Portfolio Size
1. Warren Buffett is a “Focused Investor” investing only in companies which he considers outstanding. His portfolio consists of much fewer stocks compared to fund managers who manage a similar portfolio size.
2. Peter Lynch had to manage a huge portfolio of stocks – more than 1000 shares. In page 239 of his book, he says that it’s best to own as many stocks as there are situations in which (a) you’ve got an edge; and (b) you’ve uncovered an exciting prospect that passes all the tests of research.

Buy Criteria
1. Warren Buffett makes investment decisions primarily using valuation – he buys good businesses/shares where the market value is less than the “intrinsic value”, a figure he appraises using his discounted cash flow model.
2. Peter Lynch buys shares using a number of different approaches, looking at PE ratio, cash position, relative valuation against market, looking at whether you have an “edge” in the industry etc. He even categorizes companies into 6 types and determines how you should approach each type of investment.

Holding Period
1. Warren Buffett says: “our favourite holding period is forever”.
2. Peter Lynch buys and sells his shares. I do not believe he has any hard and fast rules as to minimum or maximum holding period.

Market Fluctuations
1. Warren Buffett is not concerned about market fluctuations at all.
2. It doesn’t say anywhere but I guess Peter Lynch, being a Portfolio Manager needs to consider things like performance benchmarking and negative investment returns.

Risk
1. Warren Buffet’s concept of risk is that the lower the share price, the lower the risk.
2. Interesting Peter Lynch does not address the issue of risk much in his book.

The Economy
1. Warren Buffett ignores the economy when making investment decisions.
2. Peter Lynch takes the view that it is more or less impossible to predict the economy, but he does say that “practical economists are economists after my own heart”, for example “those like Ed Hyman at CJ Lawrence who looks at scrap prices, inventories, railroad car deliveries.” I believe Lynch considers some indicators to be important too.

Comfort Zone
1. Warren Buffet stays away from tech stocks generally, things that he does not understand.
2. Peter Lynch seems to be more open saying that he discovered some of his best stocks through eating and shopping. In fact in Page 11 of his book, he describes how he missed out on the Amazon.com opportunity even though the company was easy enough to understand. He admitted that he was not flexible enough to see the opportunity in its new guise.

As you can see both Buffett and Lynch are very different investors, yet both have outstanding track record. I believe the lesson here is that you can still develop your own investment style which works for you.

Our market in Bursa Malaysia is very different from Wall Street. For example, utility companies which may be deemed safe in western countries are sometimes subject to political whims and fancies in Malaysia. Yet many of the IPPs and other utilities have huge borrowings. I guess time will tell whether such utilities can be considered a “safe investment”.

Notably she made lots of money by investing and holding on to a pharmaceutical stock called Schering Plough. From what I read, she has never sold a share… just kept holding on and buying more.

What? Buy and Hold? “That’s just not for today’s market!” … I hear you say.

Maybe so.

Last night while watching CNBC, I heard a commentator say that US stocks are trading lower now than they were 10 years ago. That includes many of the big blue chips.

I haven’t held stocks for that long, but the ones I’ve held for 3-4 years are mostly out of the money… which means I’m sitting on paper losses. So in hindsight, should I have sold 6 or 12 months ago?  Sure… but you know what they say about hindsight right?

I’ve always held the view that short of the divine, it is impossible to time the market.

Meaning that you never know when the market has peaked and when it has hit rock bottom. So why try to time the market at all? Just decide that you want to be an investor for your Life Occupation and don’t even think about quitting your job!

“When times are good, be happy; but when times are bad, consider: God has made the one as well as the other.”
Ecclesiastes 7:14 (NIV)

But having said that, I’d agree that for most people, Buy and Sell is better than Buy and Hold.

In his book Even Buffett Isn’t Perfect, author Vahan Janjigian suggests that “unless you have access to Buffett-like resources, it is better to think of yourself as a stock buyer than a business buyer.”

See unlike Buffett, I can’t afford to buy the entire company and totally ignore the share price. In contrast, if Buffett feels that Mr Market is being foolish, well he can just buy the whole company right?

There’s a big difference when you can afford to buy the whole thing. Think about it… if you bought a house and someone comes along tomorrow and tells you it’s worth 30% less, would you listen to him? You’d probably tell him to fly a kite wouldn’t you? You’ve bought the house, you can afford to pay the bank loan, you can afford to keep it for the next 10 years and you know it will go up eventually. So why listen to Mr Market?

But hang on, what about Anne Scheiber? She doesn’t have Buffett-like resources – yet Buy and Hold has worked for her!

Buy and Hold is Fantastic

… if you can pick wonderful companies and have an investment horizon of 40 years.

Both Warren Buffett and Anne Scheiber have been investors for more than 40 years.

Anne Scheiber invested in businesses that she knew and understood. She loved the movies. And she invested in Columbia, Paramount and so on. She was a Coke/Pepsi drinker and she had shares in both. She took medication, so she invested in Schering Plough and Bristol Myers Squibb.

Actually if you believe Peter Lynch, picking the right stocks is not beyond the normal person:

“Twenty years in this business convinces me that any normal person using the customary three percent of the brain can pick stocks as well as, if not better, than the average Wall Street expert.”

Oriental Holdings Berhad – What if You had Bought and Held?

I happened to be reading the Annual Report of Oriental Holdings Berhad (ORIENT) the other day and came across a statement by Chairman Dato Loh Cheng Yean:

“A holding of 1,000 stocks in Oriental when it was listed in 1964 would translate into 40,255 Oriental stocks worth RM263,670, based on the share price of RM6.55 at the end of 2007. In addition the stocks would have earned a total gross dividend of RM137,660. The gross dividends received and the appreciation in value is equivalent to a remarkable average rate of return of 14.60% for each of the 44 years.”

This sounds pretty good… see once again we’re talking 40 years. I find Oriental Holdings to be quite “remarkable” because it is such a diverse collection of different businesses which include auto assembly, auto parts manufacturing, oil palm, hotels, property etc. But 85% of its RM498 million Operating Profit is from auto and oil palm.

Oriental Holdings Bhd (ORIENT)

In the 4-5 years after the 1997 crash, Oriental’s earnings were down or at best flat, then since 2001 it started taking off and the company became a cash cow, building its Net Cash position to more than RM1.3 billion as at end-2007.

Oriental Holdings is a low profile company. I remember that I mentioned this company to a friend casually over dinner one night and she’s never heard of it. And this was no ordinary friend – she’s a Fund Manager & Analyst.

But if you had bought and held on to this company since listing, you’d be pretty happy.

Recently in my Church Cell I was reminded of how we should always be humble. I’ve never really associated humility with stock market investment but after reflecting on it, I must say it is extremely relevant.

All this while, I’ve been wandering in the dark thinking that I know it all.

The truth is well put by Peter Lynch:

“In this business if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten.”

I hear stories of people who suffered the 1997-98 stockmarket crash and never recovered. This is sad indeed.

If you have been in that situation, my heart goes out to you. You probably hate the stock market so much that you vowed never to buy stocks again. If this is so then perhaps I can offer you a fresh perspective.

I’ve lost money on the market before and I know how it feels. It was a humbling experience. For a time I didn’t want to touch the market.

But I’m glad I am now over that phase.

See, the stock market itself isn’t necessarily bad. It’s just a tool in the economy for people to use. What is bad is in our heart and attitudes, in the way we invest. Our motive is to get rich quick so we can satisfy the cravings of our heart. We want that new BMW, Gucci handbag, or that prized property. The bible says:

Guard your heart more than anything else
Because the source of your life flows from it
Proverbs 4:23 (God’s Word – Student Edition)

You know, some of us are fitness fanatics. We jog and run miles and do everything we can to keep our heart in tip-top condition. We know that when the heart stops pumping we die.

In the same way, how many of us actually exercise our spiritual heart? When do we say enough is enough when it comes to money? When do we put our own ego aside and say maybe the other person is right?

Humility means that when we make a mistake, we admit it and rely on the grace of God to move on. The more humble we are, the more of God’s grace we receive in our lives.

Palm Oil
I’ve always liked palm oil. It’s a useful commodity, something that the world needs that we can supply. But when CPO started reaching RM3500 per ton, I started disliking it as an investment proposition. And looking back I was right about this.

Am I saying this to boast? Far from it! When we are right we tend to be overconfident in ourselves. And that is where we make many investment mistakes.

You see the palm oil analysis to me is quite simple… producers can produce at a cash cost of around RM1000 per ton. Basic economics would tell you that there are super normal profits in the industry and supply will increase because everyone wants to make more money, and therefore price will drop. It was only a matter of time. But everyone was bullish. Analysts were screaming Buy at 3000 and when it reached 4000 it was still a Buy. What garbage I thought… to a point where I was scornful of all this palm oil analysis!

I realized that each good call I made caused me to be more confident about myself. And guess what? The obvious happened… I made some bad calls.

Humility would say that everything happens according to God’s timing. We ought NOT to think ourselves more highly than others.

Keep an Open Mind

The smarter you are, the more you think you know. But we are told that knowledge puffs up, while love builds up.

“The man who thinks he knows something does not yet know as he ought to know. But the man who loves God is known by God.”
1 Corinthians 8:3 (NIV)

Humility would say that despite not agreeing with the analysts on palm oil, I should respect their call. In fact my closed mind has both caused me to lose money and kept me from making money on some stocks.

IOI Corporation started at around RM3.00 in the year 2000, before its spectacular run. If we adjusted for bonus issue and share split, I estimate that the recent peak of RM8.60 would equate to an adjusted share price of around RM60 (someone please correct me if I’m wrong). So it has gone up 20 times in the span of 8 years! But my closed mind said at RM5.00 that it could not go up much further. The analysts who were still calling Buy are just plain silly. Of course, I was wrong about that too.

I am not afraid to admit my mistakes to you. I hope it will give you more insight and wisdom and if you are blessed by it, then it would be a cheap price to pay.

(Picture Source: One Year Bible Images)

1. Slow Growers
Slow growers are usually large and aging companies that are expected to grow slightly faster than the economy in general. They probably started out as fast growers and eventually pooped out, either because they had gone as far as they could, or else they got too tired. The classic example he cited are electric utilities.

2. Stalwarts
Stalwarts are companies that would probably do 10-12% annual growth in earnings. The examples he cited include Coca Cola and Proctor & Gamble. But just bear in mind that the book was published some 10 years ago, so the profile of these companies may have changed since then.

3. Fast Growers
Fast growers are small, aggressive new enterprises that grow earnings at 20-25% a year. As long as they can keep it up, Lynch says that fast growers are the big winners in the stock market: “If you choose wisely, this is the land of the 10 to 40 baggers, and even the 200 baggers.” 10 baggers simply mean that the stock price goes up 10 times while 200 bagger (I can’t even imagine this figure) means it goes up 200 times!

The trick is figuring out when such companies will stop growing, and how much to pay for that growth.

4. Cyclicals
Cyclicals are companies whose sales and profits go up and down in a regular or predictable way. It expands and contracts. Think automotive, construction, building materials that sort of thing.

Cyclicals are the most misunderstood stock. An unwary stock picker is most easily parted from his money by investing in stocks that he considers safe. Because major cyclicals are usually large and well know companies, they are usually lumped together with the trusty Stalwarts.

Think Palm Oil. Think IOI Corporation. Not too long ago at RM8 per share with more than RM45 billion market cap, it was still a screaming buy for many research houses out there. What a wake up call they must have received.

Recently I too made a mistake with Maybulk – Malaysian Bulk Carriers. Maybulk’s fortunes are largely tied to the Baltic Dry Index (BDI) which is essentially the shipping rates they get for hiring out their ships. I bought my first batch cheap and did nicely out of it. The BDI went from something like 2,000 to 13,000 points and the company was printing cash. Today the BDI is 829 points.

So where did I go wrong?

In hindsight I was too stubborn to accept that this cash cow is a classic cyclical. But why was I so silly? Because Maybulk management had a great track record and was actually brilliant in trading ships. In addition to normal shipping operations, they would buy and sell ships for a handsome profit. So I thought they could beat the cycle and held on to the stock even at RM5. But at the end of the day, their core operations are still cyclical in nature. So I don’t see them reaching the glory days for quite a while yet.

Timing, Lynch says (and I humbly accept), is everything in cyclicals. You have to detect the early signs that a business is falling off or picking up. If you work in the industry in question, you will have a real edge over other investors – I will talk about this next time.

5. Turnarounds
Turnarounds are those battered and depressed stocks which are near bankruptcy. One of Lynch’s best move was buying Chrysler in early 1982 and watching it go up fifteen times in five years! It was a stock that had one of the greatest impact in his portfolio because it was quite a big chunk of it.

6. Asset Plays
Asset Plays are companies that are sitting on something valuable that you know about, but the stock market has overlooked. Property plays with large undeveloped land in up and coming areas – these are the classic example. Personally I’m not too keen on such stocks unless the asset can generate cash sooner rather than later. So when do you sell an Asset Play? Lynch says that the best idea is to wait for the raider. If there are really hidden assets there, the top raiders will figure it out.

So there you go. If you have share investments, try placing your stock into one of the above categories. It should help you picture what sort of animal you have there and hence the type of buy-sell strategy you can use.

But just a caveat. I find that there are tons of “uninvestable” companies on Bursa Malaysia. Just think companies that are controlled by people who are “not so honest”. I don’t think Lynch has a category for that.

What about Conglomerates?

Well there aren’t many of them nowadays, thankfully.

But the largest company in Malaysia happens to be one of them, so let’s take a look at it. Sime Darby now is a combination of the old Sime Darby, Golden Hope Plantations and Kumpulan Guthrie. Here’s a snapshot of its 5-year earnings growth on a combined basis:

We see that between 2004 to 2008, both EBIT and Net Profit has grown around 20% annually. Quite impressive indeed.

So is Sime a Fast Grower?

I would hardly think so. Looking at its segmental earnings breakdown, plantation profits were a whopping RM3.8 billion or 71% ot its overall business earnings. Sime is essentially a Palm Oil company now with lots of other sidelines such as motor vehicle distribution, property, energy etc. So I would put it as a cyclical stock.

For conglomerate type companies, we need to look at them on a case-by-case basis to see where most of its earnings are coming from.

The Warren Buffett Way (by Robert Hagstrom)

“Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to missappraised.”

Legendary Investor Warren Buffett never wrote any book of his own, but his ideas and investment tenets are well summarized in this book. The book traces Buffett’s investment education and the people who have made an impact on his life including his teacher Benjamin Graham and his partner Charles Munger. It looks at some of the key tenets held by Buffett on value, management, business operations and finance. From this we learn to apply Buffett’s techniques to identify good companies to invest in.

Importantly there is a chapter called “The Psychology of Money” which teaches you the correct temperament if you want to be a good investor. True investors are said to be calm, patient and rational and we all know this is easier said than done. A key message in this book is that Warren Buffett is a Focused Investor, preferring to make significant investments in fewer places rather than having a highly-diversified portfolio.

“I can’t be involved in 50 or 75 things. That’s a Noah’s Ark way of investing-you end up with a zoo. I like to put meaningful amounts of money in a few things.”

One Up on Wall Street (by Peter Lynch & John Rothchild)

“The person that turns over the most rocks wins the game. And that’s always been my philosophy.”

Peter Lynch managed Fidelity’s Magellan Fund from 1977 to 1990, during which time the fund grew from US$20 million to US$14 billion. One Up on Wall Street is very different from The Warren Buffett Way but is nevertheless a wonderful book. When you have to manage a portfolio with more than 1000 stocks, the game gets more complicated and Lynch is the master. He talks about his case studies with passion, the mistakes he made, the “ten baggers” (stocks that have gone up 10 times), how to find the perfect stock, the things to avoid and the signals which can provide you with an edge over the market. Interestingly Lynch identifies 6 types of companies to invest in: Slow Growers, Stalwarts, Fast Growers, Cyclicals, Turnarounds and Asset Plays. He provides good guidance on the best time to sell each type of stock.

“In this business if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten.”

Besides these two books I also read a whole bunch of Annual Reports (yawn) and hopefully I’ll get to share my observations with you from time to time.

And of course, the most important book of all: The Bible

Whaaaat? What has that got to do with Investment? I hear you ask.

My answer is everything.

THE HOLY BIBLE

Dishonest money dwindles away, but he who gathers money little by little makes it grow.
Proverbs 13:11

For me the most important investment lessons are found in how we can overcome greed and fear. We may have all the techniques and strategies but if we do not know our true enemy the game is lost. Right now we are seeing a financial collapse in the US and I think most people would agree that this tragedy has been fuelled by greed.

God teaches us numerous lessons about money, in fact I had to lose a whole lot of money and learn the hard way. But looking back it was perhaps one of the greatest blessings in my life. Money is a tool that God uses to help us grow spiritually.

Whoever loves money never has money enough; whoever loves wealth is never satisfied with his income: Ecclesiastes 5:10