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Saturday, 28 March 2020

(Tradeview 2020) My Principles of Investing - Rule 1: Buy Good Quality Companies Which Will Still Be Around In 5 years

Dear fellow readers, 

Once again, these writings are just my humble highlights (not recommendation), feel free to have some intellectual discourse on this. You can reach me at :

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The past week has been great for investors due to the relief rally globally and KLCI. Once again, the positive vibe re-emerged due to US Senate passing the US 2 trillion stimulus, extended unlimited QE commitment from Fed and for Malaysia, the drop of SRR by 100 basis point by BNM helped with the liquidity in the market. Of course it was also on the steepest sell down in KLCI since 1997, you can see the chart below.

As you can see the steep sell off have caused a sharp technical rebound or rally of almost 110 points from 1219 to 1334.73 as per this afternoon KLCI break. This in our view is within our expectations though the magnitude of rebound exceeded expectations. However, the question remains for us and many of our readers are, will this be U shape rebound or V shape? Different circumstances dictates different outcome. I will give a simple hypothetical :

If tomorrow, any country announced the vaccine for Covid-19 is ready, most definitely this will lead to a V shape rebound globally across all markets. If the Covid-19 prolongs coupled with other factors, it may even be a case of U shape rebound. In addition, world economies will need to deal with the aftermath of the impact from Covid-19.

So question now, should I sell on strength, hold or wait for dips / retracement to enter the market again since KLCI and global economy has rebounded so strongly in 1 week?

This is where I hope to draw the attention of my readers to. As boring as it may be, value investing is the best guide to making your decision. Please use this as guidance above and to make it even simpler for beginners, I would like to share our Rule 1 - Buy Good Quality Companies Which Will Still Be Around in 5 years.

This seems like such an simple philosophy, some may even say its lame. But if you look back at each recession, there is always a minority that is still around with the same management, same name and continued good performance. Just compare 1997 to 2020 share counters. Therefore, we do not have to look all the way into the future 50-100 years unlike Warren Buffet did with Coca-cola. The reason is because today, with the proliferation of technology, competitive landscape, easy funding and liquidity, there will be an ever changing dynamic to the business world. What may be around and successful now will disappear in 5 years. Additionally, investors these days are less patient and more greedy than ever, hoping for fast return and money. Not many can wait. Hence, my rationale for using the 5 years metric. 

I will use a few of the stocks in my list to exhibit how I choose to the shares to invest. CCK was listed in 1996 as poultry broiler farm company. Over the years it has evolved and grown tremendously. Today, CCK should no longer be a designated poultry company as it has businesses in aquaculture and bulk of their earnings are derived from their CCK fresh mart. There are retail company with foot prints mainly in East Malaysia. Recent expansion to Indonesia are amongst is growth strategies paying off. So when I chose this company, I believed in the prospect of the growth and most importantly, the management. I know in 5 years, this company will still be around and grow even bigger. If you look at their earnings and dividends, every year it has improved in tandem with their business strategies. Previously, we have analysed their mid term Fair value to be at 69 sens. Due to the market sell down, it is only trading at 34 sens now. It is 40% below its intrinsic value, has good DY of 3+%, it is growing as well. If we don’t consider investing now, when else?

Another example would be Guan Chong Bhd, the largest cocoa grinder in South East Asia. It is companies like this that make us as Malaysian proud. I believe most would not have known about this humble 1 factory company has grown to be a leader in this sector and region. What I like a bit this company is the fact it is involved in processing of a raw commodities which are required on daily basis for the FMCG sector. Additionally, it has grown organically in the past but in recent times have grown through M&A buying German chocolate maker Schokinag Holding GmbH for RM137.84 million at the end of January.  The valuation in itself is not expensive for a growth company at only trailing 9x PER at current price of RM2.06 (Please note ourselves and our subscribers entry price is much lower as we bought on weakness). Further they have implemented sound growth strategy whereby they are setting up their facility in Ivory Coast, the biggest cocoa producer in the world to bring down cost for their exports. I believe in 5 years, GCB will do even better and with their focus being exporting to overseas market, the world is the market.

I like the message that Ray Dalio is trying to convey here, the time to buy is when there are blood on the streets. These are just amongst the 13 stocks I have picked during this downturn and my list will only grow with the emerging values. I also like a variety of big caps and small caps, not just mid cap stocks. I sincerely believe we should not fear buying on weakness but we must have the ability to hold. I understand it take a lot of guts to buying on  a sell down compared to buying on a bull run, but it is all psychological. If you are worried and scared, always return to this Rule 1 - Buy Good Quality Companies Which Will Still Be Around in 5 Years. 

Do stay tune for my next write up, “Principles of Investing - Rule 2 : Small Is Beautiful, Especially During A Crisis.”


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