Monday, March 26, 2007

Who says investing the old-fashioned way doesn't work today?

Many have debunked the original way of value investing brought about by the late, Benjamin Graham. His original thinking on investing as thought by today world is as good as being in the grave, buried 10-foot under with the originator.

This is to disprove the notion that the old-fashioned way of investing is ineffective today. We don’t care what industry a business is in – it can be in electronics, manufacturing, finance, hotels, properties and so on – as long as it is cheap. The result from this is not a random exercise. All the stocks are hand-picked prior to what the price is today, with no hindsight involved. The exercise here is in no way similar to how the corporate world handled the recent debacle of backdating in stock options.

The following table shows stocks which are picked according to either one or a combination of the Benjamin Graham’s principles: 1) Significant margin of safety to Net Asset Value which in this exercise of which stocks selling at 25% or more discount to NAV, 2) Low Price-to-Earnings ratio which in this case if there is a lack of discount to NAV, a high return on equity is required, 3) or a combination of both. In this table, a many of these businesses are not even earning decent return on equity but yet, it proves that the theory of Ben is correct even today: That the stock price will sooner or later raised closer to its eventual asset value, given time.

Stock Brought Price PE NAV then Today or sold Price % gain

Kingboard $0.26 (Dec 05) 6 $0.45 $0.41 58%
Stamford Land $0.285 (Dec 05) 12 $0.48 $0.41 44%
Amtek $0.49 (May 06) 6 $0.66 $0.685 40%
Ossia $0.135 (Oct 06) 5 $0.215 $0.195 44%
Metro $0.68 (Dec 05) 2 $0.965 $0.85 25%
Swing Media $0.08 (Jun 06) 6 $0.21 $0.12 50%
Matex $0.10 (Oct 06) 12 $0.25 $0.13 (Mar 06) 30%
Electrotech $0.435 (Nov 06) 5 $0.46 $0.54 24%
QAF $0.45 (Nov 06) 9 $0.74 $0.535 19%
AEM $0.135 (Jan 06) 5.6 $0.20 $0.22 63%
MITECH $0.13 (Feb 06) 4 $0.17 $0.20 54%
Media Asia $0.14 (Mar 06) 6.6 $0.265 $0.255 82%
TT Intl $0.13 (Mar 06) 6.6 $0.244 $0.26 100%
Sinobest $0.08 (Aug 06) 4.1 $0.28 $0.12 50%
Hiap Moh $0.33 (Feb 06) 8 $0.89 $0.54 64%
Kian Ho $0.17 (Feb 06) 5.2 $0.29 $0.285 68%
Kian Ann $0.17 (Feb 06) 6.6 $0.315 $0.23 35%
Tai Sin $0.135 (Feb 06) 6.4 $0.20 $0.305 226%
China Transcom $0.08 (Nov 06) 3 $0.245 $0.16 100%
Asia Dekor $0.11 (Jan 06) 7.3 $0.155 $0.13 18%
Elite KSB $0.06 (Jan 06) 6 $0.12 $0.24 400%
Spindex $0.18 (Jan 06) 8 $0.36 $0.24 33%
San Teh $0.335 (Jan 06) - $0.89 $0.50 49%
IFS $0.625 (Dec 05) 12 $1.10 $1.07 71%
2nd Chance $0.205 (Dec 05) 5.8 $0.29 $0.37 80%
Willa Array $0.11 (Dec 05) 6 $0.19 $0.16 45%

Of course, for all those stocks in this table, the price bought-in was not the lowest, for example, Amtek, it went down to 43 cents. Most people will fluster and perhaps sold it and regret later. Here it is important to think in this manner in order to maintain discipline and ultimately to make profit: If you know the price today is selling for $1 and it is worth $1.2 in a year time, what difference does it makes even if within this one year it plunge to 70cents?
This table presents some lemons if you were to hold till today but then most of these, you could have made a profit if you know when to sell. For example, United Food, it went to about 30cents in Apr 06.
Stock Brought Price PE NAV then Today or sold Price % gain

Unifood $0.235 (Dec 05) 6.8 $0.39 $0.175 -26%
Lion Asiapac $0.19 (Jan 06) 4.7 $0.39 $0.16 -16%
Southern Pack $0.14 (Jan 06) 9 $0.20 $0.15 7%
KXD $0.07 (Oct 06) 5 $0.15 $0.07 -
Tsit Wing $0.30 (Jun 06) 8 $0.24 0.275 -5%
Radiance $0.125 (Jan 06) 5.5 $0.21 $0.125 -

All the above bought-in price were based on either a very low P/E or a significant discount to NAV and usually as a result, the prices paid are usually, if not all, at its past 52-weeks all-time low. The following are some stocks as of today which are in similar position to those in the first table.

Potentials Stocks

Stock Today Price

Unifood $0.175
Surface Mount $0.32
Singfood $0.88
Fu Yu $0.275
Lion A.Pac $0.16
IDT $0.40
GP Bat $1.28
GP Ind $0.49

To conclude, one thing is very clear here, the chance of winning, even if you do not get to buy each and every cheap stock, far outweighs the chance of losing. Out of the 32 stocks, only 6 businesses were lemons. But if you know when to sell as I said in the case of Unifood, it is one less lemon. By the way, I got tired typing out much more winners in such a scenario using the method of the old-fashioned method of investing.


Anonymous said...


What is considered a low PER and high ROE for you ?


Berkshire said...

Hi Jojo,

Generally, Ben Graham states anything above PER of 15 is expensive. However, a true value investor should not blindly follow this guideline. Some businesses is worth a higher multiple while some other do not.

Besides comparing across the industry, another important aspect is the historical PER that a business is being valued at. In addition, the business's moat plays a great part of what kind of multiple you think is good to pay for.

Then you need to use your discretion, thinking, and knowledge to determine if a low multiple or say a 10-year lowest mulitiple is really a value that is undervalued. Some times it could be the low multiple is because of the business irreversible eroding moat. But if the moat remains intact and just because of some "news" that cause the multiple to plunge, you should buy in all you can.

TO illustrate, I shall compare 2 example, the first is based on industry wide which is property development and the second is based on a specific business which is JNJ.

In property development in the USA, players like Toll Brothers, Centex and so on, even in its good days were never traded above PER of 12. It averages about 6 to 8. In SG, now you can see some being auctioned up to 40 to 60? I wish them good luck for those who are still buying in. Investors I suspect may have begun complacent, following a herd mentality in buying into short-term psychological gain without paying sufficient attention to the danger that the price that they are paying are putting a huge pressure into the business being able to sustain the kind of returns they themselves are expecting. Lured by the prospect of high returns, investors do not give sufficient considerations to the risk involved. But once investors become nervous, their reactions will be swift and unforgiving. As disasters always happen, it is due always to a chain of critical events and one of it is such.

Johnson & Johnson PER in the past 10 years was never below 20. At today, it is priced at slightly above 16. If you strictly follow Ben's rule, this stock will never qualify but then it is a hell of a business, their operating brands and business are either number 1 or 2 in the fields they operate in. Good management and so on.

As to ROE, this is irregardless of industry they are in. Generally, I prefer businesses that have a ROE of above 15% averagely with at least a 10 year record. Anything that falls below that must have accompanying compelling reason for me to consider.