What’s Value Investing? It applies to both Property and Stock

If you can master stock investment, you can expect a 15%-25% per annual return. You only have to learn two things. First, you have to understand the difference between “Valuation” and “Price.”

Pauline Teo, Director (Education & Training) with 8 Investment Pte Ltd shared with us some investment philosophies during this webinar:

Let me give you an example. I believe most of you somehow have a property – a house. If you want to buy a property, first thing you want to ask before you offer a price is to ask for the property valuation, correct? So one bank tells you that the house is worth a million, another one will say, “Oh, maybe a million,” then another will say a million. You roughly know the valuation is one million. You then decide for yourself if the house is worth more than a million. If it is, you put out one million. If you think the house is not worth a million, you might actually offer RM800,000.

This format works similarly in stocks. Let’s say, right now, there is a particular house, and this house is situated in a strategic location. All banks give you a valuation of one million. Let’s say the couple who owns the house wants to really get rid of the house fast. You have the money; you have taken out a loan; most importantly, the seller now offers you RM500,000 to buy the house. Definitely, you will buy the house because it is undervalued. This is the same theory when it comes to stocks.

I believe many of you have tried this drink called Milo before. Milo is owned by Nestle which is listed in the Bursa Stock Exchange. Now, let’s say the U.S. got a terrorist attack. They attacked a lot of important buildings, and not only did they bomb Boston, they also bombed the White House.

Then also, we hear that the Euro crisis coming – Italy, France, and other countries cannot pay off their loan which has Europe going through a Euro debt crisis. What happens to the stock market after hearing about these two events? The stock market will crash, right?

Because of these news, Nestlé’s share price drops from RM60 drop to RM40. This is all hypothetical. Let me ask you this question: Do you think people will stop drinking Milo the next day? Do you think people will stop drinking Nescafe? No, right? People will still continue to drink Milo and Nescafe. Do you think Nestlé’s revenue profit will drop overnight just because of the news? No!

So now, let’s say you understand the business model of Nestle and know how to calculate its valuation price. You realize the valuation is worth RM60 which has now dropped to RM40. Should you be happy? Yes, of course. Why? Because you are buying something right now that is below its worth.

Remember, when we practice value investing, we make sure that we know the value of the business or the stock that we invest in. We do not take chances. I know a lot of people like to take chances and say they would buy RM1 today, and tomorrow it will rise up to RM110. That’s called speculation, that’s not called investing.

To learn how to do value investing, we have a concept called the “3-R Concept” which is a very simple method to do value investing. We only buy where the 3-R meets. First is business model. We make sure the company definitely has the right business model and managed by the right management. When the business model and management is right, I can tell you valuation and the numbers will definitely be okay.

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