How To Make 20% Compounded Return By Yourself Without Being a Guru? Your Complete "Do It Yourself" Investment Game Plan.
Apr 11th, 2008 by AhYap
After reading 20+ books on stock investing, I still don’t know how to analyst a company! And to finish reading those books, it took me a whole year. So many books, so much time, yet so little gained.
Everything that I have learned can be summarized into 1 sentence, “Buy wonderful businesses at discounted price.” That’s the whole strategy of value investing. That’s what those books trying to tell me.
The biggest gain from reading those books is actually to realize that it is impossible to do it myself. It is impossible for me to read 10 years annual reports for just a single company to find out if it is a wonderful business. It is very boring for me to dig deep into the income statements and balance sheets to calculate the intrinsic value of the company so I can figure out if it is selling at a discount.
The problem is not that we don’t spend enough time and effort on it! The problem is that investing is an art and not an exact science. The sentence, “Buy wonderful businesses at discounted price” make a lot of sense, but implementing it is a very very tough job. It is like you also know your should not get angry easily but you rant all the time when are you inside your car and press your car horn just because the car in front didn’t move after 0.01 second after the light goes green. You know it, but it is hard to be done. You also know that you should exercise more to get healthy but when it is time to go exercise, you say “tomorrow lar, today very tired”. You know it, but it is hard to be done.
What are wonderful businesses? What price is undervalue and what price is overvalue?
I don’t mind spending time reading 10 annual reports for a company if after that I can figure out if it is a wonderful business. I also don’t mind spending 10 hours reading all income statements and balance sheet if I can figure out its intrinsic value.
But it didn’t work like that! After reading 10 annual reports doesn’t mean you will know if it is wonderful. Spending 10 hours to get an ‘intrinsic value’ doesn’t mean it is an accurate one and you can make money from it! There is no guarantee that the effort and time you put in will give you the results you want, because deciding whether a company is wonderful and finding its intrinsic value is an ART and not a SCIENCE!
10 different guys reading the same 10 annual reports can come out with 10 totally different conclusions on whether it is a good company or a bad company. 100 different guys trying to calculate its intrinsic value and they can get 100 different answers. There is no exact answer! You will only know who is right and wrong after years has passed and the future performance of the company and its stock price becomes history.
The best you can do about the future is to predict it. Prediction is an art!
I love money. But I am not really passionate about stocks. I just love its compounding power, but I feel boring reading annual reports and income statements. It is simply not my cup of tea! I have a lot of other interests, passions and hobbies. I am interested in learning and doing a lot of things but I really don’t want to be an investing guru (or a politician)! I am passionate about heath, I am passionate about my spiritual practice, I am passionate on talking cock, but I am not really passionate on picking stocks!
If you look at all investor gurus, there are very passionate in investing. They spend their entire life in investing, although they say they are long term investor and they can buy a stock and hold it for 10 years without looking at it, they NEVER DO THAT! They still look at the stock market everyday, they just don’t buy and sell everyday, but they still look and still do a lot buy and sell within a year! Because it is their passion, their life. They can’t live without looking at stocks. Also, it is their job and career because they make money by investing for others.
But it is definitely not my passion. It is also not my job and my career. I feel stressed with stock. The less I look at it, the more happy I am. So, why spend so much time on it? But I realized that the best way to compound my money is to use stocks! So what should I do?
“To be happy, you need to find someone who loves to do what you hate to do, and can do it a lot better than you.”
This is the key concept of this post, and the key strategy of how I compound my money, how I do my stock investing.
Instead of going to research and pick my own stocks, I actually went to research and pick my own fund managers! I want to find someone that is good at doing what I hate to do!
4 of my favorite investors are Warren Buffet, Mohnish Pabrai, Peter Lynch and Tan Teng Boo. Every value investor loves Warren Buffet. He is the richest man in the world now after compounding for 50 years!
I like Mohnish Pabrai because he has proved that low risk high return value investing works! He started his investing business in 1999 which is quickly followed by the dot com bubble. And yet, not only that he is not affected by the market downfall but he actually deliver an outstanding performance where he manage to obtain 28% compounded return until today! If you study him and look at his strategy, he is so conservative with his investment, making his invertors able to sleep soundly at night.
The chart below shows the severity of the dot com bubble where the NASDAQ Stock Market has plunged sharply from the peak of 5,000 points in the end of 1999 to only 1,100 points in the end of 2002! That means if you have $5,000 at the peak, you are left with $1,100 after ‘negative compounding’ for 3 years. And yet, Mohnish Pabrai, a strict value investor, made 28% compounded return from 1999 until today!
Peter Lynch is the best mutual fund manager in the world. Yep, I condemn mutual fund a lot but Peter Lynch is actually one of the very rare distinct fund manager out there. While owning lots of stocks in his mutual fund, he achieved an outstanding 29.2% compounded return for 13 years! What he did is simple, “Buying wonderful businesses at discounted price”. But different than other gurus, he made it by buying hundreds of wonderful businesses. For comparison, Warren Buffet, the richest investor and richest man in the world, only owns around 60 stocks.
You should have heard of Tan Teng Boo if you have read about my ICAP post. He is one of the best brains in Malaysia which luckily our lousy government haven’t exported to Singapore. I have seen him spoke a few times. The first time is already 4 years ago when I attended a seminar organized by him. When it comes to money, you won’t be confidence with a person by just someone ‘recommend’ him to you, like what I am doing right now. You must listen to him speak yourself. Listen to how he answers the questions throw to him. There are many videos of his interview in his website here. Watch yourself.
I decided not to invest with Warren Buffet’s Berkshire Harthaway because I know it is very hard to invest billions of cash and get spectacular returns. Warren Buffets has been compounding his money for 50 years until he becomes the richest man in the world, how big more can he be?
I like Mohnish Pabrai. But to invest with him you need $2 million USD. “*_* So you know why I didn’t invest with him.
I like Peter Lynch. But he is retired now.
There are just too many reasons why Tan Teng Boo is the best person for me to outsource my investing. The man that loves what I hate to do and can even do it better than me! I found my ‘slave’! [I think investing is painful so doing investing job everyday look like a salve to me, but he enjoys it, so let him be. keke]
1. He is so near. A Malaysian who just live in KL. A real person that you can touch (hand & shoulder only, not butt). A real person that you can see with your own eyes (not TV or picture only). Someone who also know who is Adbullah Badawi and Hishammuddin.
2. He has a newsletter published weekly so you know what he thinks every week. And his newsletter has several paper portfolio where you can mimic his buy and sells!
3. He is the fund manager of the only closed-end fund listed in KLSE! You can let him invest for you as low as RM2.17 per share right now! [not USD 2 million]
So why do it yourself when someone can do it better for you?
I prefer to have more time myself doing things I like.
I buy my first batch of ICAP in February 2007 at RM1.54. At that time I have only read a few books on investing (not 20 yet), confidence on value investing is still very very weak. And I am also doubtful to Tan Teng Boo. Within 2 weeks, the whole market suddenly crashed when the Shanghai market fell 9% in 1 day. Being one of the panic chicken, I sold it for RM1.48 and lost money! I started scolding Tan Teng Boo as a cibai. Look at the ICAP chart below, you will see a sharp fall end of February 2007.
I can say all value investing books will have this quote by Warren Buffet.
“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
Somehow, I remembered that later. And I actually started to buy back ICAP after the crash. I buy gradually for the next few months. In June, I become very confident and sold all my mutual funds and convert all proceeds to ICAP. The highest price I ever pay for ICAP is RM1.70. My averaged purchase price is RM1.55. I hold just 1 single stock and nothing else for a long time. No mutual funds, no blue chips, no Amanah Saham Wawasan 2020.
Lets look at 2 of the mutual funds I sold in June (I also sold my ASW2020 to my father, haha).
ING Global Real Estate Fund – Bought this in September 2006 after I failed to buy any ASW2020 after queuing for 2 hours at Maybank. So I immediately walk to Hong Leong bank to buy this fund. Bought price is RM0.5103. Today’s price RM0.3999. Investment return based on NAV if I hold it until today is -22%! But because it does pay dividends all the time, the return will be slightly better but I take note that I need to pay around 5% commission when I buy. So does buy and hold really works? Do mutual funds work?
Public Global Select Fund – Bought this on its launching period in September 2006 too. Commission is 6% with 1% free units, so net commission is 5%. Look at the chart below, it is -8% since inception and if I am still holding it until today for 18 months, my return will be -13% (8% + 5% commission). They even perform poorer that the market (red line)! What is the need to pay 6% commission and 1.5% annual management fee to the fund companies when they can’t even do better than the overall market?
Luckily I didn’t hold any mutual funds anymore. Because another important thing that I have learned from reading those investment books is -
“Mutual Funds Sucks!”
Repeat after me, “Mutual Funds Sucks!”. Again, “Mutual Funds Sucks!”. Good.
Most mutual funds can’t do any better than the market because each fund owns too many stocks. If you own too many stocks, you become the market, and your performance will be more or less the same as the market. [Peter Lynch is only the rare person able to do it, even Warren Buffett says he don't understand how Peter Lynch able to do it!]
Worst, you need to pay those fund managers, those sales agents and the old man of Public Bank that you always see in newspaper (the founder) 6% commissions when you buy even before the make you any money and 1.5% management fee annually even if they lose money! Now you know why they like to launch new funds (6% commission) and give you reward points to exchange for free gifts if you stick (1.5% management fee).
Just open up your newspaper to the mutual funds quote page, there are thousands of funds there! Even there are some good funds available, what strategy can you use to pick the right fund? Picking the correct fund to buy is as difficult as picking the correct stock to buy.
My challenge question to these fund managers and the public bank old man who claims his mutual fund won so many awards is this, “Why do you need to have so many funds for us to choose if what we want is simply the highest return and the lowest risk? If you are so good, isn’t that 1 fund is all you need to provide to us?”
How do you expect ordinary investors to pick the correct mutual funds from thousand of mutual funds? If you have RM30,000 and you buy 3 different mutual funds with RM10,000 each, and each mutual funds owns 50 different stocks, your RM30,000 is then indirectly invested into 150 different stocks. That means you invest RM200 each in 150 stocks. How do you expect to make good returns from that? If you want 20% return, your 150 stocks will need to averaged 20% return! Will you be so lucky to happens to have 150 good stocks in 3 mutual funds?
In KLSE with 1,500 stocks available, is it easier to pick 10 good stocks or to pick 150 good stocks? In a school with 1,000 students, is it easier to pick 10 good students or 150 good students? In Jaya Jusco, is it easier to buy 10 good watermelons or 150 good watermelons? Stop here and think.
If you have mutual funds right now, look at the performance, does it sound familiar with what I have just said? Are you suffering? Are you disappointed? Do you feel cheated by the mutual funds agent? A good salesman is good at selling, but not good at making you money.
Even if you own stocks, how is your stock performance lately? What is your performance in the last 12 months? Happy or sad? You know the truth.
Stock market is tumbling for the last few months. Almost all major markets in the whole world has fallen more than 20% from their peak. Many individual stocks and mutual funds has fall more than that.
Is that a good news or a bad news? I mean, is the crash a good news or a bad news? Before that let’s look at my ICAP performance.
It closed at RM2.17 yesterday. It has an NAV of RM1.95 (9th April). Based on my average buy price of RM1.55 and yesterday closing price, my return is 40%. If say I can only sell at NAV (the Net Asset Value of the fund) my return is 25.8%. The 22 cents differences of the market price with the NAV is the premium the current buyers willing to pay for the fund.
The highest price I pay for ICAP is RM1.70, the price where I converted my mutual funds to ICAP. If I used that price to calculate my return, it will be 27.6% at market and 15% at NAV.
Surprise, surprise. The money I put bring out from the mutual funds increase 15%, but if I kept them in the same mutual funds, not only that it lost money, it actually even go lower then my buy price 18 months ago in September 2006! What a shock!
Why? Mengapa? Wei Shen Me?
Because “Mutual Funds Sucks!”
That’s the reason why I don’t feel comfortable talking about my investment with other people right now because most people are ranting and complaining about their investment, whether they buy stocks or they buy mutual funds. They are very upset with the current stock market. I don’t think they will feel any better if they find out about my performance.
AhBeng, “Diu lor, the market is very fucked up lar. I lost a lot of money edi. All the money made last time also gone back liao. Eh, how your investing doing ar?”
AhYap, “Hmmm… Hooommm… Errrr… very bad also lar, 25% only lor …”
I am not bragging here. I want you to learn something here, this is what AhYap’s Blog is all about. I want you to do good with your investing too. I mentioned in my ICAP post that you might be late to the boat. But I think the boat is back now! At the price around RM2.20, I am confident that it can beat 95% of all mutual funds you can choose from the newspaper quote page for the next 10 years. And you can easily beat Amanah Saham Wawasan 2020 by a big margin at this price.
With 1 exception (don’t say I didn’t tell you in advance!) – as long as Tan Teng Boo didn’t visit heaven (or hell) in the next 10 years.
Re-quote Warren Buffet.
“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
Read the newspaper, listen to the news, everyone is damn fearful right now. A lot of people sold their mutual funds and stocks sitting in cash waiting for the sky to get clearer. But gurus like Warren Buffet, Eddie Lampert and Tan Teng Boo are getting greedy and greedier. Once the sky get clear, all this chickens that have a lot of cash will start to pile them back to the stock market pushing the stocks higher and Higher and HIGHER, letting people like Warren Buffet and Tan Teng Boo can’t stop laughing even when attending someone’s funeral.
I read Tan Teng Boo newsletter, he is really very greedy right now. And he is very optimistic about the future of the stock market. I don’t have balls to trust myself when it comes to investing but I can trust this guy because he really did 27% compounded return for the last 10 years with real money for his clients! And 2 of his paper portfolio available to his newsletter subscribers did 22% compounded return (17 years!) and 16% (14 years!). Do I really have the right to brag just because I’ve read merely 20 investing books. Comparing myself with his 30 years experience in stocks investing and his portfolio performance results for so many years, I am still sucking milk bottles.
Why do I need to reinvent the wheel? Why should I do the hard work myself? If someone already got the wheel! If someone can do it better than me!
I can actually sleep while holding ICAP but I can’t sleep if I hold my own stock picks! I don’t think I have the skill to pick individual stocks. But I do have the ability to pick the correct fund manager. And that is more than enough for me for the next 20 years (hopefully he can live longer than that, he is 52 now. Don’t eat too many fast food lar old man.)
You don’t need the knowledge to build a nuclear bomb to make good investment returns. As long as you accept the fact that it is hard to pick the correct stocks and mutual funds yourself but it is easier to pick a correct fund manager. Once you got one, that is all you need.
Some strategies to make good investment for the next 20 years
1. Buy ICAP, but make sure you don’t pay too much premium on it. Read my long ICAP post to learn more about it.
2. Subscribe to Tan Teng Boo newsletter and follow his buys and sells in his paper portfolio. He is quite active recently with the market crash, buying stocks like PIE and PADINI in his paper portfolio. Note that his best portfolio, known as Section C is only available to those who subscribe to the paper version (paper version is more expensive than online version).
A best news is that he just started a global portfolio that invest outside Malaysia, giving him more choices of stocks to choose form, which means he can find more good stocks to buy and at the same time reduce a lot of risk because it don’t rely on just Malaysia and the KLSE. [Election results can also affect stock market!]
The global paper portfolio is available with the RM199 online version of his newsletter and this is actually the strategy that I recommend those reading my post on how to become a multi millionaire in 25 years to use! Actually buying international stocks is more easy than you buy a Malaysian stock! And so much cheaper! You just need a brokerage account with Interactive Brokers! Minimum to open an account is USD10,000.
3. If you are rich, buy his new global fund, but minimum investment is USD$200,000! “*_* [Najib can buy since he got RM530 million commissions after buying 2 submarines for RM4,600 million for Malaysia to 'improve' our county security]
4. Mimic ICAP! This, along with #2, is what I have been doing last few months after I sold some of my ICAP to those sohai(s) who give me such a high premium over the NAV. ICAP latest holdings according to 2007 annual report (12 stocks) are F&N, Integra, LionDiv, Mieco (Tan’s loser), Padini, PetDag, PohKong, PIE, Tongher, UMCCA, UMW and VADS. In 2007 annual general meeting, he revealed that ICAP has also bought in SweeJoo, BStead and Suria.
Based on his paper portfolios, his company reviews and my guesswork, he has sold LionDiv after it spin off Parkson, sold UMCCA, UMW and some or all of PetDag. And buy in TM and load up a lot of PIE and Padini.
5. You can even mimic his global fund! He will publish his quarterly report of his global fund in his website. It does come out a bit late but at least you know what he is buying.
6. This is a coming strategy. Tan is launching a new global fund in Australia that require less minimum investment amount (AUD50,000 = RM150,000). Actually there are 2 opportunities here. One is to buy the fund. Two is to buy ICAP at that time! WTF, what a weird idea is this. That is because some of ICAP current shareholders will want to buy the the new fund and they will sell at market to get cash. They will create a surge of supply and thus pushed ICAP shares down.
The availability of so many strategies to ride along with Tan Teng Boo is also one of the reason why I pick him over many other gurus. Most gurus are not so transparent with their buy and sells, making it very hard to mimic them. And somehow, I feel more proud to use our own Made in Malaysia products.
A bit more about ICAP.
Q1: Wah! ICAP rise so much already, 2 ringgit already, so expensive, still can buy meh?
Q2: Wah! ICAP is falling wor, I think it will fall more. I will wait and see.
People who have excuse have excuses for all situations. When a stock goes up, they say it goes up already so they are late, can’t buy. When the stock fall, they say it is falling so better ‘wait’ for it to go ‘up’ first. Is that you?
Read my post on Understanding PE Ratio if you have not done so yet. It explain to you why a stock that have gone up in price doesn’t mean it is expensive and a stock that have gone down in price doesn’t mean it is cheap!
Since there are lots of activities in ICAP lately where Tan has sold of the counters to realize the profit and then buy some new counters. ICAP today is quite ‘fresh’ to make good returns for the future. For example, he sold stocks like UMCCA and UMW and buy TM and loaded up more of PADINI and PIE. And these new buys have yet to perform. Furthermore, ICAP largest holdings Parkson has corrected from over RM10 to RM6.50 and Parkson has just started buying back their own shares last week! PIE is proposing to pay his shareholders 36 cents of dividend, a yield of more than 6%. VADS, BStead and Suria is also paying out fat dividends soon.TM is going to split into a new TM and TM international end of this month.
Now, it is a really good time to load up ICAP!**
** (Borrowed from Public Mutual) INVESTORS SHOULD RELY ON THEIR OWN EVALUATION TO ASSESS THE MERITS AND RISKS OF THE INVESTMENT. IN CONSIDERING THE INVESTMENT, INVESTORS WHO ARE IN DOUBT AS TO THE ACTION TO BE TAKEN SHOULD CONSULT THEIR PROFESSIONAL ADVISERS IMMEDIATELY.
Disclosure of Interest: AhYap is a proud share owner of ICAP.
Dear Uncle Tan,
When do you spend me drink tea for promoting your products for free?
p/s Can borrow me your Lotus race car ar? Haha.