Most value investors are bottom-up investors. However, there are inherent limitations to the bottom-up approach. For starters, it is difficult to find “green shoots” and truly undervalued stocks because there are many other investors doing the same. The stocks that appear “undervalued” are likely because they have reasons to be so, such as questionable management and lack of trust. And given that much of the filtering process — the fundamental analysis of cash flow, earnings, dividends and balance sheets — is necessarily based on past performances, it misses new discoveries, innovations, technological applications and other significant changes that will have sustained effects on future earnings … and, therefore, future stock values. In other words, the bottom-up approach to value investing is backward-looking rather than forward-looking.
The Edge and Asia Analytica have embraced the use of GenAI in our workflow. For instance, the images we have included in our last few articles were created with the help of ChatGPT. The aim is to give readers a quick visual representation and summary of the subject of the article. AskEdge (a newly-launched feature by The Edge) is designed to help investors get a better grasp of the financials of companies they invest in — all the specially customised charts, tables and explanations in simple English as well as peer comparisons are available on demand, with just a few clicks of a button. More GenAI-powered features are in the pipeline. Our overarching objectives are: (i) the use of GenAI has made us more efficient and productive; and (ii) our readers gain more value, information and a better understanding, which is important as time is the most precious resource.
Over the past two weeks, we have explained some of our core investing philosophy, and how they are applied to our stock-picking process for the Malaysian Portfolio and global Absolute Returns Portfolio. To briefly recap, the basic tenet of value investing is buying stocks that are undervalued by the market relative to their intrinsic worth, on the expectations that prices will eventually reflect their fundamental worth. One typically starts by sieving the universe of stocks using a range of filters (for example, valuation metrics such as price-earnings, price-to-book, dividend yields and gearing) and/or algorithms. This is then followed by a thorough fundamental analysis of the financial statements for the short-listed companies; that is, sales, margins, profits, cash flow, assets and liabilities plus a qualitative assessment of management capability, integrity, corporate governance as well as growth prospects and so on. In a nutshell, value investing involves the rational analysis of the trade-off between risks and potential returns (the difference between the prevailing stock price and its expected intrinsic worth).
