[Investing] The Time for Value Investing Is Here

The Straits Times Index shed 15% from 3220 a month ago to 2637 today. Many stocks are on discount.

Take for example, DBS was in the $25 range. Now it is $19.35. That is more than 20% discount!

At the current price,

• DBS has a market cap of about $52B (it was $56 when I started monitoring it when the index started to fall). I've learnt its probably more prudent to buy larger cap companies.
• DBS has a P/BV of 1.01 and ROE of 12% and ROA(ssets) of about 1%.
• Its profit margin is 42% (woah!)
•  Dividend yield is 4.2% (5-yr average)

With those stats, I think the current price of DBS is very attractive. I valuated it to be about $22 then. I bought some at $21.60 (including fees).

Has the stock reach the bottom? I do not know. 

But this is not the point of this post. The point of this post is to re-visit the principles of stocks-picking, especially at times like this where prices are low and people are panicking because the prices are low.

Not for a value-investor. This is the time to hunt. The basic principles apply. A good stock has:

• Profitable business
• Good financial strength
• Good cashflow

It boils down to two words: Strong and Efficient. The pre-requisite, however, is consistency.

I aim to find stocks that exhibit characteristics of the basic principles. I cited DBS because I think it fulfill those principles (correct me if I am wrong!).

It is easier to judge whether a stock possesses the basic principles. But is is harder to know at what price should one buy the stock if it has been determined that is a  steal?

I used to think:

• What if the stocks drop further, so I can get a better bargain?
• What if the stocks increase and I missed the chance?

I learnt that I can mitigate this by:

1. Split the investment funds into half. 
2. For the first half buy at the price which I determined to be a good value*.
3. For the second half buy only when the price is substantially lower than the value I determine**.

This way I can lock down my optimal value. If the stock price goes up, at least I have gotten into a position that I think is favorable. If the stock price goes down, I can wait longer and then get into another position again, so than on average the stock price I buy at is lower than the price that I valued. This is my form of managing risk I suppose.

However there are many subjectivity. What is good value? What is substantially lower? This will require some education, experience and emotion-management. 

• On education. Reading helps. I have a curated a reading list in this blog. Read about how stocks are valuated, but do not get sucked into fancy valuation models; simple is great. Learn about risk management. Valuation models that do not address risks should be avoided. Valuation is also subjective; nobody can really pin-point the true value of a stock. And because of this, the value of a stock can also be assessed relative to another stock in terms of efficiency. If stock A is 3% return on Assets and stock B is 5%. Which is more valuable? I prefer to think of it as fair price and efficiency.
• On experience. I watch the stock market perhaps once every quarter? But I do take note of news because I know how the media can affect the markets. I personally buy STI ETF on a RSP basis. Knowing the market helps - how much a stock would max at. Some of my friends use the middle-point of the 52-week range to gauge whether a stock is selling at a discounted price. It is probably a good start. P/BV is probably also another good starting point. DCF too. But that said one should not be sucked into the mania of the media and the markets.

This sale has just started. So it is a good time to do some evaluation and buy stocks when the prices are right.

~ZF

Warren Buffett and Charlie Munger are my heroes.