This is a guest post by Mr. Koon Yew Yin. He is a philanthropic investor whom I consider the Malaysia Warren Buffett. This article can definitely sum up his wisdom through years of experience in investing in stocks.

Risks in doing business:

It is important to stress that all businesses involve risk; hence the selection of shares is also a risky business. This is not the same order of risk as may be involved in going to the casino or betting on the four digits which in 90-99 % or even more of the cases, results in the patron losing his money, if not his pants.

Picking winning stocks means that we pick the companies that can meet the constant challenges of competition, supply and demand, change of fashion and style design, obsolete stocks write off, etc. There are also unforeseen factors such as variation in interest rates, import and export restriction, foreign exchange variation, change in Government regulations, etc. Inclement weather such as flooding affects production as we have seen in Bangkok so that even the most well run of companies such as Toyata and Honda cannot escape it.

Best form of investment

In my view, stocks are the best form of investment. They are tax free, have no management problem, and you can reduce or liquidate all your holdings at any time. There is a classical saying in the market – “You can buy the winning horse after the race”. This means that you can still buy a good share after the company has announced its profit. This does not mean that stocks are entirely risk-free.

Fundamentals of Stock Selection

The basic fundamentals for share selection are P/E ratio, NTA, Revenue, cash flow etc. How important are these factors?

The most important criterion is profit growth prospect. Never buy any share if the company cannot make increasing profits. You must buy shares that Fund managers are interested. They are the movers and shakers. Do not buy too much of illiquid shares because it is cheap. It is cheap for some reasons which may keep it at basement prices.

The main reasons why share prices go up include the following:
a. Exceptionally good profit growth prospect
b. Fund managers must be interested, liquidity, publicity etc.
c. Dividends are an important catalyst for moving share prices up
d. Unexpected good news of profit, bonus issues etc. will push up share prices.

When to Sell

When to sell? Do not worry about the daily share price fluctuation if you have a target price. Quite often the share you hold can move up rapidly and continues to go up. You must remember that no share can go up indefinitely for whatever reason. Sell when you are not willing to buy at the price or the reason to buy is no longer valid. Remember you must sell so that you can have funds to buy back during correction. If the fundamentals have not changed, the share price will go up again.

What to Buy

After having seen so many unexpected surprises in the stock market, I consider the safest shares to invest are undervalued oil palm shares. The reasons are:-

a. The production cost for CPO is about Rm 1,300 per ton and the average selling price has been more than double the production cost in the last 10 years or more. The average CPO price for 2011 is more than Rm 3,000 per ton. Which business can offer such big profit margins?

b. The demand and profit are sustainable due to population increase. Moreover, both China and India who are our buyers have been improving their economy. The financial problem in Eurozone and US has little or no effect on our palm oil market.

c. A palm tree will start fruiting after 3 years. It will continue to bear more fruits until it is about 16 years old after that age it will begin to bear less fruits. Only after about 22 years a palm tree needs replanting.

d. The land always appreciates in value.

e. There is good profit growth prospect and sustainable profit

I am obliged to tell you that plantation shares form the major part of my investment portfolio. If you decide to buy, I am not responsible for your profit or your loss.

How to become a super investor?

I started serious investing in public listed shares when I retired from executive work at 50 years old. I was not an accountant nor have I a MBA degree. I was just a civil engineer and I hardly knew how to read a balance sheet at that time.

I started by reading to understand the basic fundamental principles of share selection as practiced by Warren Buffet, Peter Lynch and other great investment gurus. These are the key traits to being a super investor that I picked up.

Trait 1: Be a contrarian investor, that is, the ability to buy stocks while others are panicking and sell stocks while others are euphoric. In 1983 when China declared that they wanted to take back Hong Kong, the people were selling as if there was no tomorrow because the Communists were coming. The Hang Seng Index plunged to about 700. Currently it is around 18,500.
In such a situation at that time, would you buy Hong Kong shares? I did.

Trait 2: Obsession in playing the game and wanting to win. Winning investors don’t just enjoy investing; they live it. They wake up in the morning and the first thing they think about, while they are still half asleep, is a stock they have been researching. They are thinking about selling, or what the greatest risk to their portfolio is and how they are going to neutralize that risk.
They are obsessed in enhancing the value of their holdings. I am that way.

Trait 3: The willingness to learn from past mistakes. Most people would much rather just move on and ignore the dumb things they’ve done in the past. I believe the term for this is repression.? But if you ignore mistakes without fully analyzing them, you will undoubtedly make a similar mistake later in your career.

Trait 4: An inherent sense of risk based on common sense. Most people believe analysts’ reports which are often ‘a buy’ recommendation. It is very seldom they recommend ‘a sell’ because they would lose the business from the company he has recommended ‘a sell’. You must always take any analyst report with a pinch of salt.
I believe the greatest risk control is common sense which is not so common sometimes.

Trait 5: Confidence: Great investors must have confidence in their own convictions and stick with them, even when facing criticism. Buffett never got into the dot-com mania though he was being criticized publicly for ignoring technology stocks. He stuck to his guns when everyone else was abandoning the value investing ship. He was proven right when the dot com bubble bust.

Trait 6: Clear thinking. When considering a share, you must try to understand the nature of the company’s business and its inherent difficulties so that you can evaluate your risk exposure. There are a lot of people who have genius IQs who cannot think clearly, though they can figure out bond or option pricing in their heads.

Trait 7: And finally the most important, and rarest, trait of all is the ability to live through volatility without changing your investment thought process. This is almost impossible for most people to do. When the market makes a severe correction, most people dare not buy more shares to average down or to put any money into stocks at all when the market is plunging. They would begin to doubt their own judgement.

Wishing you a season of happy and profitable investing!

    13 replies to "How to beat the market and become a super investor"

    • Jenny Wong

      Thank you very much for the useful article.I’m looking forward more articles to read.

    • Lee

      Thank you very much for the article. Very informative and insightful.

    • Dr abella

      Thank you kc for sharing. Really need to become financially literate

    • david selva

      An excellent article. Thanks KC.

    • shiva

      a valuable article..thank you for sharing 😉

    • […] to Bursa Malaysia alone. Nowadays, most securities firms also provide the flexibility for investor to invest in stock exchange at other countries and […]

    • Teb

      Ur pro advise has always been enlighting

    • Koh

      I enjoy reading your tips on investing in the share market. I would like to learn more.
      Thank you very much for sharing.

    • Peter Lim

      Graham called this the “anticipation approach”, where investors seek to profit from companies that have the most favorable outlook over the near term – usually, six months to a year. The fallacy of this approach, was that Sales and Earnings are often volatile and the anticipation of near-term economic prospects could easily be discounted in the stock price.

      Lastly, and more fundamentally, Graham charged that the value of an investment is not what it will earn this month or next, or what next quarter’s sales volume to be, but what that investment can expect to return to an investor over a long term period.

      Decisions based on short-term data are too often superficial and temporary.

      ~ copied from the book “The Essential Buffett, Chapter 3.”

    • Linda

      I am thinking of investing in the stock market but not sure what and when to buy. Will wait for the right time. Thank you for sharing your tips which is very useful. I like it very much.

    • Woon Lip Fuey

      I recently just filtered the stock market which from A to Z and I found there are many surprises in stock market everyday, and value investment method is really work in investing stock market. However, in filtering A-Z process, I took out palm sectors which I think I should have a particular time for myself to do a greater research onto it, may I have any website or way to get myself understand about palm oil? thank you very much, and thanks for the post, I like it very much. 🙂

    • LCF

      It’s really great to have someone like Mr Koon to contribute his wisdom regularly here. He knows the palm oil industry inside out to give readers such insights, but then there’s another camp of investors (like CK Wong of InvestKK) who lean more towards real estate instead of paper assets. I suppose – any investment vehicle or non-cyclical industry which would appreciate in value over the years and immune to business cycle, are the real gold nuggets

    • BS Ong

      I agreed very much on the technical aspect of Mr Koon Yew Yin’s theory, what I would like to comment further is that despite one follows 100% what he said, one still looses money. Why? This comes to the psychical aspect of an individual. Generally, as what Buddha says a lot of things depend on Cause & Effect, and one of which is your past and present Kamma; Do more charities especially offer to those monks who have higher Purity of Mind and whilst at the same time keep your mind Pure the reward will be more abundant (but then when your mind is pure, you do not think you want the profit anymore, it just come on its own accord without you thinking of it). Think of a Cantonese song ~ within your destiny whatever will come will come, if its not there, don’t try hard ~ or you will loose your pants; like what happened to me.

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