This article first appeared in Personal Wealth, The Edge Malaysia Weekly on March 23, 2020 - March 29, 2020
Chong Kaw Choi, a certified financial planner, dove deep into the world of stock investing rather late in life, at the age of 47. But that has not stopped him from imparting his knowledge on value investing and lessons learnt via online articles over the past nine years.
In fact, now at 65, he shows no signs of slowing down. In January, he published his first book, Invest like a Stock Market Guru: The Complete Value Investing Guide that Works.
“Years ago, many investors asked about my views on some stocks and I would give them my answers on [stock investment portal] I3investor. I was already 57 years old and retired at the time, but I was passionate about sharing my knowledge,” says the author known as KC Chong.
Chong, a former civil engineer who holds a master’s degree in finance, has shared online several model investment portfolios built on the concept of value investing. These portfolios outperformed the FBM KLCI from 2013 to 2017 and netizens were impressed.
One of the portfolios, titled Investing in Bursa for Five Years, generated a return of 146% by investing in 10 companies. This compared with the benchmark index’s return of 20% over the five-year period.
Another portfolio, which Chong named 2013 2H Stock Pick Challenge, was up 175% versus the FBM KLCI’s 10% over the same period. He continues to hold some of these stocks today.
Chong’s investing track record has seen him gain some fame online and attract a following. Last year, he began thinking about writing a book that would include articles he had shared online as well as some chapters on other topics. This idea was well received by some of his friends, including Fong Siling (also known as Cold Eye), a value investor who is widely known among the Chinese-speaking community, and Ang Kok Heng, chief investment officer at Phillip Capital Management Sdn Bhd.
With their encouragement and other positive responses he received, Chong decided to go ahead and write the book. It was published by AcePremier.com Sdn Bhd, a digital, print and social media company. Some 2,000 copies of the book were printed, of which 1,100 had been pre-ordered by his online followers. The books are also sold at various bookstores.
The book is divided into seven sections. Chong starts by explaining the concept of personal finance and the various investment options available to the public. The other topics include the Malaysian equity market and the mindset people should adopt before they start investing in stocks.
The book also touches on the concept of value investing and things investors should look at when reading the annual reports and financial statements of public-listed companies. It explains the various financial ratios investors can look at when evaluating a company as well as the discounted cash flow model, widely used by stock analysts to determine the current value of a company.
“I hope the book can help my followers and other retail investors become better investors,” says Chong.
Chong grew up in a Chinese new village (settlements created by the British during the Malayan Emergency) in Bentong, Pahang. His parents were rubber tappers.
“Just like many others of my generation, my parents were poor and worked hard to earn a living. They had many children and could not attend to us most of the time. Sometimes, we had to help our parents at work,” says Chong.
He was fortunate to be able to graduate with a degree in civil engineering from the University of Malaya. But he clearly recalls that he could have lost the opportunity to further his education when he was 12 years old.
“I remember sitting with my father when I was in Standard Six and he looked at me and said, ‘Ah Choi, do not study anymore [as I do not have the money to send you to school]. Help me tap rubber.’ Luckily, I received a scholarship to study in secondary school. Later, I received another scholarship to study in university,” says Chong.
After graduating, he joined the Department of Drainage and Irrigation in 1983 before working as an engineer at Pilecon Engineering Bhd, the first local public-listed construction company. He began dabbling in the stock market when he was still a government servant. But he was more a speculator rather than an investor.
“Many of my colleagues were talking about stocks and some of my seniors were quite successful in investing. However, I did not follow in their footsteps by doing fundamental research. I listened to rumours, tips from remisiers and the advice of some investment magazines. Because of that, I lost money,” says Chong.
He remembers well the collapse of Pan-Electric Industries Ltd. The Singapore-based marine salvage, hotel and property group, with 71 subsidiaries under its umbrella, went under due to its huge debts. It owed 35 banks a total of S$453 million and had S$160 million worth of unfulfilled forward contracts.
“People told me that it was a good company and market players were going to chao (speculate in Chinese). I bought the shares straightaway. Two days later, the counter was suspended and I lost all my money,” says Chong.
He continued to speculate on stocks. Sometimes, he earned some money, but would end up losing more later on. It was fortunate that he only invested money he could afford to lose and the wild swings in the market did not affect his daily life.
“Do not buy stocks purely based on tips, rumours and recommendations is one of the earliest lessons I learnt,” says Chong.
Don’t rely too much on investment professionals
Chong eventually rose to country head at Pilecon Pte Ltd in Singapore and lived in the city state for a decade. During this time, he earned a much better income and allowed private bankers to manage a large portion of his savings. Only a small portion was invested in the Malaysian stock market.
Chong thought that his savings would be well taken care of and it would grow at a satisfactory rate over time. Unfortunately, it did not.
“I had a private banker who invested for me back then. I put about S$100,000 with the bank and received a statement every month telling me about the investments it had made for me. It usually specified which equity and bond funds my money was invested in,” says Chong.
“I did not realise at the time that the names of the funds shown on the statement kept changing. They changed the funds every month, even the bond funds that were supposed to be long-term investments. It was unreasonable and I lost some money because of that. However, I knew nothing back then and was too busy to look deeper into it.”
It was only later that he learnt the term “churning”, which he refers to as unit trust agents who frequently buy and sell funds for clients to earn commissions.
During this period, a banker approached Chong and asked him to invest his retirement savings elsewhere. “They asked me to sign some documents that would allow them to invest my retirement funds. So, I did. But those funds underperformed very badly. Yet, I did not pull my money out of these funds,” he says.
These incidents taught Chong the importance of knowledge. Many individuals and retail investors do not need to research and understand the market and stocks the way analysts or fund managers do. But they need to at least understand the basics of investing and have the ability to evaluate the person taking care of their money.
He also says investors should not make any investment decisions solely based on the advice or recommendations of investment professionals. “That is because everybody has self-interest, including investment analysts. They can be very well educated and very good at analysing, but they also have their own agenda. You should have some knowledge and do your own research.”
Transitioning into a value investor
In 2002, Chong quit his job at Pilecon and became a consultant for two years before migrating to New Zealand with his wife and three children. His main reason was the lower cost of education in the country.
“I have three children and education there is practically free. I hardly paid a cent for their education as they received student allowances and loans. Sometimes, they worked part-time while studying. I may not have been good at investments back then, but I was cost conscious,” says Chong.
Despite previously holding positions such as country head and consultant, he decided to take on the role of construction supervisor in New Zealand as he could not find a civil engineering job in the country. Some friends laughed at him, but he did not mind.
“In New Zealand, it is an egalitarian society and people do not really care what your job is as long as you do not steal, rob or do bad things. My wife worked in a supermarket at the time. I did not have any ego issues,” says Chong.
Apart from playing golf on weekends, Chong used this period to read books on value investing and even went back to university to learn about investing. “I read books by Peter Lynch [one of the most successful investors in the US] and Warren Buffett. I also like the books of Howard Mark (director and co-chairman of Oaktree Capital Management, the largest investor of distressed securities in the world). He does not tell you how to make money, but how to take care of risk and look at market cycles. I also read the books of Seth Klarman (an American billionaire investor and hedge fund manager), who is very successful.
“However, the two people I follow most in the investment community are business valuation expert Aswath Damodaran and Joel Greenblatt, who developed the magic formula investing technique.
“I obtained a diploma in financial planning and master’s degree in finance by paying a small fee there. That was how I learnt technical knowledge such as financial analysis, valuations and option pricing,” he says.
Chong returned to Malaysia in 2007 and worked as a financial planner. The following year, he started investing in the local stock market using value investing principles. He eventually built a reputation and track record and started sharing his knowledge on I3investor.
Today, Chong is happy with the results he has achieved as an investor. However, he agrees that he embarked on the value investing journey a little too late. “It is too late for me to achieve something bigger in investing, like becoming a successful fund manager. I do not have the time anymore. Also, being a fund manager is very stressful. I am retired and want to enjoy life,” he says.
“Having said that, I am doing fine. I will not have any problem sustaining my lifestyle until I die. Going forward, I want to put my efforts into [investor] education, probably through publishing more books.”
He adds that he is still a citizen of Malaysia and a permanent resident of New Zealand. “After spending many years in New Zealand, I now spend quite some time in Malaysia too. There are good things in both countries that I do not want to give up.”
One man’s investment philosophy and approach
Chong Kaw Choi, author of Invest like a Stock Market Guru: The Complete Value Investing Guide that Works, says investing is an art, not a science. An investor can use many ways and mathematical formulas to determine the value of a company, but there is no golden rule to it.
Like other value investors, Chong likes companies with an established profit track record, healthy cash flow and low debt. These companies also need to sell fast-moving consumer products and have a strong brand name in the market they are operating in. Carlsberg Brewery Malaysia Bhd is a stock that fulfils these requirements.
“I like the fact that its product is fast moving. You drink a pint of beer now and order a new pint next. It is not like buying a car and using it for 10 years before you buy another one. To me, this is an excellent business,” he says.
Companies that Chong avoids include counters that are often mentioned when people are giving tips or names associated with a lot of rumours swirling in the market. “If those stocks are good, why do people have to push them to you and not buy them quietly themselves so they can continue buying them cheap?” he asks
Red chips, which are Chinese companies listed on the local stock exchange, is another category he does not like. “Most, if not all, of their financial accounts cannot be trusted,” says Chong.
He also avoids companies with a lot of questionable related party transactions as well as high-growth companies whose return on capital is lower than its cost of capital. “Companies in the latter group tend to go bankrupt,” he says.
Companies with persistently poor cash flows and often without any free cash flows also end up on Chong’s blacklist.
He emphasises two financial ratios when it comes to evaluating companies. The first is return on capital, which measures the profitability of a company in relation to the amount of capital invested by shareholders and debtholders. “This is important because the company must earn more than its cost of capital,” he points out.
Chong also likes to value a company by comparing its earnings against its enterprise value (market capitalisation plus debt minus total cash), instead of using the price-earnings ratio (share price divided by earnings per share). That is because enterprise value considers the total capital injected into a company, including debt, while the price-earnings ratio only looks at the market capitalisation of a company and its net earnings.
“The price-earnings ratio of a company may look good, but a valuation based on enterprise value [when all its capital is taken into consideration] may be expensive. With high gearing, it could be very risky when an economic crisis hits,” he says.
Save by subscribing to us for your print and/or digital copy.