One of the GREAT role models that i look up to when it comes to equity investment is none other than a Malaysian investor by the nickname of 'cold eye' or Fung Shi Ling ( hope i spell his name correctly).
He was born in Perak on 1939. He used to be a senior employee at Nanyang Siang Pau with solid equity investment knowledge & extensive investment experience of about 50 years (Yes, 5 decades). He has conducted numerous rounds of investment talks to share his investment philosophy. He is definitely an authority when it comes to building wealth through equity investment based on fundamental analysis.
I attended his Investment talk today and would love to share the following wisdom that i learnt from the session. The wisdom shared is useful for investor who wants to build SERIOUS wealth from equity investment.
Note: His 'old' book which contains tonnes of wisdom, You can check out his new book that talks about Sun Tzu principles in equity investment for those who likes to read mandarin book.
Wisdom that I Learnt
1) Investing into a company's shares means you are participating in the company's business. Your investment will do well if the company generates higher profit and cashflow. Hence, stock picking skill is very important. If the company that you invest into is a loss-making company without recovery prospect, your capital could even vanish.
2) Do not fall into the trap of complicated analysis. He believed that complicated investment methods can be 'transformed' into a simpler method. If the simple method works, repeat the process.
3) Make more correct decisions and commit lesser mistakes. In other words, if you win more than you lose, you are likely to generate wealth in the long run. He mentioned a 7-2-1 observation, out of 10 investors, 7 lose money, 2 break even and only 1 investor gain profit from equity investment, only 10% is making money!
4) To be a successful investor, we must learn and be good in both TECHNICAL and SOFT skill. He came across some investors who are highly educated with sound investment knowledge, but still unable to generate serious wealth and some even lose money! This due to lack of SOFT skill.
5) Technical skill refers to one's knowledge in analyzing a company's financials and the underlying business. Soft skill is something which an investor need to internalize such as independent thinking, patience and good emotion management.
6) Investor should invest into companies with earnings GROWTH ( the golden rule in investment). The company must be able to grow its profits and cashflow, then only it could generate higher value to shareholders in the forms of increase in share price and increasing amount of dividends!
7) No Profit GROWTH= Don't BUY
8) If there is GROWTH= You can BUY
9) If the company can grow for a LONG period of time, you can hold on to your investment for a LONGER period of time. The longer you hold, the wealthier you are. If the company can only grow for SHORTER period of time, it is better for you to hold on to your investment for a SHORTER period of time only.
10) Invest into the company only if you think you can win! The company needs to be a strong company and you need to buy at an attractive or reasonable price level. Move only if you can win.
10) Before you invest into a company, key question to ask is : does the company have a bright prospect?
11) If a company's fundamentals deteriorates, investor must know when to change course i.e SELL. Be flexible, be like WATER.
12) Do not be concerned with decline in share price. If a company's business is growing with solid fundamentals, its share price is likely to rise over a long period of time.
13) Do not speculate in stock market.
14) If a company has high debt level, it does not mean it is a badly managed company. We need to assess the company's cashflow, if the cashflow is more than enough to pay the obligation and grow its business, it can be a good company.
15) Five golden rules in equity investment i.e growth, return on equity (ROE), dividends, PE (price earnings ratio) and positive free cashflow (FCF).
I will elaborate on the 5 golden rules based on my own interpretation:
Growth
A company must be able to grow its profit, then only it can make more money to shareholders i.e increase in share price and increase in dividends. GROWTH, GROWTH, GROWTH!
ROE
It measures how much profit is generated from shareholder funds. The higher and sustainable it is, the better. If you put in RM1k into a business and it generates RM100 net profit in a year, your ROE is 10%. Make sure you assess the ROE of the company that you intend to invest into.
Dividends
My favorite return from equity investment is none other than dividends. Dividends are real cash paid by the company to reward shareholder, but dividend is not FREE MONEY. We need to risk our capital in order to earn the dividends provided the company is making money and willing to share the profit with shareholders.
Company that pays consistent dividends is likely to be a solid company. Solid company reduces risk to shareholders.
P/E
PE refers to to payback period. If you invest RM1k into a business and it generates RM100 profit every year, you will be able to recoup your capital in 10 years time provided all the profits are given back to you as dividends. The lower the PE, the better it is generally speaking.
There is no universal PE range, always check the company's current PE versus historical PE as a gauge. Cold eye might prefer to invest into company with PE of 10x and below, but he is fine with up to 20x PE for a stock with strong growth.
In my view, PE is not carved in a stone and always evaluate PE on case to case basis.
Free Cashflow (FCF)
A company needs to generate positive operating cashflow. If a company make RM1k operating cash flow, after minus off RM400 to upgrade equipment, you will have RM 600 left which could be paid out as dividends or retained in the company. RM600 is the FREE cash flow.
Operating cashflow is important, imagine you sell a product for RM1k to a customer and the customer did not pay up, operating cashflow is ZERO. Hence, always check if the company that you invest into is able to collect money from its customers.
Company that generate sustainable positive FCF is likely to be a solid company!
Happy investing and any discussion is welcome.
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