SINGAPORE (Dec 18): Avid followers of this column would recall I talked about starting a portfolio of global stocks several weeks back. I’m pleased to say that it’s coming close to fruition.
This week, I’m going to broadly outline our stock selection methodology. Next week, I will unveil my global portfolio. I have to say, this exercise has given us some interesting names, some that quite frankly I’ve never heard of, some I had expected and yet others that I thought were good options but ultimately failed to meet our -value-investing criteria.
We started the Value Investing portfolio three years ago for Malaysia-listed companies on Bursa, with the aim of helping the man in the street make better investing decisions. Investing in equities is, by far, still one of the best means of building wealth over the longer term. We want to prove that you can be your own fund manager, successfully and with minimal costs.
That is still our objective. The key difference with a portfolio of global stocks is that we will have the same level of knowledge as you do. There will be no meeting with management or special insights into companies beyond what is publicly available. Our focus will be on data analytics and filters, a dash of common sense and discipline. Plus our judgement, instinct, background knowledge and so on.
Note that this is not robo-investing, driven purely by algorithms based on past data. I believe robo-investing is unlikely to beat the market and I will write and explain why in the future.
Trying to beat the global index will be far more challenging than what we did for the Malaysian stock market, where we outperformed by some 80% since we started three years ago. But it will be interesting and enlightening. And I hope profitable. I hope you will enjoy the ride, sharing this journey, and I welcome all comments, suggestions, views and criticisms.
With a global portfolio, we can offer you more choices when deciding on how to balance returns and risks, whether to go for growth or to be defensive. There will be greater diversification, in terms of economies, currencies and their correlations. Plus, each market will have its own strengths in terms of the industries and types of businesses you can invest in.
Investing in global stocks has never been easier or more accessible to the average person, through the numerous online trading platforms.
As with the Value Investing portfolio, the global portfolio will be based on fundamentals. As I’ve mentioned before, a diversified portfolio of stocks based on fundamentals can achieve better returns on lower risks due to their low covariances.
Let’s go back to the methodology. We started with filtering out companies that reported positive growth in sales and operating profit (Ebitda) as well as margins over a reasonable period of time, in our case from 2011. Those that made losses during this period were excluded. Then, we narrowed the selection by how quickly these companies had grown their profitability.
We also assessed the quality of growth by assigning a simple scoring system — each positive y-o-y growth gets one point. Naturally, the more points, the better. This works to weed out companies with excessively volatile or lumpy earnings.
To get a sense of valuations, enterprise value-to-Ebitda is used instead of the more popular price-to-earnings multiple. The reason -being, enterprise value accounts for a company’s net debt or cash position and does not penalise companies that reinvest heavily.
What we’ve outlined above are simple quantitative filters that can be easily replicated using publicly available information. They are similar to the Fundamental and Valuation scores calculated by AbsolutelyStocks (currently available for all Malaysia and Singapore-listed stocks) that are aimed at helping you quickly assess the fundamental strength of a company and its prevailing valuations. In essence, we hope to underscore the fact that investing is not as daunting as one would think, even for the man in the street.
Unlike most other analysts, our methodology also considers the relationships between valuations and liquidity, leverage and volatility.
But investing is not a “black box”. Data-analytics is not a silver bullet. Therefore, we take into account a host of qualitative factors, the story, if you will.
I believe that the human element is and will remain an important part of investing.
Lastly, this global portfolio too will be a “real” portfolio. I’ve opened a trading account with UOB Kay Hian in Singapore. As with the Value Investing portfolio, we want to be fully transparent. We will update the global portfolio in this column every week and benchmark our performance against the MSCI World Net Return Index in US dollar terms.
While I will measure my portfolio’s returns relative to its benchmark, my ultimate objective is to achieve absolute profits of 10% annually over the long run in US dollar terms. After all, value investing is all about making absolute and not relative returns.
In January 2018, we will provide the analysis for why we chose these companies to be a part of my Global Portfolio. We will explain the very fundamental concept of “value” in value investing and how we have applied it using publicly available information.
Tong Kooi Ong is chairman of The Edge Media Group, which owns The Edge Singapore
