Hi, I’m Ian.
As I write, on 8 May 2018, we will be deciding the future of our nation. Here, I would like to take this opportunity to thank you for playing a part in it as a fellow countryman. If you are travelling to vote, have a safe trip and a decent voting day. With that, I’ll address an interesting question posted to me by my reader at Bursaking.com.my.
‘Ian, What is Your Stock Pick Before & After GE14?’
Here is my answer:
The best stocks are always ones that have grown and would continue to grow profits consistently regardless of the outcome of GE14. Bad stocks are usually ones that are making losses regardless who is running our country. For me, it is important to note that the concept of investing is to design an All-Weather Portfolio that is profitable, resilient, stable and expandable in all economic & political situations. I believe, your investment results should not be based on solely on the outcome of this election or any elections held in future years.
So, how do I build myself an All-Weather Portfolio?
First and foremost, it is important to realize the need of a simple & practical Investment System which can be Replicated across different markets across different nations. The question is not really: ‘Is the U.S. market good or bad?’. But, the idea is, ‘Are you a good investor and can your investment system be replicated in Bursa Malaysia, the SGX, the HKSE, and the U.S. Market?’
So, what then is an Investment System?
Good question. For a start, savvy stock investors would formulate their own unique investment plan which consists of a proper investment system. It is a guide that helps investors to sift out Good Stocks that have potential to grow in value from Bad Stocks that don’t.
The system may vary according on the needs and objectives of the individual investor. However, it should consists of 4 key elements as summarized by my friends from the Fifth Person. They named it, ‘The Investment Quadrant’.
Quadrant #1: The Business
Friend: ‘Ian, is this a good stock?’
Ian: ‘What does it do to make money?’
Friend: ‘I don’t know. But, my broker is recommending it to me. He says the stock now is trading below his target price and has potential to go up.’
Time and time again, I come across well-meaning, sincere, and hardworking individuals who desire to increase their wealth in the stock market. However, many of them have unconsciously adopted a ‘Gambling Mindset’ when they buy stocks in the stock market. This is evident among people who can recite the stock code ‘GTRONIC’ but have absolutely no idea on what business or businesses the stock is getting into and how well they are being managed.
Savvy investors, on the other hand, want to know as intimately as they could about a stock before making an investment decision. They want to know the business model of the stock, who & the volume of its customers and market shares, and as well as the future growth prospects of the stock. Most of these savvy investors would select businesses that are resilient and are expandable in the future as they have the best potential for long-term capital growth.
Quadrant #2: The Management
Stock investing is also about entrusting people. We are handing over capital to people so that they have money to run their businesses and, in return, will provide us with recurring growing income and grow our wealth in line with the growth of their businesses.
In general, savvy investors would want the board of directors and as well as the management team to act to the best interest of their shareholders, who’re ultimately the true owners of the company. There are multiple angles to view this subject alone. Here, I would just state one of the most obvious examples by asking a simple question:
Who do you think has more Motivation to Grow & Expand a company? Is it:
- Tony Fernandes (CEO of Airasia Bhd)
- Peter Bellew (Former CEO of Malaysia Airlines Bhd)
I believe, the answer is obvious. But why? It’s simple. Tony Fernandes is one of the major shareholder of Airasia Bhd. His wealth and financial wellbeing is directly linked to the performance of Airasia Bhd. Meanwhile, similar to a lot of former CEOs of Malaysia Airlines, they receive a huge paycheck and a hefty employment benefits for running Malaysia Airlines as CEO which are worth millions of Ringgit. Their own financial wellbeing are well taken care of regardless of the performance of our national carrier. Hence, I believe this explains the difference between the two carriers.
I’m writing this from an investor’s point of view. It’s meant to demonstrate a simple case of how a stock performs in relations to its management structure and level of ownership in a company. It’s never meant to incite negativity or any forms of displeasure among readers. This is an investment related article written purely for the educational benefits of stock investors in Malaysia and Singapore.
Quadrant #3: The Financials
How do savvy investors separate a truly good stock from bad stocks?
The answer is by reading ‘Financial Reports’. Good stocks are ones that grow profits consistently. Consistent is key. This means, the stock has built itself a solid track record of growing profits when economic is good and bad, when Ringgit is stronger or weaker against the USD, or when crude oil prices are high and low or as mentioned above: whoever is running the country. Here’s a classic example:
Source: Annual Reports of Public Bank Bhd
Ideally, savvy investors would invest in stocks that grow profits consistently. This is because their stock prices would grow in tandem with their growth in profits over the long-term. This is what makes Warren Buffett a legend in the stock market. Of course, the rest of us (KCLau, Peter Lim, the Fifth Person & myself included) are ones who follow Warren’s style of investing and copycat our way towards investment successes. Hence, success can be copied.
Quadrant #4: Valuation
‘So Ian, is Public Bank a good investment?’
Here’s my answer. A good stock is only a good investment if its current price is undervalued. A good stock can be a bad investment if it is overpriced.
‘Since Public Bank is now RM 23.84 a share, does that mean it is overpriced?’
The stock price alone doesn’t tell you whether Public Bank is undervalued or overpriced. It is a mistake to reckon that Public Bank is expensive because its stock price is high. Believe it or not, Public Bank could be a lot cheaper than stocks that are priced way below RM 2.00 a share. Here’s a golden nugget for you: ‘Don’t Mixed Up Cheap with Affordability.’
That’s why savvy investors would calculate the valuation of a stock. This may include the calculation of financial ratios such as P/E Ratio and P/B Ratio of a stock to estimation of a stock’s intrinsic value. To put it simply, if one savvy investor estimates the intrinsic value of Public Bank’s share to be RM 30, the investor may view Public Bank to be undervalued (cheap) as the stock price is currently RM 23.84, a discount to its true potential value. Alternatively, if another investor estimates Public Bank’s intrinsic value to be RM 20, then, he would view Public Bank to be overpriced and thus, avoid investing into it.
I Want to Learn More …
On 14 May 2018, we’ll have Victor Chng, the co-founder of the Fifth Person to share with us in greater detail about the Investment Quadrant in the next 1-Hour Live Webinar. Check out the Details:
If you intend to learn how to invest for capital gains over the long-term and to replicate the successes of the Fifth Person in your own stock investments, you may join the Investment Quadrant 2.0 which consists of:
– 9 Modules of the Investment Quadrant System (Video Contents)
– 10 Case Studies of Real Stocks (Video Contents)
– Checklists, Flowcharts, and Financial Analysis Excel Template
– Q&A session to Support You.
– 1-Full Day Investment Quadrant Live Workshop
The current launch of the Investment Quadrant 2.0 will end on 27 May 2018. You may check its details and subscribe it with a US$ 50 discount by clicking the link below: