This article first appeared on Dollarsandsense.sg
Due to the success of famous investors such as Benjamin Graham and Warren Buffet, value investing has become a popular investing strategy among many investors. Plenty of books, seminars, courses and articles have been written about value investing.
In the market today, there are many different viewpoints of how value-investing strategies can be used. Likewise, there are also many different types of “value investors” out there.
It’s easy to get confused. Not every investor who practises value investing has the same objectives, thus leading to different ways of measurement and sometimes, confusion, over what it means to be to be successful.
We spoke to Ken Chee and Clive Tan, the founders of 8I Holdings Limited. 8I Holdings Limited is the holding company behind 8I Education, a financial education & training provider specialising in value investing to investors since 2008. 8I Holdings Limited itself has been listed on the Australian Stock Exchange (ASX) since 2014.
Since both Ken and Clive frequently meets people who are interested to learn more about value investing during their flagship events such as the Value Investing Summit and their Value Investing Workshops, we decided to ask them about the different types of investors they meet during their events.
The Buy-Low, Sell-High Investor
It’s common to meet investors who are looking to buy undervalued stocks in the hopes of selling them once they become fairly or overpriced.
These investors aim to make money by continuously going through the cycle of identifying the right stocks to buy, and then selling them when they think the price is right. While this may be a common target for some investors, such a strategy comes with its own limitation. Clive shared with us that such “investors (or traders) have to make three right decisions.”
Firstly, they need to spend time identifying the right companies to buy. If you buy the wrong company, then the chances of you being able to realise a meaningful profit would be low.
Secondly, investors have to practise market timing well. They need to buy the right companies they have identified at the right time. Last, but certainly not least, they also need to know when it’s the right time for them to exit (sell).
Such a strategy typically leads to investors limiting their own upside. For example, Clive shared with us that an “investor might buy the right stock at $1, hoping to sell it when it reaches what he thinks is its potential at $2. He is proven right when the company does perform well and its stock price reaches $2. He sells the stock for a 100% profit.
This looks good…until the stock continues increasing to $10. At this point in time, the stock would have been a 10-bagger (i.e. stocks that give a return of 1,000%) but the investor would not enjoy this great return, despite being right, because he has already subconsciously limit the upside he can enjoy in the first place when he first invested into it.
In addition to lower returns, Clive also added that a buy-low, sell-high approach towards value investing is also trickier to pull off, since investors need to be able to time the market well.
The Passive-Income Value Investor
Typically for slightly older investors who want to enjoy passive income, these investors would look for undervalued companies that also pay out regular dividends for their shareholders to enjoy.
While receiving dividend is something that most investors would look forward to, not all great companies will pay out dividends regularly, if any at all.
A good example would be Apple. During the lead up to them becoming the world most valuable company, Apple did not pay out any dividends to its shareholders. It’s only in 2012 after it has accumulated massive profits from its iPhone and iPad success that it started resuming dividend payout. Prior to that, Apple last gave out dividends in 1995.
Another example given by Clive is Berkshire Hathaway. It’s CEO, legendary value investor Warren Buffet, believes the company can allocate its earnings more efficiently for its shareholders compared to giving out dividends.
For investors who only invest in stocks that give dividends, such investment opportunities may be missed.
The Long-Term Value Investor
Being a long-term value investor is what Ken and Clive hopes to advocate for. They have a few good reasons for that.
Firstly, when it comes to value investing, the main focus would be to find the right companies to be investing in. As it is, finding the right companies to invest is not easy and takes a fair amount of research and analysis.
Ken puts it bluntly, “after spending so much time finding the right company, why would you not want to hold on to it (your investment) longer? Especially if the company is doing well”
Long-term value investors are not concerned about when they should sell their investments. Rather, the main question they are concerned about is whether they should invest in this stock. If a company is good, they would not only hold on to their investment, but may also increase their holdings.
Simple Factors To Consider When Choosing A Company to Invest In
Clive shared with us some simple but important factors to consider when choosing a company to invest in.
# 1 Invest into a growing company, not one that is declining.
# 2 Whenever possible, invest in it at a fair price, or at a discount.
# 3 Make sure the company does not have any accounting irregularity. Don’t ignore accounting matters, as this could be a sign of bigger problems for the future.
# 4 Founders who are still an active part of the management team is a huge plus.
# 5 Innovation has to be part of the company’s DNA
# 6 Examine the intangible know-hows of the company. Do they have specific knowledge and technology that would be difficult for their competitors to copy from them? If so, then it would be much easier for them to stay ahead.
# 7 Learn how to value companies in the industry you are looking at.
Value Investing – Done The Right Way
It’s great when people want to take a proactive step towards learning and managing their own investments, instead of paying a fee for professionals to help manage it for them. Value investing is one such way in which you can learn and take responsibility for your own investment decisions, success and failure.
However, even as you invest, remember to adopt a winning strategy rather than one that may just end up sabotaging your own chances for success. Get your strategy right from the get go.
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