Invest using a business-like approach

People who intend to invest in the equity markets must use a business-like approach to derive the best returns from their investments.

“Investors should invest in shares using the same process that they would apply if they were to buy the entire business,” said Capital Dynamics managing director Tan Teng Boo.

“They should buy or sell based on valuations.”

Citing Benjamin Graham, the founder of the value investing theory, Tan said investing was most intelligent when it was business-like.

Speaking at the inaugural investor day of icapital.biz Bhd, Tan’s presentation entitled “What is Value Investing” focused on how it was crucial for investors to be patient to reap the highest returns.

Using the analogy of buying a business concern, Tan said investors should analyse the business of a company before deciding to buy its shares.

He said they must get a general idea of the nature of the business by reading its annual reports, as well as understand the long-term economics of the business.

Quoting Warren Buffett, he said if a business was doing well, the stock eventually followed suit.

Tan

“For example, if they want to buy the shares of a newspaper, they should look at advertising revenue patterns.

“They must also look at the increasing trend of internet advertising and how these could affect newspapers,” he said.

Tan said it was also important to assess the calibre of the people managing the business.

“You should go over the financial numbers of the company, derive its intrinsic value and compare it with the market price.

“A stock is undervalued if the intrinsic value is more than the share price, overvalued if the former is lower than the share price and fairly valued when the two are equal,” he said.

He said it was also important in valuing a company to look at its free cash flow, meaning cash that was available after excluding capital expenditure and working capital requirements.

Tan said investors should buy only when the stock price was lower than the intrinsic value, adding that intrinsic value was long-term in nature.

He said value investing did not require high IQ, but patience and discipline.

“These are the two most difficult qualities. A value investor is not interested in being right temporarily, but more on a sustained manner,” he said.

Tan concluded by citing a statement from Buffett: “If you have to go through too much investigation, something is wrong.”


This article appeared in The Edge Financial Daily, August 16, 2010.