Pivot to Shareholder Activism as 8% Value Activist!

This post first appeared on 8percentpa.substack.com

Time files. It has been c.20 years since we started blogging here. Today, few people use blogger. Blogger itself became difficult to use, ads and clickbaits dominate the posts. As such we ported to substack, an innovative newsletter platform, a while back. But we continue to post here from time to time.

In 2025, we pivoted to talk about activist stocks i.e. stocks owned by diligent, smart, activist fund managers who have made good money for their investors. From 2022 to 2025, we have also covered a couple of free cashflow compounders. We will still touch on these great stocks, the basic investment related stuff periodically, where relevant.

Shareholder activism is coming to Asia and Japan, because there are too many undervalued names. Even though everyone’s focused on US and its exceptionalism today, value is in Asia. As of 2025, roughly half of Asia’s listed stocks trade below book. 40% of all listed companies in Japan trade below book.

What is Shareholder Activism?

Shareholder activism is about investors using their stake in publicly listed companies to change the companies they have invested in for the better. In activist marketing lingo, it’s called positive transformation.

Publicly listed companies are complex animals. Most companies today have hundreds to thousands and for larger caps, hundreds of thousands or even more shareholders. Executive management of these companies answer to the board of directors who supposedly represent all shareholders.

But sometimes, things don’t really work. 

Cosy management are supported by dysfunctional boards and share price languished for years. Hence we have so many companies trading below book and we need activists to shake things up.

How do Activists Make Money?

Activists invest in cheap companies stuck with certain issues and they try to unlock value by resolving those issues. It could be changing management, or divesting poor performing businesses, or even taking the entire company private. It has been a viable strategy and some of the best activist funds have generated stellar long-term track records. Interested readers please read the Harvard study link below:

Harvard study on activists: https://corpgov.law.harvard.edu/2023/08/01/do-activists-beat-the-market/

Activism is not new. Warren Buffett was the activist when he took over Berkshire Hathaway in 1965. In the early 2000s, the current version of activism came back to the US in a big way and the movement then grew globally into Europe and more recently Japan.

Family controlled businesses in Asia might need a bit more time before activists can work their magic. This is because families owning 30-50% of outstanding shares make it difficult for activist to do anything. But the time will come. It is a matter of when, not if.

We want to be ready. We hope to make money by identifying the best activist ideas. That’s the mission!

What substack has to offer?

We have published monthly investment ideas for the past few years. We started with the usual free cashflow compounder ideas but we pivoted to discuss activist names in 2025. Interestingly, many names turned out to have activist involvement. Since Japan is the biggest hotbed, we will discuss a lot of Japan ideas, but will also touch on interesting global and Asian activist names.

From time to time we will opine on investment basics, fundamentals, portfolio trades and updates, investment strategies, market analysis and more. This substack is targeting both aspiring and seasoned investors. We publish posts every 5-10 days on both invested and toehold ideas.

We invite you to start as a free subscriber on substack. We are also on X, LinkedIn and Telegram!

Let's also connect on: 

LinkedIn: https://www.linkedin.com/in/8percentpa
X: https://x.com/ArvelVista
Telegram: https://t.me/+zF0bRcOXXo4zOTc9 

The rest of the post is on 8percentpa.substack.com

Top Five Myths about Investing Busted!

We had discussed a lot about investing myths in the past and here's a post to really bust them once and for all.

1. Investing can make you filthy rich

I think this notion deserves a lot more analysis and the way I would think of it is to look at the top 10 or even the top 100 richest people in world, in each region and also in Singapore. Investors seldom get featured on these lists. The most famous rich investor remains to be Warren Buffett. In Asia, there is no equivalent. Most of the richest Asians are either entrepreneurs or property tycoons.

The second argument relates more to mundane mortals like us and here the stats don't lie. Over 90% of all retail investors don't make money while 80% of professional fund managers don't beat their benchmark like the S&P 500 which generates 8-10% per annum return over time. Putting these together it means that an average investor doesn't even get close to high single digit returns annually. If that is the case, on average,  how can we expect investing to make us filthy rich?

Getting rich through hard work and compounding!

But having said all that, I would say the fruits of labour awaits the diligent and the intelligent investor and if we do achieve 8% return annually, over a span of 10-20 years, we can increase our wealth by a factor 3-4x. This is the goal! It's achievable with effort, grit and time. There is an early post in this blog addressing this exact topic. In short, investing can make you rich if you are really patient and really trying hard and putting in the effort required. But it’s a tall order to make you filthy rich.

2. Investors spend ten hours in front of four trading screens

Most laypeople probably have no idea what real investors do. We get our notions watching Hollywood or old Hong Kong drama depicting investors as big shots in front of trading screens. Actually, real investors rarely spend time in front of screens reading charts. We spend 80-90% of the time reading. We are constantly reading newspaper, annual reports, business magazines and what other investors write. The remaining 10-20% of the time, we either talk to other boring industry people or watch investment related videos or we write own our thoughts for other investors to read, haha. That's the truth.

3. Investors can predict markets

Well, sorry, investors cannot predict nothing and so does everyone else. The future cannot be predicted. It exists as a set of probabilities at any given time and people who are predicting don't know any better. So don't be fooled. The space-time continuum is one of the least understood physics of our universe. The current way we think how our universe works might be completely missing the point. It was postulated that every action that every single one of us takes might create a new universe and a new reality in a whole continuum of realities. That's like 7 billion universes and realities every split second. It's literally to infinity and beyond! If that's truly the case, then how can anyone ever predict markets? 

So the way to think about the future when it pertains to investing and making money is to know how the big probabilities and the big scenarios would play out. There would be times when the risk-reward is skewed such that in the bear case scenarios we don't lose much but in central and bull case scenarios we make a lot of money. That's when we bet and make the outsized expected returns. This usually ties in with valuation. When we buy things cheap, we protect ourselves against the bear case scenarios. This is why value investing is always about buying cheap, margin of safety and strong business moats.

4. Investing is super exciting

Investing is boring!

Well, this is probably the biggest myth i.e. this statement is the furthest from the truth. Investing is super boring for most people. This is a job that requires you to read and read and read some more, then talk to boring people. Sometimes we get to go visit companies' HQ and sit through meetings after meetings. It's called Death by Marathon Meetings. If we get real lucky, we get resurrected during lunch and then "afternoon dessert" get served - Death by Powerpoint. Hahaha! George Soros said it best - good investing is boring. It becomes fun a bit like how some foodies get acquired taste for certain foods. Like how some Korean food lovers acquired the taste of eating live octopuses or how some people like blue cheese or stinky tofu. 

5. Investors are like Hollywood hotshots

As you would have guessed by now, investors are no hotshots. Investors are mostly boring people with limited communication skills. They talk in their own jargons and have no clue who's BTS or Twice. (BTS might ring a wrong bell as Bangkok's railway system.) Most teenagers wouldn't want to hang out with the best investors in the world. Just look at the two of them below! Again, it's really acquired taste for people who idolize these two cute grandfathers!

There is a new breed of younger investors who can stand somewhat closer to George Clooney and Robert Downey Jr if they tried. They are Dan Loeb, David Einhorn and Bill Ackman as depicted below. But still, they wouldn't be considered your regular heart-throbs. Ironically, their value goes up as they age in the world of investing. So they would really become iconic and super famous and well-known to the general public say twenty years from now, when they look more like Warren and Charlie above!

Alas, there are no pretty investors. That is a sad fact in both real life and in the movies. The closest Hollywood ever managed to depict was a femme fatale serial entrepreneur in The Intern. Such a person doesn't exist, at least in our current universe and current reality :)

So that's the five myth busted. Are we ready for some real boring investing? Anne Hathaway would have this to say,

"I've honestly been really lucky, my only jobs have been babysitting and acting."

Huat Ah! 

The Essence of Value Investing

Here is a good analogy on investing and the concept of margin of safety from Buffett some time back.

If you see that a man is very fat, it makes little difference that you are able to precisely calculate his exact weight to enhance your conclusion. Is he 102kg or 110kg? Does it matter? Similarly in trying to determine the intrinsic value of the company, it doesn't matter if you get it at $102 or $110. What is more important is where is the price now? If it is $98, it means that you are aiming for 4-12% upside. That's not a lot of buffer against any calculation error. It means that the stock is not cheap enough. 

Margin of Safety

If the stock is at $70, then we are talking. The margin of safety now opens up to 30%. It takes a few more mistakes for us to be wrong vs if we bought it at $98. The chart above is quite enlightening in telling the whole margin of safety story. The blue line represents the intrinsic value of a company. Over time it creeps up as most companies create value for the society and earn profits that help it to grow stronger.

But the share price rarely track its intrinsic value. It moves above or below it with the vagaries of the markets. We buy it when there is a margin of safety. Usually, this doesn't come often. Maybe once every 12 to 24 months or longer. There are more times when stocks trade above intrinsic value, esp when their sectors are very hot, like technology in 2017 and early 2018.

This is essentially the essence of value investing. Ben Graham, the father of value investing, was famous for saying, if you have to surmise value investing in three words, it is this: margin of safety.

See also
Business moats
Intrinsic Value
Value Investing

5 Things You Need To Know About Investing

I have always wanted to write something about investing incorporating some well known statistics which I think every investor should know. Only then we can appreciate how the value philosophy will help us win this complicated game. Well, though first we have to define what the definition of winning is:

Winning, in my opinion, is to generate a long term annual return that is higher than the market return. The market is usually defined by an index like the Straits Times Index or the Hang Seng Index. Needless to say, the most famous of them all is the US S&P500 which has generated a 8-10% return per annum since like 1900. Yes, since more than a hundred years ago.

It would be a feat to actually beat this tall order (of 8%pa or 10%pa for that matter) over a long timeframe like 20 to 30 years. Warren Buffett who managed to achieve this feat over the last 50 years have recently admitted that he would probably fail to beat the S&P in the next five years as his fund size has gotten too big.

Why is achieving 8-10% per annum so difficult? This is related to the 5 things that you need to know (all are statistical numbers) which I would like to highlight today.

1. The top 10% takes all. Since the inception of fund management, only 10% of all investors (roughly speaking), or statistically proven, only 20% of all professional fund managers have actually beaten the benchmark that they were supposed to beat. This means that 80-90% of investors actually earn less than 8-10% over a very long periods like 20 to 30 years.

2. 20% of your bets will make 80% of your profits. This is the well-known 80/20 rule and it sure works in investing as well. Later we shall see how this plays out to ensure that most investors are destined to earn mediocre returns.

3. 30% margin of safety. One paramount rule of investing is the margin of safety rule. According to Ben Graham, the father of value investing, if you have to surmise investing into 3 words, it's margin of safety. It is that important. What this means is that we can buy only when there is a significant buffer, or when there is a huge gap between price and value. Again Ben Graham advocated that one should ask for at least 30% margin of safety ie if you determined that a stock is worth $100, you should only pay $70 for it.

4. There is always a 40% chance of getting it wrong. No matter how much analysis you have done and how many expert opinions you have consulted, for every stock that you buy, there is a 60% chance that you will get it right, and a 40% chance that you will lose money. This is a well-known probability statistics in investing that applies to both for investors and traders. Actually it's more like a 55% or 57% winning ratio. But this is already far better than the casinos as the highest winning ratio for any casino game is always less than 50%. (Closest being Blackjack apparently at 49.4%. In casino parlance, it's call the house edge of 0.6%. I haven't confirmed the exact math in converting it to a winning ratio - my own terminology, but the idea is the same.)

5. Invest with at least a 5 year investment horizon. This is something that is almost impossible with today's MTV culture of instant gratification. We don't even want to wait 5 min most of the time, especially not for the MRT at peak hours. The investment horizon has declined to 6 months in a recent study on the holding period for investors of the New York Stock Exchange. But compound interest only works well the time period is long enough. Anything less than 5 years is basically not cutting it. The famous rule of 72 tells us that even with a high 10% return, it will take 7.2 years to double our money. Trying to achieve anything significant in 5 years is just plain illogical in the world of investing. Strangely, Wall Street and most market participants think otherwise.

Summing this all up, what does it mean?

First we should think about Pt 3 and 4. We must understand that 4 out of 10 stocks we buy will not make money. This means that every time we lose, we must ensure that the loss is minimal. This can only happen if you have a good margin of safety for any bet. So a 30% margin of safety and a 40% winning ratio goes hand in hand. Incidentally, trading tactics talk about a similar strategy. One must have a strict cut loss rule. Like maximum 3% loss or 5% loss. This is then offset by a "let your winners run" rule, usually at least a 10-20% profit. That way you can lose 3-4 trades but still make it back with 1-2 winning trades.

Now with Pt 3 and 4 in mind, we then take in Pt 2 which says that 20% of your bets will generate the bulk of your profits. This means that out of the 6 winning bets, only 1 or maybe 2 will make it really big like doubling the initial money or more. But if we have a short term investing mindset we would then take profit in Year 1 or 2, (or sometimes even shorter) which means that we lose all the upside that comes with the compounding effect. Then we are destined for mediocre returns, aren't we?

Let's just do a simple math on all these.

We have a capital base of $100 and we make 10 bets. 4 bets will lose money. But because we diligently adhere to our margin of safety rule, say we lose 10%. So of the $40 invested, we are left with $36. The remaining $60, let's just assume that 4 bets did ok, ie we make 20%. So we have grown our $40 to $48 from these 4 bets. The last 2 bets we make 100%. So from $20 we now have $40.

Adding the numbers up $36 + $48 + $40 = $124. So we managed to make 24% return. But over what time period? If we can do this in 1 year and repeat for the next 50 years, we are on our way to beat Buffett's record. That's very unlikely, so I would say this is probably achievable over 3 to 5 years. Then we would only barely make 8%pa.

Most investors don't think in terms of 5 years, they take profits off their 20% winning bets way too early, they are not interested in adhering to a Herculean 30% margin of safety (which means they will just buy when they are afraid of "losing out", like everyone who bought tech stocks at the height of the tech bubble, or every Singaporean who rushed in to buy Sky Habitat at the peak of Singapore's property bubble) and obviously they also think that they will lose not 40% but 4% of the time.

Is it then a wonder why only 10% of all investors can actually beat 8-10%pa over time?

Ms. Market

This post is rehashed from an old post written many, many years ago.

The father of value investing, Ben Graham, likes to describe the market as a person who is always ready to buy or sell you a part of his business, but the problem with him is that he is very emotional. And when I say emotional, I don't mean that Taiwanese actress Liu Xue Hua shedding one teardrop from her left eye over some bloke. (kudos to you if you actually know who is Liu Xue Hua).

So what's very emotional? Picture yourself sitting in a roller coaster with some Ah Lian yelling her head off one second and cuddling up to you the next. That kind of emotional. Anyway, let's calls this person Mr. Market. That's how Ben Graham and Warren Buffett calls him. But I think maybe it's more appropriate to call her Ms. Market.

On some days when Ms. Market is very happy, she sees everything in an optimistic light and she will offer to sell you a part of her business at a very high price. Like Singtel for $5. Or SIA for $20. On other days, she will be all depressed and can see only doom and gloom, and she offer to sell you the same business at a very low price. Lay-Long Lay-Long! Singtel for $2.50, or SIA for $7.50. So as you can tell, Ms. Market is that Ah Lian in a roller coaster, regardless whether anyone is beside her. Screaming her head off. Every day.

You are free to transact with Ms. Market on any particular day, or not transact at all. She will always come back tomorrow and quote you a different price. Depending on her mood, the prices will be all over the place. You are free to take advantage of her, and buy a good business cheaply from her on her down days, or sell back to her a bad business at a dear price when she is feeling on the top of the world.

However, you should never be influenced by her mood, i.e. you too, start feeling super happy on days when she is on a high (i.e. you imagine yourself sitting on that emotional roller coaster with her), and buy a lousy business from her at a high price. Millions of individual investors never understood this, so they never took advantage to buy a good business at a cheap price from Ms. Market when she is feeling sad, but instead, only buy from her when she is bright and sunny and offers to sell Singtel at $15 and SIA at $20.

PS: Singtel trades at $3.50 and SIA trades at $10 currently (in late 2013).

See Lemmings and herd mentality

and Expectations vs Reality

The Acme of Value Investing

I have been thinking about this for a while. Some time back, Warren Buffett started buying over mum-and-pop businesses that have grown tremendously over a long span of time from its original owners. These owners have painstakingly built their empires over the years, they are now old, they want to cash out some of the future earnings of their business, so they go to Buffett. But how do they determine price? Buffett being Buffett, is not going to undercut them by paying them just 10x earnings. But he definitely will not overpay as well.

In the stock market, Mr Market determines the price, which some times go crazy and the owners of businesses (ie shareholders) have no choice but to sell at basement prices. Buffett takes this opportunity to buy from these willing sellers. Well, in the first place, some of these market participants never regarded themselves as the owners of the firms which they hold stocks. They are in for the quick gamble. So Buffett gladly profits from their fear.

However, in private transactions, Buffett knows these sellers. Some of them are his friends in Omaha. He is not going to shortchange them. So the logical conclusion is that Buffett pays a reasonable price for these businesses he buys, Maybe 18x earnings. We can think of it as the sellers get 18 years of future cashflow from their business. Thereafter, the profits will be what Berkshire shareholders stand to gain from. There is bread from everybody. Nobody gets shortchanged.

To put it graphically, value investing is often viewed as buying an asset below its intrinsic value with a margin of safety (ie buy when purple line is below green line). Since Mr Market eventually prices asset correctly (albeit after a long time and only for a short while), money is to be made when value investors buy stocks way below intrinsic value and wait for it to rise back to intrinsic value.

However what Buffett does with buying good franchises would be buying an asset at its intrinsic value, at that point in time. And since it is a good franchise, its intrinsic value rises over time and way out into the future, Berkshire shareholders benefit from the exponential growth in intrinsic value. This is perhaps why he keeps talking about buying a strong franchise at a reasonable price, rather than buying a mediocre firm at bargain prices.

In every transaction, we are taught that usually there is a buyer and a seller, and there is a winner and a loser. Yet in Buffett's position, it is possible to have a transaction and yet benefits both the buyer and the seller. In my opinion, this would qualify as the acme of value investing.

Graham and Lao-Tzu

Not sure if it is just me. Reading some of Graham’s philosophy reminds me of Taoism and Lao-Tzu. Using no-change to combat ten thousand changes, cycles and repetitions, no rules etc. More than a handful of Tao philosophy is actually reflected in Value Investing. Well someone did come out with a book called Tao of Buffett.

Combating ten thousand changes

Graham thinks that it is futile to predict the future. Nobody has been able to do it. So what he does is to assume that what has occurred will continue, with relatively high probability. This has of course been well mastered by Buffett, his prodigy. Hence their preference for brick and mortar businesses that basically face little changes over the years (unlike technology or growth sectors).

This is also exemplified by his preference for 10 year valuations. Which I think is probably one of the most important concepts from the Intelligent Investor. You see, on Wall Street today, most people, when they talk about valuations: ie PER and PBR. They talk about Share Price today divided by the Earnings Per Share next year for the company.

Graham uses an average of 10 years’ worth of EPS in order to determine if the stock is cheap. Basically, he is saying that if the average annual EPS over the next 10 years is the same as the previous 10 years, and if the price is cheap (ie PER of less than 15x), then the stock should be a BUY.

This makes whole lot of sense for someone who really thinks about buying a business for REAL right? Think about it, if you are going to buy that coffeeshop down the road. The owner says the shop will earn $500k next year. So you will pay 15x of $500k for the shop (ie $7.5 mn)? Or would you be more willing to buy from the other owner who showed you his average earnings for the past 10 years, amounting to $300k per year?

For one, the average earnings would usually be lower than next year’s earnings forecast. Especially if the forecast is made by a 23-year-old analyst from the brokerage firm. Or in the coffeeshop case, the owner who wants to cash out.

In any case, nobody ever gets their forecast right? So Graham simply uses the past and assume that the future is going to be like that. Using no-change to combat ten thousand changes. Bu Bian Ying Wan Bian.

More Taoism to come.

What is Value Investing?

Value Investing is perhaps one of the most important topics in life that is misunderstood by the most people. This is a reflection of our modern society that constantly tries to replace rationality, long term thinking and hard truths with sensations, material gains and get-rich-quick mentality.

It is a sad fact that most people today equate investing with gambling when the segregation can be crystal clear. To quote Benjamin Graham, father of value investing, “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return and operations not meeting these requirements are speculative”.

In simple layman terms,

Value investing simply means adopting an investment philosophy to buy something that's worth a dollar with a lot less, like 60c or less.

Here is a modification of the old formal definition that I posted some years back.

----------------------------------------------------------------

Value investing is a broad definition of a style of investment that follow two basic principles:

1) Buying at a price that is less than its intrinsic value

2) Buying with a margin of safety

----------------------------------------------------------------

In a nutshell, value investing is simply applying the concept of "shopping during bargain sale" to buying stocks, bonds, properties ie investing. It means paying less for more. Get good value for money. Buy one get two free. Buy a dollar for 60 cents.

The concepts here are not difficult to understand and their applications are also straightforward but as with dieting, what makes sense doesn't mean that it's easy to accomplish. This is because human emotions like greed and fear are constantly playing tricks to blur our rational minds which it what makes value investing tough. Especially when there are prices, charts and patterns, talking heads with irrelevant short term newsflow bombarding us daily.

Over the years, the paradigm of value investing has expanded to encompass many things:

1. Fundamental analysis (FA) needs to be rigorously employed in order to determine the stock's intrinsic value. This plots value investing into the infamous FA vs TA argument. TA stands for technical analysis ie looking at charts and stuff.

2. Buying a stock is like owning a business. Hence long investment horizon becomes norm as business owners don't buy and sell their co.s like oranges. And also undervalued stocks usually take some time to revert to it's intrinsic value.

3. Stocks that have certain characteristics become known as value stocks

a. predictable business operations and stable earnings (easier to calculated its intrinsic value)

b. low PER, PBR, high dividend, high cashflow or other "value" quantitative factors

4. Based on the points raised in Pt 3 above, value stocks typically come from mundane industries like food and staples, utilities and other old economy industries ie no high-tech, alternative energy or bio-venture stuff.

5. It is generally accepted that Benjamin Graham is the father of value investing. Other well-known value investing practitioners include: David Dodd, Irving Kahn, William Ruane, Martin Whitman, Charles de Vaulx, John Templeton, Charlie Munger and Warren Buffett.

Since the concept of buying something that is undervalued is so broad, value investing is sometimes used to refer to investing in special situations like merger arbitrage, discount bonds (e.g. some bonds trading at 50% below par value and pays 10% interest and has little risk of default). However, this blogger thinks that this is a stretch for value investing.

For most people, it should suffice to understand that value investing is about owning a partial stake in a good company by buying its stock at a reasonable price.

More on margin of safety

A frequently asked question on value investing is this: how can you be so sure that the co's intrinsic value is $100 (or any other no.)?

For those not so sure what the hell is going on, read these first
Value Investing
Intrinsic Value
Good Investment

Well, the truth is, you are never sure, you can spend 20 days calculating the intrinsic value of the company and become so sure that the stock is undervalued. So you buy and the stock tank 20%. Shiok huh?

Intrinsic value goes hand in hand with margin of safety. Bcos you can never be sure whether you really got the intrinsic value right, you need to have a margin of safety. ie you will only buy the stock if the current price is way, way, WAY below your calculated intrinsic value. As a rule of thumb, I recommend 30-40% below your calculated intrinsic value. That is if you calculated that a stock is worth $100, you should be buying only when it hits $60-70.

Buffett used the example of building a bridge. If you know that the maximum weight of vehicles that will cross the bridge is 10 tons (based on historical statistics), will you build a bridge that will support 10 tons or a bridge that will support 30 tons?

That is margin of safety.

Ben Graham, the grandfather of value investing once said this: if you need to surmise value investing into only 3 words, it would be "margin of safety". It is THAT important.

Unfortunately, most investors don't really have this concept in mind. Even those who are very experienced. I guess it's not easy partly bcos have a strict margin of safety rule forces you to pass on many investment ideas even if they are quite good. And when you see them rally 100% after you decided NOT to buy them, wah shiok right? Now every wall you see has a purpose. For you to bang your head hard on it! Haha!

But having a margin of safety will make very sure that you will not lose your shirt. Even if you are damn wrong on your intrinsic value, you may lose a bit of money, the stock may tank 20%, below your buying price but quite unlikely to tank 80% below your buying price. And chances are after it tanked it will creep back up again, it will not bankrupt you. That's the strength if you have a huge margin of safety.

Focus on cashflow and not capital gain

When people say they do investing, there is a tendency for most people to focus on the capital gain that each investment will bring in. Eg. Ah Beng buys SGX at $3, today is $6, so his perceived capital gain is 100% and he is happy like a bird. Or Ah Gou buys a property at District 10 for $1mn in 2006 and today it is valued at $2mn, his capital gain is again 100% and he goes and buy a Ferrari. This is very natural and it's got to do with our primitive wiring and we cannot easily re-wire our brains.

However as long as we don't sell and lock in whatever gains, there is no cashflow coming into our pockets. And in most cases, it is actually not to our advantage to lock in the gains. Take the example of Ah Gou's house, if he sells, he gets his $2mn but the a similar house in District 10 will now cost $3mn. So he has to downgrade. And for Ah Beng, he sells and lock in his gain, but now he needs to find something else than to park his money, and in this market, it is difficult to find things that are safe.

Furthermore, price that Mr Market dictates has nothing to do with the true value or the intrinsic value of the asset. ie Mr Market may say that SGX can sell for $6, but it is really worth $6? And so did Ah Beng really double his money? Again the Mr Property Market says Ah Gou's house can sell for $2mn but is it really worth $2mn? If we cannot be sure, then why do we always look at our portfolio value at the end of the month and go smiling when Mr Market says your portfolio is up 10% this mth or down 20% next mth?

So instead of looking at the at the absolute price of the asset as dictated by Mr Market, perhaps the better way to look at investment is the real cashflow that it can generate for us. For stocks, since most people go for capital gain, there may be very little cashflow to talk about. Unless you keep buying and selling stocks and make sure some cash in generated every year or every quarter. However that means you need to be very good at market timing and studies have shown that most people sucked at market timing. So at some point in time, one should think about how to extract stable cashflow out of the portfolio regularly in order to enjoy some of the fruits. I mean no point holding on to stock certificates until you are dead right?

Assuming that your portfolio have grown substantially large over many years, one way would be to slowly sell some shares (assuming that they are infinitely divisible) as one approaches retirement so that cashflow can be generated and support a meaningful lifestyle. Another more realistic way would be to have a good % of dividend stocks that will generate some cashflow even if you don't sell any holdings.

Warren Buffett probably knows this better than anybody and that is probably what he has been doing this for 50 years. I estimated that Berkshire's stable of companies can generate USD 6-8bn of cash every year on an asset size (not original capital amt!) of roughly 220bn, so that's a 4% cash yield, on current asset size. Of course he can buy 100% of the company and demand all cash generated to go to him. That's not quite possible for us lah.

Nevertheless, at some point in time, when we are closing on retirement, we need to focus on how much cash the portfolio can generate every year. And personally I don't think it is wrong to practise that now, even though we may be 20-30 yrs away from retirement. I would be quite happy if my portfolio can have a cash yield of 2-3%pa for a start.

As for property, needless to say, the focus should be on how much rental the property can fetch, instead of thinking whether you can sell this property for $1,100psf after you bought it for $1,000psf. As a rule of thumb, I think we should only buy properties that can generate a sustainable rental yield of 5% over long period of time.

The focus on capital gain also means that we have to constantly buy and sell in order to lock in profits and find new buys. Now value investors do not like to play this game of buying and selling too frequently. It does not fit their investment philosophy and it serves only to make brokers happy. So they focus on cashflow. When thinking about the next investment, ask whether the investment can generate you good cashflow yield over a long time horizon, not whether you can sell at a 10% profit in 1 mth's time.

More Margin of Safety

A frequently asked question on value investing and how to calculate intrinsic value is this: how can you be so sure that the co's intrinsic value is this and at this price it is a good investment?

For those not so sure what the hell is going on, read these first
Value Investing
Intrinsic Value
Good Investment

Well, the truth is, you are never sure, you can spend 20 days calculating the intrinsic value of the company and become so sure that the stock is undervalued. So you buy and the stock tank 20%. Shiok huh?

Intrinsic value goes hand in hand with margin of safety. Bcos you can never be sure whether you really got the intrinsic value right, you need to have a margin of safety. ie you will only buy the stock if the current price is way, way, WAY below your calculated intrinsic value. As a rule of thumb, I recommend 40-50% below your calculated intrinsic value.

Buffett used the example of building a bridge. If you know that the maximum weight of vehicles that will cross the bridge is 10 tons (based on historical statistics), will you build a bridge that will support 10 tons or a bridge that will support 30 tons?

That is margin of safety.

Ben Graham, the grandfather of value investing once said this: if you need to surmise value investing into only 3 words, it would be "margin of safety". It is THAT important.

Unfortunately, most investors don't really have this concept in mind. Even those who are very experienced. I guess it's not easy partly bcos have a strict margin of safety rule forces you to pass on many investment ideas even if they are quite good. And when you see them rally 100% after you decided NOT to buy them, wah shiok right? Now every wall you see has a purpose. For you to bang your head hard on it! Haha!

But having a margin of safety will make very sure that you will not lose your shirt. Even if you are damn wrong on your intrinsic value, you may lose a bit of money, the stock may tank 20%, but it won't tank like 80% and chances are after it tank 20% it will creep back up again, it will not bankrupt you. That's the strength if you have a huge margin of safety.

Intrinsic Value - Part 2

This post is updated in 2013.

The intrinsic value is determined by the future cashflows that an asset earns. In the case of stocks, it is earnings and is partially transferred to investors via dividends. In the case of property, it's the future cashflows coming from the rental income. In bonds, it is interest income. In businesses, it is real cash generated. When an asset has no cashflow, we can safely say that it has no value. This means that in today’s context, there are many things actually being masqueraded as investments such as wine, art, watches and some may even consider gold.

The ways and means to calculate intrinsic value is called Valuation. In the purest form, it is by discounting all the future cashflows back to the present and that determines the intrinsic value. This methodology is known as discounted cashflow or DCF. This is very high level stuff and for those who are really, really interested, please continue to read my 1,500 word thesis under the Value Investing Page.

Luckily, for the rest of us, I have updated this simple methodology to determine a stock's intrinsic value right here, in this post. For an earlier tongue-in-cheek discussion, please refer to my previous post on intrinsic value. In this post, I shall attempt to calculate the intrinsic value of some stock using PER and EPS. Now please understand this is really cutting really big and round corners.

Anyway, the idea behind is actually quite simple. Basically you must first have an idea of what is the true PER of the stock, and what is its sustainable EPS, say 5 to 10 years in the future. PER stands for price earnings ratio and it represents a multiple that we should pay when buying something based on its earnings power. EPS, which stands for earnings per share, is one simple way to measure that earnings power.

A simple analogy is property, Singaporeans' favourite topic. The equivalent of EPS would be the rental income and the equivalent of the multiple is the inverse of the rental yield that we are prepared to pay. Say Sky Habitat (my favourite property in Bishan) has an annual rental of $48,000 (or $4,000 per month) and the right rental yield should be 4%, or inversely a "mulitple" of 1/0.04 = 25x. This means that the price of this Sky Habitat condo should be 48k x 25 which gives us $1,200,000. Today Sky Habitat condo sells for $1,500,000 to $2,000,000. What does this says about its price vs intrinsic value? :)

In the case of stocks, we can use the same methodology by multiplying the PER with EPS and get the intrinsic value. For those still blur, don't worry, here's the formula:

PER = Share price / Earnings per share (EPS)

if we swap the formula around,

Intrinsic value = true PER x sustainable EPS

Simple right? But do take note of the words in italics: true and sustainable.

So, how do we know what is the true PER of the stock? The true PER isn't next year's PER as it is commonly used in today's market. It is a reflection of the really correct multiple that we should use. This has to be determined by looking at the historical multiple of the stock in question, or by comparing with peers, or by thinking in terms of the growth, stability of the business etc. Usually, the multiple ranges from 12-18x. Personally, I would be very reluctant to pay for anything more than 18x PER. There is a lot more in-depth discussion on this and it can really intellectual simulating and interesting. I am not kidding. Interested parties please continue to read my 1,500 word thesis under the Value Investing Page.

Next we need to determine its sustainable EPS. Again this is not the current EPS, or next year's EPS. It has to be a sustainable EPS over a decent time period, say, 5 to 10 years. In fact, for most value investors, they would be looking for sustainable EPS over much longer periods, like 10 or even 20 years. Of course it is almost impossible to be able to determine with accuracy over such time frame. Which is why Buffett has a tendency to invest in certain kinds of businesses which allows for some predictability over long time frames.

Ok let's use a real stock to illustrate this intrinsic value thing. I would like to use Singtel, our largest stock that has the longest history.

Singtel has managed an average EPS of 22c to 28c over the last 10 years. So assuming that it can maintain this, we can say that it's sustainable EPS is probably 25c. Now we need to determine its true PER. Again looking at its own history, it has traded around 12x to 17x.  Globally telcos have also traded around 8x to 20x PE. So what's the right number to use? There isn't really much science here, I would use 15x.

So Singtel's intrinsic value should be 0.25 x 15 = $3.75. Today it is trading at $3.60. So it's a buy?

Well, the answer is no, because our calculations may be wrong. What if the true PER is 14x? Or what if the potential EPS is only 22c?. If you work if this new set of no.s, (0.22 x 14 = $3.08) Singtel is now 15% overvalued!

Intrinsic value is not just a single number, it has a range of probable values. It changes when we use different assumptions and nobody ever gets it right. And I really mean nobody, not even the Gahmen and definitely not the Korean pop group who declared "Nobody, Nobody but You".

Ok jokes aside. Since we can never be sure we got the intrinsiv value, that's where we need the margin of safety comes in. For those not-so-familiar, pls read the post on margin of safety.

However, if Singtel ever trades at $2.00. Then it is definitely a buy, because no matter how you tweak the two no.s (PER or EPS), you probably find it very hard to get Singtel's intrinsic value to go below 2 bucks. In fact, Singtel has only traded at 2 bucks for a brief period over the last 10 years, the recent bout during the Global Financial Crisis in 2008 which is like 5 years ago. In other words, it is damn bloody difficult to find great companies trading below its probable range of acceptable intrinsic values for long. This is the challenge and this is value investing.

Singtel's stock price from 2004 to 2013

See also Definition: Value investing
and Expectations vs Reality

Value vs growth

In investment lingo, one way of classifying stocks is to label them as either value stocks or growth stocks. Some other ways include large cap vs small cap, NC16 vs R21.

Value stocks are what we have been discussing all this while, stocks that trade below their intrinsic value, come from understandable and mundane industries (insurance, utilities, consumer staples), low PER, low PBR, stable earnings streams etc.

At the opposite end of the spectrum are growth stocks. These are stocks with a lot of potential but they may or may not make their mark. They usually have high PER and high PBR, weak earnings, from hot sectors like Tech, Energy, Biotech etc. But they are attractive because their intrinsic value in the future can be 2, 5 or 10 times higher than today's price. Microsoft was a growth stocks in the 80s, early 90s.

Without considering valuations (i.e. let's not think about prices and whether if it's value for money), let's try to look at growth and value stocks in another perspective:

Growth stock = Porsche, sexy and fast, but prone to accidents

Value stock = Volvo, ugly but safe, reliable and down-to-earth

Buffett thinks that classifying stocks as value or growth is not important because they are simply on different sides of the same equation. A true growth stock is essentially a value stock in disguise.

See also Definition: Value investing

and Value Trap

Value trap and the cigar butt analogy

This post is updated in 2024.

Value trap is a stock that looks very cheap but the reason it is super cheap is because it is a crappy company and deserves to be that cheap. This company probably trades below its book value (i.e. Price to Book ratio less than 1x) and had poor earnings and near zero cashflow for the past few years. Buffett likes to give the analogy of the cigar butt. Imagine finding a cigar butt that someone just finished smoking, but there is still a last puff left. The cigar comes free but you get one puff, which doesn't make you feel one hell of a good.

To give another example, a value trap is similar to doing shopping at Ikea (no offense to Ikea and Ikea fans, just an analogy, just an analogy...), you get super cheap stuff but their worth is also just that. If you haven't shop at Ikea before, let me give you an idea. You can get kitchen set (with sink, top and bottom shelf etc) for less than S$1,000 which is like dirt cheap because a Prada bag cost as much. But the kitchen set probably lasts a couple dinners before some panels or screws come loose or some other defects present itself. Yet another example would be "you pay peanuts and you get monkeys", sounds familiar?

In essence value trap means that you are paying cheaply for zero quality. A true value investor pays cheaply for some value, not for garbage.

See also Definition: Value investing

and Intrinsic value

Definition: Value investing

After numerous mention of value investing, perhaps it would be appropriate to give a proper definition of value investing on this blog.

Value investing is a broad definition of a style of investment that follow two basic principles:

1) The investment can be bought below its intrinsic value
2) The investment must have a margin of safety

Value stocks are generally characterized by low PER, PBR, high dividend, and typically from mundane industries (not high tech or bio related). Pioneers of value investing include Benjamin Graham, David Dodd and Warren Buffett.

See also Value vs Growth

and Value trap

Margin of Safety

This post is updated in 2023.

The margin of safety (coined by Benjamin Graham, father of value investing) is a concept of buying investments that are significantly cheaper than its intrinsic value. The key word here is "significant". We need to buy with a margin of safety to minimize the risk of losing any money.

Let's put it this way, imagine that you are going out on a date with a babe (or a dude) and you think you will need S$100 for that night. Will you bring $105 or will you bring $300? That is the meaning of margin of safety. 

*For those still blur, the answer is S$300 because what if the chef of the posh restaurant you booked fell sick and they closed for the day and you have to go the next restaurant charging $100 per pax. So, you will be in deep sh*t if you only have S$105 in your pocket.*

Going back to my favourite analogy, let's assume that our friend bought the golden tap to re-sell it to another buyer. According to his calculations (see previous entry), which was the same as ours, the golden tap is worth $1060, and he bought it for $1000. So he could have sold the tap to another buyer who is willing to pay $1060 and he earns $60.

However as you can see, this trade does not have a margin of safety. What if the tap can only sell for $900 because our assumptions were wrong? What if gold dropped 10% the next day? If he bought the tap for $500, then the trade would have earned the praise of the guru himself, by having a good margin of safety.

See also Definition: Value investing

and Intrinsic value

What is the intrinsic value of a golden tap?

The intrinsic value of a stock or an investment is its true or inherent value based on some valuation method and it is usually different from its market value.

Going back to my favourite analogy of the golden tap, I would like to ask this question: what is the intrinsic value of a golden tap? We know that the market value is S$1000, well because someone paid that much for it. But is that its true or intrinsic value? To calculate this, we make a few simple assumptions.

1) The golden tap used 28g or 1 ounce of gold
2) Manufacturing, processing cost is S$100 (10% of S$1000)
3) Price of gold at the time of purchase was US$600 (or S$960) per ounce

Adding up the no.s, we have S$100 + S$960 = S$1060, the intrinsic value of the golden tap according to my valuation method. So, our friend did not overpay for his golden tap.

In our example, intrinsic value = market value, but in reality that is rarely the case, more often than not, market value is greater than intrinsic value. For luxury goods, like a Prada bag, market value is probably 10-20 times more than its intrinsic value, in my opinion. (However, there are different valuation methods to derive at a product's intrinsic value. Perhaps a Prada bag owner's valuation method is something like: $10 cost of leather, $990 ability-to-show-the-world-I-own-a-Prada-bag).

The goal of investing, is to find an investment which has an intrinsic value significantly higher than its market value. This kind of investing is also known as value investing, pioneered by Benjamin Graham and David Dodd and later Warren Buffett, the world's most successful value investor.

See also Definition: Value investing

and Margin of Safety

Great company, good stock but not a good buy

This post is updated in 2023.

One important tenet about investment is to separate a good stock from a good investment. What do I mean by that? A good stock or a good company is one that consistently delivers earnings, capable of making good strategic decisions, always one step ahead of competition and the leader in its field. Essentially the WalMarts, the Googles and the Toyotas of the world. A good company however may not be a good investment, because its "goodness" is already factored in the share price. A good investment is buying a good company at a cheap price. That is, buying WalMart 30 years ago, when nobody has heard of it and when it was trading at a huge discount to its intrinsic value.

To put it in another perspective:

- a good stock = a good babe or dude

- a good investment = dating a good babe or dude at a cheap price

- a bad investment = dating a good babe or dude at an expensive price

As another analogy, let's look at the LV bag. For simplicity, let's say the bag can be bought roughly S$5,000 today (in 2023). Is it expensive? To answer that we need to know its true or intrinsic value. For consumer products, an easy way is to breakdown its cost components. For the back, probably goes like S$100 labour, S$40 material, S$20 packaging, S$50 logistics, S$10 admin cost (I am arbitrarily putting in no.s here), the rest of it the brand, marketing, prestige and heritage. 

When you buy a LV bag, you are paying all these, if you don't like the bag, you can resell it to someone who would gladly buy at more or less how much you paid for, depending on the design, how well maintained it is etc. And if it's not LV but Hermes, then you can probably sell it for more! 

In other words these bags probably fairly priced (i.e. going on a date with a good babe at an expensive price). When you buy a great company like Google, or WalMart, it is the same. Chances are you are not buying them at a bargain price. This is what it means: the "goodness" is already factored into the share price.

So how do we find a stock that is a good investment? That is the question, isn't it? Just like going on a cheap and good date with a good babe, good investments don't come by easily. One has to dig, to search, often to find that it is not so good after all. But they do exist. At least the guru, Mr Buffett managed to find 12, and that made him a billionaire.

See also Investment Philosophy and Process

and Three principles of value investing