Tuesday, June 24, 2014

A value investment course that is simple to understand and simple to execute

Alvin first communicated with me after I wrote a eulogy on his late teacher (Dennis Ng). He wrote books on trading and published interviews with Singapore Trading Gurus. Today, he conducts a value investment course. It is good to be open-minded and flexible. There are many ways to make money from financial markets. Without being exposed to the different ways, it is difficult for a person to pick the best one that is suited to his temperament.

Alvin asked me if I would like to attend his course. I had always been a lone operator in investing and never attended any course except read books and paying school fees to Mr Market (I lost lots of money as a newbie and it is more beneficial to share such experiences than boast about winnings). As I preferred to remain anonymous, I refused his request but offered to review his course based on his training materials. Since I am not paid, I am free to write negative stuff, if any.

I do not know how Alvin is like as a trainer. I have never met him in person but I like his intellectual honesty.

It is inevitable to pay school fees to Mr Market along the way. A prerequisite to benefiting from the school fees is to admit your mistakes and take the blame on yourself. Don't blame unfair practices like market manipulation, insider trading, bad advice from brokers etc. Blame yourself because ultimately, the buy and sell decisions are yours to make. I was very impressed with Alvin's honesty when he revealed that he blew up SGD100k in his trading account. Potential students of his value investment course may ask ... why would I want to learn from a loser? Most of us will lose big at some point (me included) no matter how prepared. The loser has a better chance of becoming a winner in future if he is honest about it to himself and family who are affected by the loss. I have reservations in a guru of an investment course who spends more time harping on his winnings than sharing the lessons from his losses. You cannot learn much from someone who boasts about his achievements but you can learn much from someone who reflects on his past mistakes. 

I doubt Alvin's training style would be to impress, boast about past achievements to appeal to the greed of newbies who want to get rich quick. If he is which I doubt so, I apologize for writing this positive article on his course.

The CNAV strategy that will be taught in the course involves buying stocks at prices way below their conservatively estimated net asset value. Suppose you buy a company with net assets worth $100 on its balance sheet at $50. Your downside is well-protected. If the company is liquidated today, it is quite unlikely to sell below $50 because of the asset backing. In addition, given that the asset base has adequately compensated the investor for the price paid, he is getting the earning power of the company for free. The company need not be a growth stock or highly profitable as long as its operations are not burning cash. In fact, any profits will be a bonus to the investor.

A few things to note is the quality of the assets. For this kind of asset play which is probably low growth, high quality assets are those that are easy to value and hard to defraud. Cash, marketable securities, real estate fall into this category. Assets whose values are hard to estimate should be discounted heavily to be conservative. Almost 4 years ago, I wrote an article which describes a case study using a method similar to the one employed in Alvin's course.

One problem with this method is the risk of stumbling onto value traps. After all, when something is too cheap to be true, it probably is. To reduce the risk of stumbling onto minefields, Piotroski score is added as an additional screening criteria as taught in the course. A Piotroski score of at least 7 would be good enough.

Every investment strategy has its pros and cons. The problem with the CNAV method is that the stocks uncovered tend to be illiquid and few. A bad scenario will sound like this. Someone runs the CNAV screens and uncovers only 4 stocks. He puts his entire capital into these 4 stocks. Something goes wrong with 2 of them. He tries to cut his losses but the stocks are too illiquid for him to run. There are a few things to note to counter the weaknesses of this strategy. Using the CNAV strategy, does today's market generate enough stocks to provide adequate diversification? If no, the investor needs to watch his position size in each individual stock. It should not be so large that he cannot cut his losses fast enough if something goes wrong later. Fortunately, these problems are less of a concern to the small retail investor as his capital is small.

The CNAV strategy is not suitable for investors with large amounts to invest. This is bad for the big institutional investors but good for small retail investors. Because CNAV stocks are illiquid, they are not worth the attention of the big players. It is because of this neglect that they become so cheap for retail investors who do not mind the illiquidity to pick. Since CNAV is not a scalable strategy, retail investors will need to look for other strategies after they have become successful. That is a good problem to have.

What I like about this course is that it is highly focused on a single concept that is simple to understand and simple to execute. Value investing is simple to understand. What is so hard to understand about the concept of buying something worth $1 and paying $0.50 for it? What is really difficult is its execution. How do you really know it is worth $1.00? The problem gets even more complicated when the investor tries to project future earnings and cashflow. The CNAV strategy has nothing to do with the future. No projection. The investor only needs to know how to read the balance sheet to extract net asset value and apply a discount. A one day course is quite sufficient.

The course costs only SGD98. It is too cheap for the trainers to make meaningful profits. Therefore, it is quite fair that other products/services will be promoted during the course. I cannot review on this aspect because I did not attend the course.

PS: This is not a paid advertising post. Nobody knows my real identity except my wife. I like to share good financial products/services, particularly from fellow Singaporeans. Other similar posts are (Link) and (Link) and (Link)