TheEdge Investment Forum 2018: Q&A

Having presented at TheEdge Investment Forum 2018, I thought I share some of the questions asked at the end of the presentation with the public. While these may not be all the questions being asked, I thought I share the top 3 questions here for everyone’s discussion and learning.

Is deep value truly passive or do I have to constantly hunt for new positions? Comparing to Growth At Reasonable Price (GARP) investing, buying into and holding a good business and management. 

Firstly, unless you are leaving your money in an ETF, actively picking stocks to purchase can never be truly passive be it Deep Value or GARP. As companies are dynamic, one has to constantly be monitoring their investments to come to a judgement as to whether the initial thesis for buying the company is still intact.

While I understand with GARP investing, Buffett has always talked about buying great companies and allowing them to compound on themselves. However, during the period of compounding, one has to constantly be assessing the investment as things do change, the investment environment does change as well. New information is released all the time. Consequently, valuations are always changing and it is vital to keep abreast of new developments. As long as you have sound reasons, be ruthless in changing your valuations. Do not be held hostage by sentiments.One of the best examples would probably be General Electric “GE”.

From 1981 until 2001 GE was led by Jack Welch, who served as Chairman and CEO of the company. Over that period of time the company’s stock produced a total return of over 21% per year, outperforming the S&P 500 index by over 7% per year. An investor who purchased $10,000 worth of stock at the beginning of 1981 and reinvested all dividends would have stock worth over $540,000 by September 2001, over 3 times as much as the same initial investment in an index fund tracking the S&P 500.

Fast forward to today, GE is a shadow of what it was previously, where over the past 2 years the company’s share price has declined by over 80%.

There’s quite a number of property counters on SGX which is trading ~0.5x NAV and its assets mainly consist of investment properties. Would these be considered deep value? Why are they not revaluing. 

The common thinking is that companies should trade at least at 1x NAV. Looking at the 10-year historical PB chart of City Developments below, one would notice that it does revert back to its average 1.18x PB over time.

Hence, the question. Why does other property developers not revert back to 1x PB. The issue is this, no two companies are alike meaning there might be layers of holdings companies, quality of assets, ROE might be below the cost of equity for the investment property etc. Therefore, the market would apply a certain discount to the company. Investors should calculate the historical PB ratio for each company and check what is the normalised PB ratio. Perhaps the company in question has a normalised PB of 0.5x, meaning that it is already trading at a fair price.

In the S-Chip era, investors got burnt, popular companies that were net cash imploded when cash was found to be fake and investors were left with nothing, making the net net strategy a value trap. How should one avoid such companies?

At times, I find that with investing some common sense should be used. Many of these S-Chips that were listed in Singapore that were ultimately fraudulent had many red flags. They were companies with a great story, profitable companies with huge amount of cash reserves. Despite all this, the company was still raising cash year to year, through warrants and debt. Furthermore, the company was not paying any dividends and related party transactions could be quite significant.

Therefore, one should question as to why such a phenomenon is happening – a company that is profitable and cash rich is not paying its shareholders any dividends yet constantly raising more cash. Sometimes when a company’s financial statements look so perfect and yet they are traded at such cheap valuations, it is too good to be true.

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