This article by Goh Tee Leng (left) was recently posted on ValueEdge and is republished with permission
LOOKING BACK at my past investments, I realise that for companies to realise their full potential, it usually takes 4 to 5 years. In today’s article, I will write about my investment thesis at the point of investing in 3 companies and where I went wrong.
» Singapore Post:
This was the very first stock I bought and it was solely based on my wanting a stable stock which would pay dividends year after year.
Subsequently, given how the slow-mail business was dying, SingPost's earnings started to decline, resulting in a fall in the share price to a low SGD0.80. While the company still consistently paid dividends, I decided that with a spike in price, it was my cue to exit this stock.
I remembered reading many reviews that there was too much optimism in the market especially for a business that was dying.
Looking at it now, who would have anticipated that Singapore Post would do a joint venture with Alibaba, reviving what most thought was a ‘dying’ business. Looking at all the past DCF models analysts created, there was no way anyone could have expected this move.
» Comfort Delgro Corporation:
SBS Transit is expected to divest S$1.2 billion of assets in 2016 to the government. NextInsight file photoI felt that with the company controlling more than 50% of the fleet of taxis in Singapore and trading at much lower multiples than SMRT, it was definitely a good stock.
Furthermore, Comfort Delgro offered overseas exposure, something that SMRT was unable to. When the share price hit a low SGD2.00, I ran through my numbers again. Although, based on a fair FCF yield, I estimated the fair price to be approximately SGD2.50, I reasoned that I was expecting too much from the company and it seems to have plateaued.
Looking at it now, who would have anticipated the Government’s move to overhaul the bus industry by restructuring it to a ‘government contracting model’ to encourage greater competition and to ease operators’ capital expenses.
Previously, Comfort Delgro’s 75%-owned SBS Transit had reported losses in its bus business due to the high cost of operations.
» QAF Ltd:
With QAF, it was one of my first forays using a Graham-method of buying stocks below NAV.
With a NAV of approximately SGD1.00, I felt that at SGD0.70, the stock offered a sufficient margin of safety.
Furthermore, with its simple business of selling bread – Gardenia & Sunshine -- I felt it was definitely a classic Graham stock to buy. However, what led me to sell the stock was probably behavioural bias as I saw the company suffering a few quarters of negative FCF. Looking at it now, the company has hit my initial target price of SGD1.00.
While I did make a profit from all these 3 investments, I realise I could’ve done much better if I had waited longer with a timeframe of 4 to 5 years. Take the case of Singapore Post -- what we all thought was a dying business managed to turn itself around through the joint venture with Alibaba. Perhaps even with QAF, after a few quarters of negative FCF, it still managed to revert back to normalised levels.
The point I’m driving at is that with these long-standing businesses, there is no point trying to forecast where they may be 10 years down the road. Our main aim should just be to identify companies that are cash-rich with minimal debt, have a long company history and offering a decent margin of safety. Having taken care of our downside, our outperformance would come over time.
To end it off, I would like to share some research findings by Fidelity. The company did a study of their investors’ accounts to find out who were the best performers and their strategy in outperforming the markets.
What they realised was that the accounts that did the best belonged to investors who had already passed away. Next were investors who had forgotten that they had an account with Fidelity.
From this we can see that investing is simple, but not easy. The secret to getting such outperformance seems to be just doing nothing. How many of us really have the willpower and patience to do nothing for 4 to 5 years?
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