to identify value and growth companies as mentioned by Warren Buffet the company must exhibits certain competitive advantages to its peers in order to success in the long run. Below criteria are some of the evaluation tools I using.
1) Business that is easy to understand – Perhaps as easy as possible. It will good if the company business nature touches on our daily lives as we can evaluate ourselves physically and easily on their products or services like consumer industry.
2) ROE – It will be good to have >5 years record and showing consistent ROE of >15%. It shows how well the management team able to generate return using shareholders’ equity. It shows the company exhibits certain competitive advantage over its peers if its ROE is higher to its peers within the same industry.
3) Earnings – It’s same as ROE, must exhibit consistent and increasing earnings for the past 5 years. It will be good to have >5 years record and see how the company did during economic downturn.
4) Profit margin – I choose company with consistent gross profit margin >30% and net profit margin >10%. Those companies that highly depends on raw material fluctuating price and interest expenses will definitely unable to meet consistent margin.
5) Balance sheet – Debt to me is okay as good debt is essential to a company growth as long as the interest expenses to its operating profit is low and its short term debt is under controlled. Should have adequate amount of cash to prepare for rainy days or invest in certain assets that good to the company when the timing is right. Extra cash must be utilized whether it’s short term investment or other high liquidity assets as too much cash sitting inside the bank may not good to the company.
6) Cash flow – This is another good way to evaluate a company whether it exhibits a good competitive advantage to its peers as they do not need to offer longer credit period to its customers. Besides, it shows how the cash is being generated whether it’s from its operation or from borrowings and where the money being used to whether for capital expenditures, tax, dividend or interest payment.
7) Dividend – Personally think that dividend payout ratio should less than 50% as growth companies need to retain and use the earnings for future expenses unlike blue chips who are able to distributed 100% their earnings as dividends as they are considered as market leader in their respective industries.
8) Management – Share buy back, management team experiences and salaries, their interviews and their responses during AGM are the good way to evaluate the management team.
It may not need to fulfill all of the criteria but business nature, ROE, balance sheet and management team are the must to me. After that, wait for price correction or economic downturn or crisis and invest in it and have a nice sleep thereafter 🙂
Of course need to monitor their quarter report from time to time.
CT, are you monitoring both SGX and KLSE? 🙂
Yeah .. trying to squeeze my time on it to cover both exchange. Are the writters of this book from 8 Investment Pte Ltd?
Yes CT.
In my case, due to time constraint , normally I will do quick filtering for listed companies by applying the following criteria: 1
1. increasing net profit margin or steadily growth in its profit margin for at least 3 years
2. Does the company has dividend policy or not? That mean the board of directors willing to share the company profit with its shareholders and now just keep to themselves
3. Growth in its earning per share for at least 3 years(preferably >10% per annum)
4. Companies that perform good ROE with at least more than 10% for past 3 years
5. Low debt/equity ratio with preferable number which is less than 0.5
6. Liquidity or cash position of the company which means the cost of financing the business with cash to debt ratio can be more than 1.0 with preferable ratio more than 2.0 as excellent
Since I am just retail investor with limited capital, other important considerations are
a. Either the company has strong brand/monopoly or possess exceptional tehcnology in its own industry/business
b. does the company running easy to understand/simple business model
c. Does institutional fund hold substantial percentage/inside top 30 largest shareholder? if yes, that mean fund manager also express interest in this company
At last , if possible, I will only make purchase when price is in dip discount during uptrend, big discount to its NTA or breakout from its consolidation phase in order to enjoy higher margin of safety.
CY, that still sounds like a lot of time! 🙂
without effort, how could we have peace of mind when price drops below your buying price
I will get the 10 years record for the earning per share and roughly estimate the Intrinsic Value or the company. If the market price is about 50% of the Intrisic value, I will study the ROE > 10% and dividend > 5%. If the company can meet both criteria, then I will make sure the top management of the company salary is pay according to the performance of the company (Profit sharing). If the company meet the above criteria, I will consider a buy.