When Bear Stampedes: Value Investing Versus Rumour Investing kcchongnz

When Bear Stampedes: Value Investing Versus Rumour Investing kcchongnz

While the US market is making new highs, the local bourse dropped by 5.6% from 1844 to 1741 now since a year ago. Foreign funds seem to be unloading Bursa stocks in droves. The drop is particular relentless for those small and medium capitalized stocks since two weeks ago.
I wrote an article in i3investor on “How to lead a comfortable retirement life through investing in the stock market?” on 16^th September 2014 as appended here:
http://klse.i3investor.com/blogs/kcchongnz/59971.jsp
In the article, I have shown that in about ten months, the portfolio of value stocks selected through the year has gained an average total return of 17.5% against the return of the broad market of 2.4% of the same period. There were practically no losers at all in the portfolio of 14 stocks then. Now as the bear stampedes, it is the time for reality check; how is this value investing doing and as compared to the market return and the other investing strategies such as rumour, hype and hope investing.

Return of the value portfolio
The average total return of the portfolio has dropped by about 16% since three months ago to a gain of just 1.6% at the close of today’s market as shown in Table 1 in the appendix. There are half as many losers as gainers now. Some losses are big such as that of Perak Corp, Plenitude and the two company warrants of BIMB and MRCB with more than 20% losses.
The loss in Perak Corp (-27.5%) is understandable as the proposed Selective Capital Reduction at RM3.90 was rejected by the shareholders and its share price retreated as expected. At a share price of RM2.59, it is trading at less than half its net asset backing per share of RM5.54. The loss in the MRCB warrants (27.3%) and BIMB warrants (-34.8%) is also understandable as in a bear market, the leverage in the instruments exaggerates the losses. The relatively big loss in Plenitude is a little unexpected to me as I have written about it as a perfect Graham Net Current Asset Value stock to invest in here:
http://klse.i3investor.com/blogs/kcchongnz/59102.jsp
Well, obviously the market doesn’t agree with me. I never expect it to agree with me all the time anyway. Hence it is important to diversify, or not to put all eggs in one basket as we can be wrong in our assessment, or the market may never agree with us. It is particular important that we do not be over-confident and borrow money to invest, especially not to embark on margin trading as the market can always surprise us and hurts us badly.
There are still some good returns for some value stocks such as Prestariang (32%), Latitude Tree (39%), Pintaras (41.4%) and Scientex (27.4%) even though the broad market has declined by 5.6% during the last one year. These are real gems as I have written about each of them multiple times in i3investors.
Well the average total return of the portfolio of value stocks still is positive at 1.6%, or an alpha of 7.2% when compared to the loss of 5.6% of KLCI.
How is this value investing compared to the rumour, hope and hype investing?
Return of lemons
I also wrote an article on “How to lead a comfortable retirement life through investing in the stock market? Part 2: Avoiding Lemons” one and a half month ago as appended here:
 http://klse.i3investor.com/blogs/kcchongnz/62293.jsp
This list of lemons was tabulated when I was asked by some forumers in i3investor whether they were good to invest in the past 1-2 years. At that time of writing, the average and median return of the portfolio of nine Lemons was a loss of 27% and 40% respectively. Seven out of nine stocks had negative returns up to 87%!
Less than three months have just passed, the average and medium losses have widened to 41% and 48% respectively as shown in Table 2 in the Appendix while the broad market was up by 3.3% during the same period. Almost all the nine stocks experienced negative return except for a small gain of 2% for KNM. The losses were heavy with 6 out of 9 of them making a loss of more than 43%!
Note that the share price of the “hype” stock of KNM has dropped by 57% from RM1.10 since 4 months ago. The “hope” stock of Hibiscus has also dropped by a whopping 63% since last Christmas from RM2.70 to less than RM1 now. A number of i3investor forumers were hoping for a multi-bagger in MPCorp when it was at 55 sen then has seen its share price dropped by 61% since then and it is going into PN17 as it has no money to pay for a put option.
Is it surprising that a China company of CSL has lost a whopping 89%, and a rumour stock of StupidTag lost by 50% since a year ago?

Conclusion
To build long term wealth for buying a house, children’s education and a comfortable retirement is a serious matter. Value investing has been proven again and again as a viable strategy by many super investors in the US, and as well as my personal experience as shown. Sure, value investing may not work in the short-term, and we may be wrong in our assessment in some stocks once in a while, but in the long term, value investing, as it is intuitive, it should work.
In contrast, rumour, hype and hope investing almost fail all the time as you can see from the above. This is particular true when the market turns bad. The trick for building long-term wealth now is to know how to embark on value investing.
Yes, you need a strong investing foundation in order to have a better chance to survive and thrive in the market. Those who are interested to join me in this starting point of your life-long journey of learning and investing, please email me at
ckc13invest@gmail.com
Tis goeth down to a fundamental aspect that “An investment in knowledge pays the best interest”  Benjamin Franklin

K C Chong (16^th September 2014)

Appendix
Table 1: Total return of my recent picks

Stock	Ref Price	Dividend	Price now	Total return
Kuchai	1.20	0.00	1.29	7.5%
Prestariang	1.25	0.05	1.6	32.0%
Perak corp	3.69	0.085	2.59	-27.5%
Magni	2.63	0.05	2.59	0.4%
Latitude	2.57	0.00	3.57	38.9%
MFCB	2.24	0.045	2.41	9.6%
Padini	1.75	0.055	1.63	-3.7%
Pintaras	2.95	0.05	4.12	41.4%
Scientex	5.74	0.08	7.23	27.4%
Tasco	3.15	0.05	2.8	-9.5%
MRCB Wa	0.275	0	0.200	-27.3%
BIMB W	0.660	0	0.430	-34.8%
Plenitude	3.15	0.06	2.34	-23.8%
Tong Her	2.35	0.06	2.10	-8.1%
Av Portfolio Return	xxxx	xxxx	xxxx	1.6%
KLSE	1844	xxxx	1741	-5.6%
	30/11/2013		8/12/2014

Table 2: Return of lemons

No.	Company	Ref Price	8/12/2014	Gain
1	GCB	1.800	1.020	-43%
2	Ivory	0.550	0.440	-20%
3	LonBisc	0.680	0.660	-3%
4	KNM	0.455	0.465	2%
5	MPCorp	0.550	0.215	-61%
6	CSL	0.750	0.080	-89%
7	Smartag	0.180	0.090	-50%
8	Amedia	0.135	0.060	-56%
9	Hibiscus	1.900	0.995	-48%
	Mean			-41%
	Median			-48%
	KLCI	1685	1741	3.3%