My investing muse - How I follow Value Investing Gurus (26Sep2021)

Over time, I have been introduced to value investing. Mr Warren Buffett aged 91 was my first reference. It is interesting to note that over USD$80 Billion in wealth (out of his USD$91 Billion as of late 2020) came after his mid-60s. Such is the power of compounding that Mr Charlie Munger rightfully calls compounding the 8th wonder of the world. This has ranked Mr Buffett as one of the most successful value investors in modern times. It came as no surprise that I started to pay attention to his news article, interviews and YouTube videos.

As I read up on him and studied his investment strategies, he was one who has the ability to pick up good companies at bargain (fair) prices along the way. He would spend time reading the quarterly reports of the companies that he was interested in. He would study the industry and cross-check with their competitors. While reading the quarterly reports, he was looking out for areas of durable competitive advantage (DCA) and identified areas of concern. This would lead him to qualify the companies with potential investments. Following these, he would also calculate the intrinsic value of these companies to establish a fair price (targetted price for purchase). During times of company or market dips, he would take up positions of these companies if the price fall within his fair valuation. After that, he waits as time does her magic of compounding. Mr Munger (the right-hand man of Mr Buffett) mentioned that we should always work within our circle of competence. This has explained why Berkshire did not invest in technology companies like $Apple(AAPL)$ Apple till much later. With regards to knowing companies, Peter Lynch mentioned that we should be able to explain the companies we invested to young children within 5 - 10 minutes.

Beyond just the monetary returns of investment, there should also be objective(s) to our investments. I love what Mr Morgan Housel said in his book (image above) - the greatest return of money is for us to gain more time - with family, loved ones and things/business/social needs that we are passionate about. Time is the most precious asset, not wealth - even health deserves a higher priority than wealth. It is not surprising to learn that some value investors end up donating their huge wealth back to society. The other major takeaway from Mr Housel’s book was the topic of savings. Savings is not what you have left at the end of the month but rather the money that you deliberately set apart first thing after receipt of your income and/or salary. Other items that fall under the category of savings include our regular insurance premiums.

Value Investing as the only investment strategy may not be suitable for all. For Buffett and all, they can sit on these investments for years and decades. Such is their typical investment timeframe. They exhibited a different temperament with their ability to buy when the market is fearful and to sell when the stock is overvalued. They also believe in investing in significant amounts to take advantage of the good (fair) price.

Mr Buffett stayed in the same house he bought decades ago and still go regularly for his McDonald’s breakfast. He is contented to be reading financial reports most of the time and trade on his own (even if he can easily hire the best analysts to work for him). He has only recently upgraded to iPhone and he enjoyed playing Bridge weekly. He does not exhibit a typical lifestyle of the rich & famous and enjoy finding good discounts for his daily needs. As per reports in May 2021, Mr Buffett’s company Berkshire was sitting on a cash pile (including short term investments) of over USD$145B. This is viewed by some as no opportunity for good buys (at the price he wanted). Some also viewed such as concerns of an overheated market (sustained by Fed’s stimulus and money printing), waiting to swoop in when there is a correction.

For full-time traders who depend on trading for livelihood, they would not be able to afford to wait for decades for income. They have monthly expenses & mortgages to pay. Thus, they will need to perform regular, short term trades to generate income. The majority of the investors may be looking at short term gains and are not willing to wait for longer terms returns. However, we can probably consider a mix of long term investments and shorter-term trading as part of our investment strategy as regular investors.

As value investors like Buffett, Munger, Pabrai, Spier and Li Lu typically hold their stocks for years, I follow their 13F filings closely. I follow them because this approach works well for me without constantly monitoring the markets. One of the sites I used is www.whalewisdom.com. This is not real-time as 13F are filed on a quarterly basis for their US-based investments (for companies that have over USD$100 Million in portfolio). Using Alibaba as an example, Mr Munger bought this stock in Q1 of 2021. From the 13F submission, it was purchased at an estimated price of USD$226 per share. This implied that UD$226 per share was considered to be "fair value for the stock” by Mr Munger (a value investment guru). Given that he will typically hold such stocks for a long term (in decades), I use the dollar cost average to buy up Alibaba stocks, adding to my positions monthly as I set aside my savings (and put part of them into investments). This does not mean that I do not need to research these companies. I will still go through their recent quarterly reports and understand their past performance, current positions and future developments/expansions. I will treat the gurus’ recent purchase as stock recommendations and I will need to add my own due diligence before I made up my mind on which to invest.

Like most, I have limited funds and I do not have big amounts of money (unlike the gurus). I will continue to hold stocks for value and some for dividends (treating them like good-paying bonds). This does not stop me from buying growth stocks that I feel will create great value in the future even when some of the financial fundamentals are of concern.

Using Tesla as an example, the current P/E ratio stands at 403 as of 24 Sep 2021. From Ycharts, their average P/E ratio over the last 5 years was 825. A P/E ratio of 403 means that if we buy all the stocks of Tesla, it will take over 403 years to recover our capital based on their current earnings. In the lens of value investing, a P/E ratio of 403 would be deemed overvalued. However, I see Tesla’s plans to expand into other countries, build more gigafactories, AI robot, FSD, robotaxi, Tesla insurance as opportunities to expand their earnings. At the same time, we should view Tesla as a sustainable energy company that provide energy generation & storage solutions, paired with sustainable transport EV solutions. It is touted that their energy generation (solar) and storage (powerwall) solutions have the potential to be even bigger than their EV business unit. With the P/E dropping from an average of 825 to the current level of 403, this implies that Tesla’s earnings is growing (way) faster than their current price increase.

In conclusion, each of us has different financial needs and objectives, following any guru blindly is not recommended. But this can start as a reference point for us to narrow down stocks we can consider. Let us put in the efforts to study these companies before deciding a fit with our own portfolio and investment time frame. We need to monitor their quarterly/annual performance. No advantage is permanent. If the company is making money, there will always be new competition that may provide better, cheaper, faster solutions. Like many, I am just a passive investor who holds a day job, trying to build a better future for my family, kids. Here is wishing all, happy investing. Hopefully, this is able to help some of us to improve our returns on investments.

(The above write up on Alibaba and Tesla are my own opinions and these should not be considered as financial advice.)