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Saturday, March 1, 2014

Buying a Ferrari for the price of a VW

Published on Mar 01, 2014

Knowing how to spot a good company can help a ready investor identify an undervalued stock

FORGET market trends. Forget market timing. If one believes that the global economy will be stronger in five years' time, the present is always the best time to invest in shares.

That view comes from someone who remains fully invested in stocks even as volatility roils markets around the world.

For Mr David Kuo, chief executive of Motley Fool Singapore - a portal that offers stock market and investing information - the ability to recognise a good company, one that is run by strong management, is more important than timing investment market trends.

With that skill, the investor is always ready to jump in when a stock looks undervalued.

Unlike investors who believe that only high-growth companies can generate exceptional returns, Mr Kuo watches out for businesses that are "valued by the market at 50 cents, but are really worth a dollar".

As he puts it, he is "looking for a Ferrari that's selling for the price of a Volkswagen".

"That rarely happens when the market is trending higher, which probably makes me a contrarian."
The secret to high returns…

Is compounding capital growth and reinvested dividends.

I have a portfolio of good stocks that gives me plenty of opportunities to add money to.

Any cash that I don't need for the next five to seven years is generally put to work in the stock market. I just keep adding money to the companies that I like.

I am fully invested, which means that the only cash in my portfolio comes from regular dividends. I am not a fan of fixed income, and property is too troublesome to manage.

Property can take too long to liquidate and can't be easily sold, brick by brick.

My only exposure to property is through Reits (real estate investment trusts) and the roof over my head.

My investment strategy is…
I started investing in stocks in my 20s. At the time, buying and selling were done over the phone, and getting information about companies took ages. But poring over company accounts in annual reports was a good learning experience.

Most people start out trying various investing techniques before settling on one particular style that suits their temperament and personality.

I was no different and, in my case, it turned out to be income investing. To me, it is logical, it can be rewarding and, if you pardon the pun, it pays dividends.

Investing is a business…
I am a great believer in capitalism, in allocating capital in an efficient way to achieve an acceptable rate of return.

Not many of us will have the opportunity or the resources to run our own business. But when I invest in a business, I become a part-owner. I am not involved in the day-to-day running of the business, but that doesn't mean I can't be interested in how the business is being run or enjoy the rewards when the business does well.

What should one do or have to be a successful investor?

Investing is not difficult.
The one skill to attain is how to recognise a good company when you see one. When you do, don't ever let it go, whatever the market might say.

Likewise, having the patience and the ability to stick to an investment strategy is important.

Some of the most boring and mundane companies can generate some of the most lucrative returns - if you are patient.

Within the Straits Times Index, firms such as Keppel Corp, Sembcorp Industries and SIA Engineering have delivered, on average, annual double-digit returns since the turn of the millennium.

During the dotcom boom, I mistakenly believed that the world was entering a new paradigm and invested in a company that eventually went bust.

The point is, there is no such thing as a new paradigm. The old rules always apply. If a company has too much debt or if it is making losses, then chances are it will go bust.

Many think they can dance in and out of the market and use fancy mathematical formulas and theorems to profit from shares.

It just doesn't work. The most profitable investment is the one that you understand best.

What shouldn't one do?

Never borrow money to buy shares. Leveraging - using other people's money - can amplify your gains, but it can also magnify your losses; the market can stay irrational longer than you can stay solvent.

Overtrading is another thing to avoid. Buying and selling incur costs, and every cent of cost paid out is a cent that could be earning you money in the market.

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