Sunday, July 20, 2008

Why I Decided to Create My Own Investment Blog

I have been doing investing myself since year 2000 when I was still a student studying in National University of Singapore. There have been many moments of losses mixed with moments of gain. I have witnessed the panic selling after 9/11, as well as how the SARS impacted Singapore's economy. Most importantly, I have appreciated the complexities and entanglements between a rational mind and human emotions, and the impact it has on making investment decisions

My Gains and Losses: Graduating from the School of Value Investing
My losses are like 'school fees' paid for lifelong lessons in investment and valuing businesses. The point of 'graduation' came last year when I felt I have acquired immense confidence to apply value investing principles with a significant level of success, and it occurred to me on the importance of crystallizing the principles and paradigms of thought in a clear and explicit manner in the form of articles.

The Purpose of this Blog
This blog articulates my framework of investing and freely shares with all readers my investment knowledge. For non-starters, this blog will equip them with the basic knowledge on how they can take on investing by themselves. In addition, there will be specific references and sharings of analysis of a few companies.

I have gained immensely from the wisdom of the forefathers of value investing, and I hope you will be able to learn as much from what I have to share. Watch me as I rigorously apply the principles of value investing and achieve annual returns that consistently outperform the market and exceed the performance of the professional fund managers

Recommended Resources for Value Investing

I would say that my investment philosophy started with just bumping around and mindless dabbling. It was over time that as I read and studied that things became clearer and an investment ideology emerges. Below are some resources that I accumulated over the years. 

*1. What is Value Investing? by Lawrence A. Cunningham

- Good introduction to investing in general, and why the philosophy of value investing dominates

*2. The Essential Buffett by Robert G. Hagstroms
- Details on the science and art of the investing methodology behind the world's most successful investor Warren Buffett
- A must read if you buy into the philosophy of Value Investing

*3. Common Stocks and Uncommon Profits by Philip A. Fisher
- A classic on investing that brings new dimensions and perspectives to value investing

*4. The Interpretation of Financial Statements by Benjamin Graham
- A starter's guide, and a classic, to reading financial statements written in plain English

*5. The Intelligent Investor by Benjamin Graham (dry read, but certain chapters explain key concepts and must be read)
- Ben Graham is the mentor of Warren Buffett, this is the must read for any investor

*6. Essays of Warren Buffett: Lessons for investors and managers by Lawrence A. Cunningham
- A compilation into themes of all the letters written by Warren Buffett
- Alternatively, can find all the letters at

*7. Sun Tzu on Investing by Curtis J. Montgomery
- Curtis is a Singapore investor with a website at
- Good read to draw a few pointers from Sun Tzu

The below reads are for you to expand horizons.

7. Security Analysis by Benjamin Graham (for reference only, and advanced reading. Very DRY)
- An intense text on how to quantitatively analyse stocks

8. Buffett: The Making of an American Capitalist by Roger Lowenstein (recommended for leisure reading)
- Good biography on how Warren Buffett came to be. With the mistakes and lessons he has learnt over the years

9. The Starbucks Experience: 5 principles for turning the ordinary into extraordinary by Joseph Michelli
- Recommended leisure read to expand horizons
- Good to know how Starbucks evolved from a small time business to a world enterprise

10. Built to Last: Successful habits of visionary companies by Jim Collins (recommended for lateral knowledge)
- Not exactly investing, but explains to you why world's greatest companies come to be and can last beyond 100 years
- Excellent read to expand horizons, and definitely help for investment purposes

11. Good to Great by Jim Collins (recommended for lateral knowledge)
- Not exactly investing either, introduces you to what companies and businesses are on their way to greatness

Websites to Visit
- Value Investing website of Curtis J. Montgomery.
- Interesting articles on investing
- Singapore Exchange website with all the listed company information
- Includes annual reports, up-to-date business announcements

Business Grapevines - Places to fish for information Forum "Market Talk"
- Mostly rubbish. But sifting through with patience will sometimes reveal posts on hidden gems. & Forums
- Mostly rubbish posts too. But think of it as a source and tipoff Forums
- Excellent sharing forum. Best place to sift for bargain hunters
Online Brokerages

I would recommend POEMS as a start
- Good tool that research and compile all listed companies info for last 5 years

Second & Third Level of Stock Screening

The Second Level of Business Analysis

The second level of business analysis adopts a different approach. It requires the investor to have a much deeper understanding of the people and the processes of the company through unusual means of obtaining information

The four aspects we are interested in here:

1. Marketing strength
2. Sales ability
3. Research & Development capabilities
4. People factor

1. Is the company a strong marketing organization?
2. Is the company an above average sales organization?
3. Does the company have outstanding labour and executive relations?
4. For consumer franchises, are the storefronts consistently packed?
5. For production companies, are the book orders filled for next few years?
6. Does the company have depth in the management?
7. How effective are the company’s research and development efforts in relation to its size?
- Quality of research personnel

Reference text:
- Common stocks and uncommon profits by Philip Fisher
- The Essays of Warren Buffett by Larry Cunningham

The Third Level of Business Analysis

The third level of business analysis base its principles of analysis on a few concepts empirically distilled by Jim Collins in his book "Built to Last". The investor seeks
to determine if the company can become larger than life and enter the likes of HP, 3M, P&G, General Electric, Ford, etc. This is much more demanding approach and requires the investor to have a very intimate understanding of the company from ground-up and top-down.

1. Does the company pursue a purpose that is greater than profits?
2. Does the company preserve a set of core principles and ideology, but also actively stimulate progress?
3. Does the company have audacious and stretched goals?
4. Does the company possess a cult-like culture?
5. Does the company develop its top management from internally?

Reference text:
- Built to Last by Jim Collins
- Good to Great by Jim Collins

First Level of Stock Screening

The first level of business analysis (or stock screening) uses only information freely available in the public domain. It allows the lay investor to understand and quantitatively measure the four dimensions of a business:

1. management quality
2. business fundamentals
3. financial strength
4. intrinsic value

The seven step screens will be able to help identify a good investment opportunity. However, the individual screens must not be used in isolation as it will not correctly represent the entire business quality.

Reference texts:
- The Intelligent Investor by Benjamin Graham
- Buffettology by Mary Graham
- What is value investing by Larry Cunningham

Management Quality
Is the management of an unquestionable integrity, holds a vested interest, highly competent and shareholder oriented?
- CEO/Chairman/Executive Directors > 10% stake
- Executive Officers > 10 years industry experience

Business Fundamentals
Does the company have a significant profit margin for its products and services, with a high Returns on Equity?
- Profits / Equity > 1.15 or 15% ROE

Does the company possess high barriers to entry and a durable competitive edge?
- Low cost producer enjoying significant economies of scale
- Strong brand with ability to set prices

Does the company have products and services with sufficient market potential to expand the company to twice its size in 5 years?
- Growth drivers
- R & D efforts: R&D / assets

Financial Strength
Does the company require massive amounts of debt and equity financing to sustain its growth and profits?
- Current Assets / Current Liabilities of > 1.5

Is the company effective at managing its cash flow?
- Operating Cash Flow / Current Liabilities > 1.5

Intrinsic Value
Is the company at an attractive valuation with a significant margin of safety?
- Net Tangible Asset / Price > 1.0
- Intrinsic Value (Discounted Cash Flow) / Price > 1.5

Three Levels of Stock Screening

The recommended process for carrying out business analysis is divided into multiple levels. Each level varies depending on depth and accessibility of the information.

The First Level Screen

The first level deals with material public information that is freely available to anyone. It allows the lay investor to be able to conduct a first cut analysis to determine if a company is worth investing through information found in the public domain. Although the risk level due to misinformation is high (I estimate that public domain information accounts for only 30%), an outstanding management coupled with a significant margin of safety applied in determining the company’s intrinsic value will significantly mitigate the investor’s risk.

The Second Level Screen

The second level serves as a check-and-balance and validation of the first level information. The analyst uses unorthodox means to obtain material and insider information that is not easily acquired in the public domain. E.g. the investors can pose as customers to understand service level, sales staff competency or employee satisfaction. Through such unorthodox means, the investor can glean insights that are not easily available to public. The second level screen is a significant move in providing validation to the analysis in the first level, as well as uncovering any possible problems that is hidden from the public eye.

The Third Level Screen

In this level, the investor strives to acquire an intimate understanding of the workings of the business, processes, visions, company culture, philosophy, management succession planning, people buy-in factor, team dynamics. The investor is interested to determine if the company can evolve a profitable enterprise that lasts beyond a century, filled with people who are builders of a true lasting legacy like a endlessly ticking clock tower. There are many profitable businesses that grow fast but decay after some time; but, like Warren Buffett, the value investor seeks to have ownership in a profitable business that will last forever.


It is recommended for any investor to understand his investments as much as possible, but the different levels of screen demands increasing amount of time and resources. How much is enough, would actually depend on how much time and resources one can set aside for your investments. For the uninitiated investor, probably the first level will suffice as a start. Given the inability to commit more time and resources to perform a full fledged analysis, this level is recommended for all DIY investors. And do take note that there must be a significant margin of safety and the study must be carried out merticulously to accurately ascertain the transparency and integrity of the management. Those companies with a management that have signs of inconsistency or possible lack of transparency should be avoided at all times.

The second and third level screens, when appropriately applied, will further lower the investor risk due to half-truths of public domain information. For any investor who is not holding a job as a finance analyst, to carry out this level of analysis entails taking leave from work to visit the company, talk to their staff, pose as customers, etc. This level can be seen as too much to ask for from DIY investors, but is probably more suitable for the part time or full time research analyst who is able to commit more resources. Nonetheless, if you are willing to invest your good money and spend time to read annual reports, why not consider taking it one step further to talk to people?

Paradigms of Thought in Value Investing

There exist several ideas central to value investing:

1. Concept of Mr Market

This concept of Mr Market is first coined by the father of value investing, Benjamin Graham. He tells of this story where the stock market is like a salesman named Mr Market who suffers from extreme mood swings. Every day, Mr Market will unfailingly come knocking at your office. If he feels extremely optimistic, he will offer businesses for sale at a high price to you with a very convincing pitch that he knows the company will soar towards stellar heights come tomorrow. And there will also be days when Mr Market will come to you with a very depressed sentiment because there’s a riot happening on the other end of the planet; he will probably offer the same businesses at incredulously low prices even though the business is still overflowing with endless streams of income.

The relationship between the value investor and Mr Market

The value investor is not to partake in Mr Market’s fleeting moments of optimism and depression. What he has to do is to perform his own independent evaluation and use Mr Market to his own advantage – by either buying excellent businesses at rock-bottom prices, or to sell off businesses at a price that is higher than the underlying intrinsic value.

2. Concept of Margin of Safety

The principle of margin of safety is a concept coined by Benjamin Graham in his authoritative book “The Intelligent Investor”. It states that a transaction to hold a stake in a stock should only be executed when there exists a significant disparity between the price and the estimated worth. This disparity is termed a margin of safety as it provides a tolerance for valuation errors due to ‘fudged’ financial figures and etc.

3. Concept of Circle of Competence

Warren Buffett firmly believed that if he cannot understand the business and its products and services, then he will avoid holding stakes in such companies. Likewise, the value investor should only acquire stakes in business that he understands and is deeply familiar with; the value investor stays within his circle of competence.

Fundamental Tenets of a Value Investor

There are four fundamental tenets in value investing:

1. Value investing is part ownership of excellent businesses.
2. There will always exist a disparity in the price of the business versus its underlying value.
3. The primary basis for buying into or selling out of businesses depends on a measure of underlying value versus the current market price.
4. The stock market only exists as a convenient means to buy into or sell out of businesses.

Requirements to be a Value Investor

It does not take much for one to be a value investor. There’s no requirement to be a financial expert, economist or have an accountancy degree – these are only ‘good-to-have’ as they accelerate the learning curve. What is more important is for the person to have (1) rational thinking, (2) an open mind with a willingness to adopt new perspectives and (3) to have emotional disengagement from the stock market, courage and patience.

A Rational Mind. The value investor must be one that has a desire to improve his knowledge through his own reading up or cross-sharing with others, and apply what he has learnt in school to perform his own independent analysis. He must be open to acceptance of new ideas that challenge how the general population will perceive things; only then will he be able to see what others cannot see, and achieve what the general crowd will not be able to achieve.

Emotional disengagement from stock market To become a value investor, one has to disengage from the emotions and mood swings of the stock market fluctuations. Only when this is achieved, will one be able to make sound and rational decisions, while capitalizing on the herd’s foolish behaviour.

Courage – The next most important virtue after intelligence. It requires immense courage to act against herd behaviour and run in the opposite direction. The next step after completing a thorough financial analysis is to wait for opportunity. When the opportunity comes, the investor must trust in his independent judgment and take action swiftly and decisively.

Patience – “Inactivity strikes us as intelligent behaviour”. The value investor has to be patient and recognize the fact that as long as value of the company has been correctly ascertained and acquired at a significant bargain, the price will take care of itself – in due time, the stock market will rise to match the underlying value. He will look away from the stock market, and direct his efforts to understand the business further, acquire new perspectives in valuing businesses. If the business’s underlying value strengthens over time, but the stock market does not price that in, the value investor will be even happier to acquire bigger stakes with a greater value-for-money proposition.

Are you a Value Investor?

“Investing is most successful when it is most businesslike” – so said the father of value investing, Benjamin Graham, who is also the mentor of the world’s richest man Warren Buffett. Value investing requires a paradigm shift from the common perception of companies listed on the stock market as a bunch of ticking numbers to thinking of oneself as truly a part owner of a business. To express it succinctly, value investing is about ownership of an excellent business at a price that is a fraction of its worth.

Are you a Value Investor?

Characteristics of a non-Value Investor

Investors who have acquired the Holy Grail of Value Investing are few and far between. I would reckon that more than 95% of the investor population comprises of non-value investors. This group of people generally does not recognize that there will always be a disparity between price and value. Amongst them will be a lot of people who are emotionally correlated to the fluctuations of the economy and the stock market – when the stock market is bullish, their portfolio value rises and they are happy; when the stock market is bearish and their portfolio looks mediocre, they are unhappy. Their actions are driven by their emotions.

Amongst this group will also have people who profess to be technical analyst (TA) or computational clairvoyants who claim that they are able to predict future price movements by drawing charts based on historical prices and volume. Amongst them will be people who are opportunists and gamblers who hop on the bandwagon of certain news in the hope of obtaining a quick profit. There is also the group of Efficient Market Theory believers who firmly insist that information is perfect, and that all prices reflect the company’s underlying value; they firmly believe that all efforts to perform an investment analysis are futile and it is more worthwhile looking at global trends.

Characteristics of a Value Investor

At any point in time, value investors keep things simple and they only seek to obtain answers to one question: what is the company’s underlying worth? The fundamental difference between a value and non-value investor is that a value investor recognizes that there will always be a disparity between price and value of the business; there will always be room to capitalize on situations where the price grossly misrepresents the company’s value.

Value investors think independently and do not follow the herd’s behaviour. They are emotionally disengaged from daily stock market fluctuations; their decisions on buy/sell are strictly based on a sound and rational judgment of the business quality versus the price. Value investors are highly risk-averse; they only seek to invest in companies that fall into their circle of competence – they thoroughly understand the industry requirements and business model of the companies they hold stakes in. They sleep soundly all the time, even if the stock market closes for a prolonged period. As long as the company continues to operate profitably, value investors will remain inactive.

Value investors are very intelligent; they will awake from their inactivity or ‘slumber’ to swop in for bargains when everyone is fearful, and they will not hesitate to sell off their businesses at a significant profit when everyone else has a sense of unfounded optimism.

So, are you a value investor?