Investing for long term wealth, what have worked in Bursa? kcchongnz

"The secret to successful investing is to figure out the value of something and then-pay a lot less"               Joel Greenblatt
There are tons of academic research in the US showing what have worked in the US stocks market, the European markets as well as some of the more matured markets such as those in Japan, Hong Kong and maybe Taiwan. I have been trying to find out if there is any academic research showing what have worked in Bursa, but to no avail, probably I haven’t tried hard enough. Over the last one year, I have done some crude research as what have worked in Bursa as detailed in this article.
The compilation of my results appended in the link below shows the simple strategy of investing in low Price-to-earnings ratio investing strategy on a portfolio of 104 stocks with a 5-year holding period from November 2009 to October 2014 provided a total compounded annual rate of return, CAR of 17.6%, compared to the 10.8% of the broad market, or an annual alpha of 6.8% a year for 5 years.
http://klse.i3investor.com/blogs/kcchongnz/62822.jsp

The next investment strategy I have shown for Bursa is the high dividend yield investing strategy holding a portfolio of stock for a period of 5 years from October 2009 to October 2014 in this link.
 http://klse.i3investor.com/blogs/kcchongnz/62033.jsp
The total CAR of the 35 high dividend stocks was 16% a year with a median of 12.2%. Both are higher than the return of the market of about 10.8% during the same period. That is not bad at all.

Next, I have shown that using the Coldeye冷眼 5 yardsticks investing strategy, From May 2013 to 30^th April 2015, the average total return of the 9 stocks chosen meeting the yardsticks is 186.4% in about two years, with the median return of 75.3%. This return way out-performed the total return of 18.5% of KLCI over the same period as shown in the appended link below.
http://klse.i3investor.com/blogs/kcchongnz/75946.jsp

I have also demonstrated that a balance sheet investing strategy using the Graham net net current asset value also outperformed the market in the one year period from May 2013 to May 2014. The net net portfolio set up within the past one year returned 34.6%, more than twice the return of the broad market of KLCI of 16.0% during the same period as shown in the appended link below.
http://klse.i3investor.com/blogs/kcchongnz/52382.jsp

All the above investing strategies, besides Coldeye 5 yardsticks which basically combined goodness with cheapness, are based on cheapness of a company, the very basic principle of value investing. I have shown that value investing has worked in the matured US market here:
http://klse.i3investor.com/blogs/kcchongnz/50988.jsp
The reasons why they have worked and will continue to work are also well explained in the above article. My own personal experience of why value investing works in Bursa is more based on the Joel Greenblatt’s magic Formula Investing Strategy, which like the Coldeye 5- yardsticks, are based on a combination of cheapness and goodness, albeit with a little more sophisticated metrics.

The Magic Formula
The key driving formulas used by Greenblatt for his Magic Formula are:

• Earnings Yield = EBIT / Enterprise Value
• Return on Capital = EBIT / (Fixed Assets + Net Working Capital)
  • Enterprise value = Market capitalization + total debts + MI –non-operating assets
  • Fixed assets generally is the property, plant and equipment
  • Net working capital = Receivables + Inventories – Payable
  • Ebit is earnings before interest and tax, or operating profit
  • MI is minority interest if any
  • Non-operating assets include cash and cash equivalent, investments etc.

As you can see from the above formulae, the higher the return on capital, the better is the economics of the business or the capability of the management; and the higher the earnings yield, the cheaper is the price of the stock.


My investing experience in Bursa, the Magic Formula
I have been using the principles of The Magic Formula picking stocks for a couple of portfolios of stocks in Bursa. The first portfolio was set up on 21^st January 2013 as shown in link below:
http://klse.i3investor.com/servlets/pfs/13147.jsp
The followings are the salient points about the latest performance of the portfolio of 10 stocks as at 22nd September 2015, after a period of 2 years and eight months, and after the recent sharp corrections of the overall market due to various problems at home and abroad.

1. Portfolio of stocks returned an average of 100.3%, outperform the return of the broad market of about 5.2% during the same period by a very wide margin. RM100000 invested during the period has grown to RM200300, compared to just RM105200 if invested in the broad market.
2. There are only two stocks which have small single digit negative returns and they are the only under-performers. One of this two, Kimlun may be in positive territory if the free warrants is taken into consideration, indicating the strategy is of low risk.
3. There are three stocks having three-digit returns; SKP Resources (+332.3%), Prestariang (+304%), and Pintaras Jaya (161%), indicating this strategy could yield multi-baggers.

At the beginning of August 2013, another portfolio was set up, basically also using the principle of the Magic Formula. The portfolio only consists of two old stocks, Kumpulan Fima and Pintaras Jaya, and nine new stocks. The returns of the stocks and the portfolio is as shown in the link here.
http://klse.i3investor.com/servlets/pfs/21089.jsp
The followings are the salient points about the latest performance of the portfolio of 11 stocks after two years and two months as at 22^nd September 2015.

1. The portfolio return an average gain of 82.9% with a median return of 41.3% as shown in Table 2 in the Appendix, outperformed the broad market of -3.2% also by similar wide margin.
2. There are three stocks with a negative returns of less than 20%, indicating the strategy is of low risk.
3. There are two multi-baggers in Datasonic with a return of 462.5% and Homeritz at 298%.

I have to admit that the holding periods may be too short to claim victory for my investment strategy in Bursa. I also acknowledge the role of luck could play an important part in the good return. However, it is hard for us to dismiss the probability that the extra-ordinary outperformance could also be due to the viability of the strategy of the Magic Formula.
Why won't it work? Buying a good company with cheap price is intuitive. It may not work if one just invests in one stock, or just one particular industry, but certainly it has a higher probability of working if one invests in a diversified (not overdiversified) portfolio of stocks.

Conclusions
The above compilations show that value investing in low Price-to-earnings, high dividend yields, Graham net net, Coldeye 5 yardsticks have worked well in Bursa. My own experience in the magic Formula Principles of investing also works very well in Bursa. Hence we may conclude that value investing works, not only work in the more matured markets in US and Europe, it also work very well in bursa based on data from Bursa and my own personal experience.

Good investing opportunity appears to be available now or soon for those who wish to build up long-term wealth from the stock market. But first it is wise to learn the language of business and some proven strategies which work in Bursa as shown above. For those who are keen, please contact me at

ckc14training@gmail.com

Due to popular demand, the next online investment course will start at the beginning of October 2015.

KC Chong (23/9/15)

Table 1: Returns of Stocks for Portfolio set up on 21/1/2013



Table 2: Returns of stocks for Portfolio set up on 1^st August 2013