Monday, June 26, 2006

The three important principles of successful value investing

There are different ways to label these principles but I shall call them Fundamentals, Valuations and Timing. Making a successful investment will demand that all three principles are followed, in my opinion.

Fundamentals refers to the inherent characteristics of the investment or stock, i.e. whether the company is a good company and whether it has good growth prospects.

Valuations refers to the cheapness of the investment, or stock. A company may be have all the positive traits, but if it is not cheap, it is not a good investment.

Timing refers to when to buy (and of less importance) when to sell. Needless to say, buying at the wrong time results in very different performance.

To see how this can work, let's pick a local stock, say, Singtel. Fundamentals for Singtel looks ok, it has not seen red ink for the past 10 years, maintained low debt, and management seems prudent and competent. Within its industry, clearly Singtel is the market leader and regionally subsidiaries are expected to provide reasonable growth.

Looking at Valuations, over the past 10yrs, Singtel has traded within the range of 10x-30x and currently it is trading at PER of 10x. Not overly cheap but definitely not expensive at all.

Now Timing makes all the difference right? If you had bought Singtel when it listed, you would still be losing money. Of course timing is linked to valuations, at its listing, Singtel might not have passed the valuations part of the test (i.e. at listing it was probably too expensive).

The guru does not believe that timing is important. In his view, a good stock should be bought as soon as you identify it, if it goes lower, you should buy even more. Sounds like a strategy for gambling addicts or rogue traders but it's not. Value investors believe in holding investments for the long term, and if you have the holding power, over time, your investments will reach its intrinsic value. Usually after you gave up waiting and sold the stock though.

In a way, low valuations will take care of timing, i.e. low valuations ensure that you have bought the stock at the right time (and price). Also, according to the guru, once you buy a good stock, you should never sell no matter what (this is also called the buy-and-hold-until-you-peng-san strategy).


  1. "this is also called the buy-and-hold-until-you-peng-san strategy"... classic! Hahaha!

  2. I agree there is a fundamental flaw with buy-and-hold, if you really hold until you are one foot in the coffin, then when do you reap the rewards?

    My conclusion is that stocks should pay dividends. If you bought a good value stock, and it pays decent dividend every year. Then you can hold it and yet reap some rewards.

    E.g. you bought a stock at $100, it pays you $4 dividend per yr while the stock rises 8% per year. After 10 yrs, you get roughly $40 in dividend and the stock prices is roughly $180. That's quite a good deal right?