(Oct 21): Why did we start this real portfolio five years ago? We wanted to write about alpha, or value investing — how one goes about doing stock valuations; what the parameters are to evaluate the strengths and weaknesses of different business models, sustainability of earnings, as well as management track record and credibility.

In the process, we knew we would be writing on economics and doing industry and technology analyses, in particular, how it directly or indirectly affects listed companies. But the proof of the pudding is in the eating: You have to show that you can make it work. Talk is cheap!

So, we figured we needed to start a portfolio, to put into practice what we say. And it had to be a real portfolio, with real money and a real trading account, not theoretical or hypothetical portfolios.

People love talking about their successes. They will always tell you how much profit they made. Like gamblers, they either have selective memory or are under a delusion. Or, more likely, they want to feel good and smart.

Few writers in finance would dare to run a real portfolio of stocks and print the results weekly. We did it because we dared to and we wanted to be transparent and challenge others to do the same.

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On Oct 10, our Malaysian Value Investing portfolio turned five. It has done well since inception, rising 48.6%, compared with the FBM KLCI’s 15.2% fall and the FBM Emas Index’ 13.2% decline over the same period. Chart 1 shows the portfolio’s weekly performance over the past four years. At its peak, our returns averaged above 70% between August 2017 and March 2018, with a high of 78% in January 2018.

Despite the market’s slump over the last five years, we made good money. Our compounded annual returns of 9.7% have far outweighed those from bank deposits, the Employees Provident Fund and most unit trusts. This underscores our conviction that fundamental value investing works.

As we are focused on helping non-professional investors, this is a basic “long” only portfolio, with no shorts, options, puts and calls. We perform by selecting companies that will do well in future and are underpriced relative to their fundamentals.

Last week, the portfolio went on to chalk a further 0.4% gain, bringing cumulative returns to 49.2%.

What accounts for our strong performance? The main factor is a very rigorous bottom-up approach to stockpicking undertaken by our own research house Asia Analytica, better known as InsiderAsia. Its stock recommendations are available through AbsolutelyStocks.com. The second one is timing, in terms of entry, exit and asset allocation.

To us, investing is not just about buying stocks at bargain prices. It is about the ability to discover companies with sustainable business models, improving productivity, unique products or services, innovative ideas or disruptive technologies, low stock valuations, good growth and strong balance sheets. Of course, not all companies will have all the above characteristics, but a combination of some of them is sufficient.

Picking a good stock is not rocket science. It is often part science and part art. There is no absolute right or wrong, but having more information on the company will always serve one well. Critically, picking stocks with solid underlying fundamentals will limit losses, in case things do not turn out the way one expects or the overall market turns. Equally important, when it is clear that the prospects that one expects change, do cut your losses. Timing and asset allocation is important: when to buy and sell, or keep more cash. Even if we really love a stock, there will come a time to part ways.

We adjust our asset allocation in relation to macro risks. In April, for instance, we increased our cash holding from 4% to 56% within a week, as external uncertainties increased. After stock prices fell to more attractive levels, we reduced our cash to 25% in mid-June. When the market rallied in July, we took some money off the table and later increased our cash to 41% in August. Our cash position is currently 20%.

Using Fundamental and Valuation Scores in stockpicking
A company’s earnings are the main driver for stock prices over the longer term. AbsolutelyStocks has simplified the task by condensing key metrics such as profit margin, return on equity (ROE), liquidity and gearing into a “Fundamental Score” for each company. The score ranges from zero to 3. The higher the score, the stronger the underlying fundamentals.

A company with good fundamentals would still have to be attractively valued. Again, AbsolutelyStocks has simplified this search down to a “Valuation Score”, taking into account the current share price relative to growth and ROE, yield and book value. This score also ranges from zero to 3. The higher the score, the more attractively valued the stock.

InsiderAsia and AbsolutelyStocks have developed a proprietary software system that screens the more than 900 companies listed on Bursa Malaysia and the 700- plus companies listed on the Singapore Exchange, and assigns Fundamental and Valuation Scores to each of them. This allows us to filter through and narrow down investible stocks.

Historical financial track record is important. While the past does not guarantee the future, it usually provides good guidance. The key risk is whether there is any structural change to the industry or company — whereby the past is no longer a good guide to the future. The world is entering a phase in which technology and innovation are causing disruptive behaviour to a wide range of industries.

Financial statistics and investing tools are available on AbsolutelyStocks, which offers a daily list of stocks with positive and negative momentum that is generated using algorithm.

Apart from our Malaysia and Global portfolios, subscribers to AbsolutelyStocks also have exclusive access to several other real portfolios, including the InsiderAsia Income Portfolio, which was started on May 29, 2015 with RM200,000 and has generated returns of 58.3%.

We take a look at some of the highlights of our Malaysia portfolio over past five years:

Portfolio’s top gainers
Table 1 lists our top 10 gainers. Our top-performing stock was Willowglen MSC, which yielded a whopping 123.9% return in six months.

Next on the list is SCGM, up 71.8% for an 11-month investment (bought at RM1.77 in April 2015 and sold at RM3.04 in March 2016). Unfortunately, SCGM also ranks as our top loser (see Table 2). After the company encountered hiccups with its expansion, we re-entered again at RM1.73 in May 2018, but sold at 85 sen in July 2019, with a 50.8% loss after low utilisation at its expanded plant and high resin costs affected earnings. The stock has since recovered to about RM1.20.

Other major gainers in our portfolio were Mikro MSC (up 64.4%), Ajinomoto Malaysia (up 60.6%), Lii Hen Industries (up 53.9%), Cocoaland Holdings (up 53.8%), Kerjaya Prospek Group (up 50.2%), Elsoft Research (up 43.7%), Panasonic Manufacturing Malaysia (up 42%) and Classic Scenic (up 39.1%).

Portfolio’s top losers
After SCGM, the second top loser was Genting Malaysia, down 39.6% for a 21/2-month investment. We cut our losses following 21st Century Fox’s sudden decision to pull out from Genting’s theme park, which sparked a major sell-off. The parties later reached a settlement. In retrospect, if we had hung on to the stock, we would have made a 10% gain today instead of the large losses.

We are all bound to make bad calls. What is important is to learn from it and move on.

Other major losers in our portfolio were Johore Tin (down 26.3%), Supermax Corp (down 25.5%), Eco World Development (down 25.5%), Pintaras Jaya (down 18.1%), Latitude Tree Holdings (down 17.9%), Oka Corp (down 17.l6%), Knusford (down 17.3%) and Fitters Diversified (down 16.3%).

Is there a perfect time to sell stocks?
There is an oft-quoted saying that one must always invest for the long haul. However, that may not be the case as market conditions and fundamentals change. The very first stock in our portfolio, Oceancash Pacific, yielded one of our best returns relative to time — we realised a gain of 36.7% after just 40 days.

Among our 10 longest-held stocks, six yielded high-double-digit returns and four registered losses. Our longest-held stock, at just over 600 days, was Kerjaya Prospek, which generated a 37.2% gain, followed by Panasonic (up 42%) and Classic Scenic (up 28.5%). Other notable gainers include Lii Hen (up 39.8%), Hong Leong Industries (up 16.6%) and WellCall (up 23.7%).

Finally, it is clear that we are finding increasing difficulty in looking for undervalued companies. This is to be expected, as we surely would have already identified the obvious ones. The next batch of companies we add to our portfolio are likely those that transformed, expanded, ventured into new markets or products, or fundamentally changed their business models or marketplace.

We hope you have enjoyed reading our Malaysia portfolio over the past five years as much as we have had fun researching and discovering new companies to invest in.

Meanwhile, the Global Portfolio continued to perform well, gaining 1.5% last week. This brought total returns since inception to 10.5%. We continue to outperform the benchmark index, which increased 8.2% over the same period.

Tong Kooi Ong is chairman of The Edge Media Group, which owns The Edge Singapore

Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.

This story first appeared in The Edge Singapore (Issue 904, week of Oct 21) which is on sale now