I recently had a discussion with a friend w.r.t value investing. Here is the summary of the discussion
Value investing alone is unlikely to work in most pple. Most people will give up after some time. Not giving up doesn't necessarily equate to success.
- basically value investing involves buying an undervalued stock and waiting for value to be unlocked, and repeating the process till one becomes rich. there are a lot of what ifs....here they are:
what if it is not undervalued in the first place?
what if the calculation is not correct?
what if the above two points are correct but unlocking does not happen?
what if there is another better counter discovered later and one's cash is locked in this "value counter"?
what if there is unknown what if?
Because of the above, I notice that to be a value investor one needs to :
- need to have good understanding of the company intrinsic value, which in some cases might be hard to work out and/or different value investor might have different values.
-need to have cash
-need to have deep conviction keep money there and wait for it to be unlocked.
-need to keep monitoring financials etc, I see the same people keep saying the same things about the same counters and keep harping on numbers. imo doing that incessantly appears to me to be time consuming and draining to one's emotional well being.
Still, the above what ifs continue to exists, even after crunching numbers as they come in from the quarterly reports or analysts reports or blogger reports..what have u.
therefore in my personal experience:
what i would prefer and in my own personal experience is more acceptable and workable
- understanding of company and businesses and how money is earned and distributed to shareholders is still important.
- regard dividends highly. buying shares to me is akin to buying my future cash flow.
- getting money stuck for unknown period of time with no dividends is not a good idea.
- portfolio planning is equally important to individual stock planning.
- think cash flow rather than capital gains from possibility of value unlocking. Discount and/or disregard portfolio losses of even up to say 30% in even of crisis provided cash flow still intact.
- little benefit in long run, and most likely psychologically and time draining to focus so much on numbers and look so closely at things.
***PS. The above are just based on my discussion and my views which might be wrong totally. Plus I am no accountant and did not attend any investing or accounting courses. Take the above with a pinch of salt if you have to, yah?
Value investing alone is unlikely to work in most pple. Most people will give up after some time. Not giving up doesn't necessarily equate to success.
- basically value investing involves buying an undervalued stock and waiting for value to be unlocked, and repeating the process till one becomes rich. there are a lot of what ifs....here they are:
what if it is not undervalued in the first place?
what if the calculation is not correct?
what if the above two points are correct but unlocking does not happen?
what if there is another better counter discovered later and one's cash is locked in this "value counter"?
what if there is unknown what if?
Because of the above, I notice that to be a value investor one needs to :
- need to have good understanding of the company intrinsic value, which in some cases might be hard to work out and/or different value investor might have different values.
-need to have cash
-need to have deep conviction keep money there and wait for it to be unlocked.
-need to keep monitoring financials etc, I see the same people keep saying the same things about the same counters and keep harping on numbers. imo doing that incessantly appears to me to be time consuming and draining to one's emotional well being.
Still, the above what ifs continue to exists, even after crunching numbers as they come in from the quarterly reports or analysts reports or blogger reports..what have u.
therefore in my personal experience:
what i would prefer and in my own personal experience is more acceptable and workable
- understanding of company and businesses and how money is earned and distributed to shareholders is still important.
- regard dividends highly. buying shares to me is akin to buying my future cash flow.
- getting money stuck for unknown period of time with no dividends is not a good idea.
- portfolio planning is equally important to individual stock planning.
- think cash flow rather than capital gains from possibility of value unlocking. Discount and/or disregard portfolio losses of even up to say 30% in even of crisis provided cash flow still intact.
- little benefit in long run, and most likely psychologically and time draining to focus so much on numbers and look so closely at things.
***PS. The above are just based on my discussion and my views which might be wrong totally. Plus I am no accountant and did not attend any investing or accounting courses. Take the above with a pinch of salt if you have to, yah?
Hi Paul,
ReplyDeleteI don't think it is draining to one's emotional well being for some value investors. In fact, they like crunching numbers and following companies closely. They find it interesting and enhance their understanding of the company and its business.
As for your questions of "what if", it is because of these uncertainty that a value investor chooses to diversify across stocks. You can also have a portfolio of 100 value stocks if you wish to. There is no limit to the number of stocks you want to hold to eliminate these stock specific "what ifs".
Hi ghchua,
ReplyDeleteMany thanks for ur comments. Agreed that some value investors or so they call themselves like doing numbers and working out sums. If they truly find joy doing that, i guess make/lose money doesnt matter so much, of course make money becomes a bonus to their joy.
Personally (i must emphasise), i find beyond a certain aspect or level of doing the sums and knowing what there is to know, there is lesser benefit in terms of cagr gains to my portfolio.
On a personal i do like maths a lot, i was top in maths in my secondary sch n obtained a distinction in maths special paper at a levels.
I do agree with ur comments wrt what ifs. Too many what ifs might mean diversification to reduce risk but thats might mitigate any gains one counter makes to the entire portfolio.
Thanks once again gh!
As to your comments on dividend vs capital gain, I think it is a chicken and egg problem. Some companies pay little or no dividend not because they are not profitable, it might be because their business is capital intensive and they need the cash flow from their business to re-invest back for future gains. Some need cash flow to fund their working capital so as to keep the business going.
ReplyDeleteBut to me, as long as the company can grow its NAV over time with retained profits, the share price will take care of itself. Which means, long term wise, a company with increasing NAV will do well even if it gives out little dividend. Of course, one must go through the details on what consists of the NAV and discount appropriately on some of these assets.
A case in point is WCY related companies like Haw Par, UIC, UOL etc. They have never been known to give out generous dividends but their NAV had been growing in the long term. Therefore, their share price appreciated accordingly if you hold their stocks for long term.
Hi gh,
ReplyDeleteThanks for your reply.
I agree with you on your points. Perhaps i will add: The part about companies not paying a dividends but nav is growing: we need to analyse carefully n validate n satisfy ourselves that this is indeed the case, especially on companies which are not well known and especially those without hard asset backing. I agree with u on wcy companies n i myself won't mind being vested in one of those. In fact i am vested in one of those. But wcy companies u memtioned all pay dividends regularly albeit small amts. N over a long time the share price will play catching with the nav. Those type of companies we can rather safety invest for long term cos we know more likely than not, the share prices of those are going to go up. Its those without asset backing n nil dividends that we have to be extra cautious, imho..n personally i stay away from these.
Personally i prefer companies to give dividends rather than those that do internal reinvesting n pay out none. I know berkshire doesnt pay a dime. :)
as i am able to feel a financial connection between the company n shareholders in those which pays dividends.
Thanks. It has been a fruitful exchange of knowledge n ideas.