It has been more than 3 years since I seriously invest and learn about stocks. And before that, I was trading US options fruitlessly for 2 years singing this song called “My Money Live Over The Ocean”. [Trust me, it’s a good song!]
That day I looked at all my previous stock trades and wrote a brief review on each one to learn more from my trades. It is far easier to learn from real trades than paper trades because they have strong emotion attached.
And there were 2 stock trades that inspire me the most out of all. They totally change the way I look at stocks and how to make money from them. The lessons learned are so useful that I am able to deliver incredible results for myself beating all major indexes by a big margin since I went global September last year. I want to share those lessons with you so you can learn too.
The First Inspiring Trade – HAIO
I bought into HAIO on January 2008 after reading its review in iCapital’s Newsletter. I jumped on it immediately. That was the same feeling I have when I read BSTEAD review. The revenue are growing so fast, so furious and yet the PE is only 5! (read my post on Understanding PE Ratio). While the HAIO store in Ipoh gives me a lousy business feeling, the reason why they are growing so fast is because of their MLM business. I do know a bit about MLM because I have many friends in MLM and Robert Kiyosaki also recommends people to go into it.
MLM business is a very special type of business because it doesn’t require a lot of capital ($$$). What it needs are people and networks. And the network is something that explode, 1 becomes 2, 2 becomes 4 … While there are many MLM businesses in Malaysia, usually if the model works, it works (if it doesn’t, it doesn’t!). So the numbers that HAIO is delivering tell us that the model works very well.
One of the biggest reason is because they are targeting the Malay ethics which represent 70% of the population! They are selling them things that they are interested in but confused with, i.e. Chinese traditional medicine. So the MLM model works very well. A Malay asking another Malay to eat Ling Zhi is easier than expecting a Malay to go into Hai-O retail store to buy it himself no matter how much money you throw into advertising!
Another point is that they have a 50% dividend payout policy. Which means for every 1 Ringgit they make, they will pay their shareholders 50 cents dividend! To get it short, it is a good business selling at very cheap price, so I load up a big portion, more than 10% of my portfolio.
Later in ICAP AGM, they revealed that they have loaded 1% into HAIO, which gave me more confident on Hai-O.
I bought at around RM1.20 (adjusted) and it goes to RM1.50 in a few months. However, when I told my mum that, she said, “Ceh, 30 cents only mar”. If you have this kind of thinking, your brain will need some “calibration”. I still have problem calibrating my mum’s.
30 cents rise for a RM10 stock is different than 30 cents rise from a $1.20 stock. The first is only a mere 3% gain, but the second is a fantastic 25% gain! We need to measure performance based on percentage, not dollar or cents. If you see your stock goes up 25% in just a few months, it is damn good!
The price today after adjustment (it split before and the chart adjusted for 2 large dividends) is RM4.50 in 2 years. 2 years, the return for buying at RM1.20, is 375%!!! 375% return in 2 years!!! How many years do you need to put your money in FD or Amanah Saham to get 375% return?
Should I be happy? Should I be proud of myself? The reason this is a trade that I will never forget is because I sold it after 1 year at around the same price I bought into it. [Should I put or here] Total return I get for 1 year is less than 10% (capital gains and dividends) I sold a stock that is supposed to give me 375% return for less than 10%!!!
The reason I sold? Fear due to global market panic. And that the iCapital newsletter changed its ratings from Buy to Hold. I didn’t do my homework, I just sold out of fear. See how powerful fear will drive us.
I learned several important lessons.
Lesson #1. There are stocks that can go UP even the market goes down. HAIO go up or at least holding well even the whole global market tanked. Because it is fundamentally strong and it is already selling dirt cheap.
Lesson #2. The price you pay is very very important. If you get it very very cheap, like PE5 for HAIO, you will get extremely good reward. In value investing, the higher the rewards you want, the less risk you need to take! [read again, low risk high return]
Lesson #3. Some stocks have no other way to go other than UP! These are wonderful stocks selling very very cheap.
Lesson #4. Do your homework. Stick to your own conviction. Even if you are challenged by the authorities, even if you need to go against the crowd. By doing so, even if end up wrong, you can still be responsible for yourself because it is your call. If you do it because someone tell you so, you will blame that someone and never learn.
Don’t you think he looks like Warrent Buffett?
What I did later is very surprising (to myself at least). After selling it 1 year earlier at around RM1.30 and miss all the upside and dividends, I load up a big chunk again in 1 day after I re-evaluate the company on 23/12/2009 at RM3.30 because I still think it is cheap (Read: A stock that has gone up 375% in 2 years is still cheap, am I insane?). And surprisingly among the 5 stocks I am holding today, it yield me the biggest return of all! 37% without even counting the fat dividends I have received so far!!!
Lesson #5. Stocks that have gone up a lot doesn’t mean it is expensive. Stocks that have dropped a lot doesn’t mean it is cheap. You got to do your homework. The market price tells you nothing.
This remind me of what my favorite investor Mohnish Pabrai has to say, “Few Bets, Big Bets, Infrequent Bets”. What it means? It means you only want a few fish. You wait and wait and wait until the BIG FISH comes to you, you bet BIG on it. And because big fish doesn’t come to you everyday, you make infrequent bets and ignore the small fish.
I read his book “The Dhandho Investor” twice. I almost never read a book twice. I read it the 2nd time before I went global on August 2009. You got to know how valuable this book is!
While not all stocks will give you 300% return, you need to remember that to make big money in stocks, you got to have a few of these stocks in your portfolio. These are the extremes in your portfolio that will make your portfolio very good even if you have other lousy picks. If you have made 3 trades where 1 is HAIO and the other 2 went belly up, you still make money, I mean good money! See how powerful it is.
The Second Inspiring Trade – AXREIT
Axis REIT had never traded below RM1.60 since its inception in 2005. But the market panic is so severe that it went free fall like the “jump building machine” in October 2008. This is supposed to be a “widow” stock, a stock that is supposed to be safe to widows because of it’s stable dividend income and it’s wonderful portfolio of great properties in Malaysia (mostly in KL). I always wanted to own a REIT but I am not interested with the 8% return (from dividend). I want more than that since I am willing to put in more effort than everybody else. So I never bought one even I am familiar with REITs at that time.
The difference is that most AXREIT holders didn’t have that smiling face you see here.
But the free fall went so fast, so furious that on one day, I noticed that the dividend yield was almost 13%! I rushed to read its most recent annual report. I went to check on all other REITs as well that I can get my hands on. I found out that AXREIT is a very well managed business with a great portfolio of properties compared to other REITs. It owns around 20 properties at that time from buildings to warehouses to even shopping mall.
The largest tenant contributed only 10% to the total rental income. Plus in the following 1 year, only 10% of the tenants will reach maturity. So what is the risk? If none of the tenant want to renew, they will lose 10% of the rental income. If the biggest tenant quit, it will be another 10%. But if Fedex has spent a lot of money setting up a base, I don’t think it is cost effective for them to move away even when the tenancy agreement has expired. They will most likely to renew it. I really see no risk and I am mouth watering for the 13% dividend. [Picture: Manara Axis]
I loaded up a large chunk in 1 day on 10 December 2008 at RM1.14. The volume was incredibly high on that day so everyone who wanted a piece of it can get it. Know what? It dropped to RM1 the next day with even higher volume! A drop of 14 cents is not 14 cents but 12% lost in 1 day! And that is a huge lost, at least on paper.
Guess what I did? I increased my position by 25% the next day using margin at RM1.01 (borrowed money). I also kept pitching to my parents on this stock. Luckily I did not need to put a gun on their head to force them to buy. They seems to be very intelligent this time and I helped them to buy in at RM1.01. At RM1.01, the stock will give you around 14 cents dividend a year, easily beating Amanah Saham Wawasan 2020 or 3030 without taking into consideration the upside potential of the stock!!! [Picture: Nestle House]
This trade is a super no brainer. But why people sell it? If we know the reason, it makes us easier to buy in. There are many property based mutual funds that invest solely on REITs or other similar property stocks. But there are only that much REITs in our region. Maybe we have more of these mutual funds than REITs itself!
Being the big brother of REIT in Asia, AXREIT will be one of the top holdings of these mutual funds. As you know, when fear kicks in, everybody sells, especially the individual investor that knows nothing about investing. They sell their stocks, they sell their mutual funds. So people started to redeem their mutual funds and the fund managers have no choice but to sell AXREIT even at ridiculous price! They have no choice! The fund manager knows they shouldn’t sell AXRET but they have no choice! They need the cash to pay the redeemers. [Picture: Kayangan Depot]
So if you are an educated individual investor, this is where you come in to make big money. What is the risk here? The fundamental of the stock has not changed, or at least “not yet seen”. Tenants don’t move out in 1 day. Even if the tenants really move out at 20% rate, you still get fat dividends of more than 10% per year. But remember that the vacant building is only temporary because you still own the properties which can be rented out to other tenants! So what is the risk? There is almost no risk. This is another low risk high return example. To get the bigger return, take the lowest risk!
Another possible reason of this free fall is because of margin call. Because everyone assumes it is a “super safe widow stocks”, they are willing to borrow money to owns more of it. But borrowing money to buy a real properties is different than borrowing money to buy stocks because for stocks, how much you can borrow depends on the ending stock price every day. It changes everyday. No one expect it to drop below RM1.60 but when it does, it sparked a disaster to margin players. Force selling kicks in. The momentum went on and it rolled bigger and bigger until all margin players were kicked out [burned out]. [Picture: Axis Plaza]
You may be surprise that the biggest reason I buy into this stock is not because of the 12-14% dividend I want! FD rate is only 3%. If someone found a safe investment that give them 12% return, what will they do? They will automatically be tempted to buy! Sooner or later, people will rush in to buy the stock given the fundamentals don’t change much.
So when more people buy, the stock price will go up, which means the yield will drop. But when it drops to 10%, people will still be tempted to buy because it is still a good yield! Amanah Saham only gives 6% but everyone willing to queue 3 hours early morning to buy. So the yield has to drop more to some place to justify their risk appetite. Let’s say people are happy to take the risk for 8% yield, with a 14 cents annual dividend, that would need a share price of RM1.75 to justify the yield! [Picture: FCI Senai]
What I am looking for, is not the 14 cents dividend that I will get, what I am looking for, is the appreciation of the stock price from RM1.14 to RM1.75 in a short period of time!!! Because that would be 61 cents or 53% gain in short period!!! If it didn’t happen in short period, I will still get 14 cents per year as my safety net. So where is the risk? Isn’t this a no brainer if you can calm down and think without looking at the crowds? [Picture: Giant Sg Petani]
Even if individual investor are foolish, fund managers are not. The fund managers who are forced to off load the stocks earlier due to foolish individual investor redeeming the fund will start to load it up again once their redemption is under control. Because it is very obvious to them that it is a bargain. Even if the fund managers are idiots, they will still buy it if the theme of their fund is “real estate funds” because there are only that few REITs that you can buy!
Mohnish Pabrai another favorite quote is, “Heads I win. Tails I don’t lose much”. It means if you toss a coin and it is head, you win big, if it is tail, you lose just a little. It again pointed to what we want – a low risk high return investment.
The fundamentals of AXREIT didn’t worsen. It actually gets better with the increase of rental income and dividend payment! It even changed its dividend policy from half yearly to quarterly meaning that you will get paid more frequently. It is also approved to be an Islamic REITs which means more people and more funds can buy into it.
In lesson #3, I said, “Some stocks have no other way to go other than UP!”. People starts to buy and pushing up the stock price while lowering the yield. I sold everything at RM1.78 when I want to go global. That’s more than 70% return including dividends in almost a year. I sold because at that price, you no longer can expect big gains in short time, however you can still get good dividends at 8%+. The stock won’t go down much (unless another panic). It won’t go up a lot either.
What are the important lessons learned?
Lesson #6. To make big money from dividend stocks, you make it from the stock price, not the dividends! You buy a stock with fat dividend yield and sooner or later, someone will bid up the stock price while pulling down the yield to an acceptable one. [Another example which I rode too is PBBANK]
Lesson #7. Sometimes, people sell because of fear and because they have no choice (the mutual fund manager and the poor margin player), you got to take advantage of that!
Lesson #8. In order to make big money, you have to repeat what you do instead of holding your stocks forever. Once the stock price go up to a normal price and is no longer interesting, sell it and swap it with other bargain stocks and repeat the process again and AGAIN AND AGAIN!
Riding on these precious lessons that I have learned, I went full fledged into global stocks (in Hong Kong and US). There is only one possible result – good result. I’ve closed many of my trades now. I will try to share some of my closed trades to you to illustrate the lessons more clearly later. I will also teach people who want to invest globally how to do so. I hope you have learned something today.
Disclosure: Owns HAIO. Parents owns AXREIT.