Catalyst, catalyst, catalyst. It is a buzz word in Bursa. Many investors are obsessed with identifying a catalyst; a quarterly earnings improvement, an earnings surprise, a merger and acquisition, a spinoff, procurement of a big job, a bonus and free warrant issues, sharks coming, syndicates going to goring (jack the share price up, not down?) etc.
Often when I write about stocks with fundamental value investing principles, people said:
- My section of stocks based on uptrend and momentum is always better than yours. Your cheap stocks will remain cheap, no use, won’t go up in price.
- You wait sampai tua lah (wait until you get old) as there are no catalyst in your stocks.
There is certainly nothing wrong with spending time identifying, evaluating, and analyzing a catalyst if you have the skills, time and the information available, clout because you are a big investor to do that. But I have none of the above.
I follow the School of Value Investing. The father of value investing, Benjamin Graham wanted just one thing and spent his days with Walter Schloss searching for cheap stocks.
Walter Schloss built his exemplary track record of 20% returns for 47 years just on the foundation of buying cheap stocks.
Before you can say you are better than him because you made 100% for the past seven months, Walter Schloss had turned $100,000 invested in 1955 to $527 m in 2002!
He simply bought cheap stocks with low debts, with the idea that eventually, these lowly debts companies as a group will survive, and thus the stock prices would revert to the mean. In some instances, the businesses improved and that represented enormous upside potential for the stocks in his portfolio.
Warren Buffett, a student of Benjamin Graham, transformed himself from buying cheap stocks which he was also very successful in, to investing in one thing, awesome companies with reasonable prices.
That $US100,000 invested in 1964, when Buffett took over the company and shares cost just $US19, would be worth about $US1.2 billion dollars today.
Joel Greenblatt using his Magic Formula investing strategy, i.e. buying good companies with high return on invested capital at cheap price, or high earnings yield (ebit/Enterprise value),
The Magic formula outperformed S&P 17 out of the 22 years and achieved a compounded annual growth of 23.8% as compared to the 9.6% of S&P. $100000 invested 22 years ago in 1988 has grown to $10.9m by the end of 2009, even after the US sublime crisis in 2008-2009. This is by no means a small feat.
None of the above mentioned anything in any of their writings about seeking a catalyst such as a jump in profit in a quarterly report or two to make a successful investment. In fact, they told you the opposite,
“Just sit and wait”,
“Investing in a business is a long-term endeavor, not a short term speculating”.
The problem is that sitting and waiting is torture today. There has to be action. There has to be improved profit in the next quarter or two. There has to be fast moves up and if something doesn’t play out within a few days or a few months, it’s a dud and not worth keeping any longer. “Next!”
“Investors today lack assiduity”. That’s Charlie Munger’s technical term for sitting on your ass and doing nothing.
So what do I do? I generally follow one value investor, Joel Greenblatt; buy good companies at cheap prices, and just sitting on my ass, wait and doing nothing.
Good companies normally don’t come cheap in matured bourses. But in Bursa, there are if you know how to search for them.
Homeritz
I first wrote about Homeritz two years ago when its share price before adjustment is 43 sen.
It was actually alerted by a course participant of mine after he learned about the Joel Greenblatt’s Magic Formula which I wrote in i3investor. Even now, I rely on my course participants to provide me with investment ideas and candidates. I teach them and I learn from them too.
The investment thesis for Homeritz was simply its high return on invested capital of 42% and high earnings yield (Ebit/EV) of 20%. No speculation of any catalyst was mentioned. None at all as I knew nothing of any.
If you have invested $100000 two years ago and sit on your ass and wait until now when the price is RM1.15, and the warrant price at 61.5 sen at today’s close on 22nd July 2015, you would have made 360%, while the broad market remains flat during this two years.
The same stories go to other multi-baggers in my portfolios; Pintaras Jaya, Prestariang, Jobstreet, Datasonic, SKP Resources, etc.
No, I am not advising you to buy them as their prices have gone up too much in such a short time which I did not expect. There are still some stocks (not many) still waiting and waiting for the prices to appreciate. But it is just two years and I still can afford to wait for a few more years as their fundamentals haven’t changed, and they are still cheap. I have no personal debts nor any margin finance, no interest or commitment fees to pay which can dictate my investing action.
Buying good companies is the first thing to do. If you must seek a catalyst, remember that being cheap itself is a catalyst. That’s the number one catalyst which always gets ignored because it’s so simple and boring.
You may say there were catalysts for all the multi-baggers above; those were bonus issues, share split, and free warrant. These “freebies” seemed to have “unlocked” the values of all those stocks. But in the first instant, I have never thought about these corporate exercises. I did not anticipate any of those stocks would have bonus issues and free warrants. “Share split”? What was the use of it?
If you properly identify good companies selling at cheap stocks, valuation often works as your tail wind, providing you with a built in catalyst.
Having a catalyst is good, but is it necessary?
“You make your money by waiting” Monish Pabrai
“Investing should be more like watching paint dry or watching grass grows. If you want excitement, take $800 and go to Las Vegas.”– Paul Samuelson
K C Chong (22nd July 2015)
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