In 2020, this was quite a formative year for me.
My banker hat
As a banker in a large local bank, I do credit analysis for a living. In a nutshell, this means
1. Looking at the company business and deciding whether we want to be a part of it
2. Looking at the financials and seeing if its capital structure is sound and can support the loans.
3. Looking at the business risks and figuring out what mitigating factors there are.
In some way, lenders or bond holders are in the "negative art" business" being we are looking to avoid losses of any sort rather than make a huge upside which is the opposite end of that an equity holder holds. All that really matters is 2 things (Operating Cash Flow / Free Cash Flow and Shareholder Equity Cushion)
So to say I understand a balance sheet and profits is quite natural as part of my daily job.
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My value investor hat
As a lifelong learner, I have taken up many financial education (Finance Degree, CFA, FRM (in progress), Moody Corporate Credit Certification etc.). But nothing beats learning from having the skin in the game.
For years, I did not find much success fishing in the small local pond of Singapore. Imagine buying things like hyflux bonds, noble, viking offshore. I have been there and done that.
I found some success in buying value stocks looking at PE, PB and buying things like Guocoland, Keong Hong, Ho Bee, IREIT, Lendlease Reit, Mapletree NAC etc.
So imagine my shock when I checked out the company "Yihai International", a company I briefly read about and understood as a distributor of condiments of the hotpot brand Haidilao.
I saw it at 3.80 in 2017, it double to 7.60 in the same year.......and kept going - see chart below.
That is when I realized, it is not that value investing is broken but that there may be a better way. That was when the lightbulb lit up. An eureka moment for me.
Think of it - one may be quibbling about that 5% yearly dividend return or sitting on a stock for years when there are companies that have appreciated 20x.
Just 5% of your portfolio in that would double your whole pot. Let that sink in.
And that's just what is wrong with Singapore stocks where the majority of STI stocks are in the old economy (high cash input and low returns - think like a power plant)......the digital economy requires a different lens where a small investment churns out a lot of money (e.g. Developing a super app like facebook and distributing it across billions of handphones)
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My growth investing hat
So I read about the two philosophies - Value and Growth Investing and found that both had similar beginnings being born in the post depression era of 1930s of USA.
- Value Investing was conceptualize by Benjamin Graham and brought to much forefront by Warren Buffett who is an extremely disciplined, focus investor on core business principles.
- Growth Investing was conceptualized by T.Rowe Price. A lesser known legend but with solid groundings. He believed the best time to invest in a company was the point it was in rapid growth and sell when it is at the tail end of maturity or declining.
In other words (from the Corporate Finance Institute picture above) - buy early at the start of the growth stage as seen from the red arrow and sell at the black arrow (Decline segment).
Cigar butts with a few puff left or companies with a huge runway that can keep going....like a snowball rolling down the hill, if a runway is long enough, it could get quite big...maybe huge.
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I can hear thousands of questions ringing in your head.
1. How do I know what is a growth company?
2. How do I know when it is in decline or just a temporary bridge?
3. Growth? That's just a company with no earnings and all dreams!
4. It is just the flavor of the month/year/decade....value will return at some point!
I will answer all these questions in the next segment, but most importantly. One must be open-minded to understand how each strategy works. After all, there are more than one way to become wealthy.
- Some do it through buying Bitcoin
- Some do it through hardwork in a 9-5 job and rising in their careers
- Some just inherit it
- Some build it from scratch (entrepreneurship)
For me - it is going to be from investing. Since you are here, I assume we are heading the same direction.
Till next time. Invest Well.
Joel Siew
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