You can contact the author (Teguh Hidayat) by email, teguh.idx@gmail.com. The author live in Jakarta, Indonesia.

See my pictures in Instagram, @teguhidx.

An Easy Example of Value Investing

When you want to buy a car and you have budget of Rp150 million, then what kind of car would you choose? You may choose Toyota Avanza, Daihatsu Xenia, Nissan Grand Livina, or Suzuki Ertiga. But what if I told you that with the funds, you may be able to obtain a Kijang Innova that its original price was around Rp200 to 250 million? 

Well, it sounds impossible, is not it? How might you be able to buy a car worth Rp250 million at a price of only Rp150 million? But believe it or not, sometimes we are lucky enough to do that, i.e. buy something at a lower price than the original price. Perhaps my father is one of a very good example. He is a civil servant who worked as a high school teacher, and unlike his fellow civil servants who are often mortgaged their civil servant certificate to the bank to buy a house or a car, he always avoids the so called ‘debt’.

That's why, in the early 2000s, when his colleagues had dared to buy car on loan, my father still ride a Honda Supra motorcycle (at the time, I was in a high school). But here are interestingly points: At certain times, he can sometimes purchase certain
stuffs at a low price from a friend who needed immediate money, usually because this guy was in debt. Including the motorcycle above, he bought at the price of Rp1.5 million, even though the market price was at least Rp3 million. He could get that low price because the seller was in a condition of ‘I need the money, now!’

Anyway, the habit of 'purchase things from those who needs money', is still continue to this day. Some weeks ago, my father bought a Kijang Innova of year 2012 at a purchase price of Rp150 million, aka discount price. Actually there were no plans at all to purchase Innova, because he was willing to buy a Nissan. However, because there are desperate guy who sell the car at the price of 'Whatever you say!', and after some checking the car is in good condition, then so be it. 

And if my father was still insisting to buy a Nissan, the Innova would still able to be sold at the price of let say 200 million (profit Rp50 million), because it was its market value. Though of course, the car could not sell quickly than if sold at desperate price, say Rp150 million earlier. 

Okay, back to the stock market. The basic concept of value investing is just like that: Buy goods (stock) at a lower price than its original value. You do not need to be tired of thinking about you would sell the stock at some higher price, the important thing is that you buy it at the lowest possible prices. For example the car, which, if my father sell it at (still) discounted prices, say Rp180 million, then he would still get a profit, right?

There are at least two points to consider when you decide to buy a stock that you think is 'cheap', or its fancy term, undervalued

As with the example of my father who could not buy cheap goods from those who need immediate money everyday, then the stock market is the same way: You cannot find desperate investor/trader who selling their shares at a discounted price everyday, but only at certain time. That is, when you are in a situation where you could not find a stock at a discounted price, such as when the stock market is in bullish period, then do not buy anything.

There is a big difference between 'undervalue goods' and 'two-bit goods'. When you buy a car at a much lower price at the market price, then of course you would check the car as detail as possible, isn’t it? Who knows the car air-conditioner is broken, its registration is troubled, had an accident, and so on. Well, so does the stock. When you find a stock which seems to be sold at a discounted price, then do not buy it directly, but take a deeper analysis of the stock, ranging from who the owner of the company, how was its performance in the past, how its future business prospects, and so on. If it turns out that there is no problem, which means that the stock is actually undervalued, then you can buy it. 

The second point might be a bit complex. Basically there are only three valuation method to calculate the value of the shares, namely the Price to Earnings Ratio (PER), Price to Book Value (PBV), and dividend yield. But the difficulty is to determine how much the PER, PBV, and a dividend yield that can be said to be discounted for a particular stock. For example, you can not assume that the stock of Charoen Pokphand Indonesia (CPIN) is cheaper than Unilever (UNVR), only because its PER and PBV are lower, and its dividend yield is higher. Just as you could not say that Innova is cheaper than Alphard, simply because the price of Innova only Rp250 million, while Alphard reached Rp1 billion (Alphard is a premium-luxury MPV, while Innova is only a family car).

On the other hand, if you find stocks that are fundamentally not good at all, then do not even think to buy it! Even if it was sold at a penny. You know, a brand new Innova car which is crashed until it is totally destroyed probably could be sold to scrap handyman at some price, but clearly it is not worth of Rp150 million, let alone Rp250 million.

Another important thing is when you successfully buy certain goods at low price, you may not be able to quickly sell them if you want a good selling price. For example take a look at above again: When you buy an Innova car at the price of Rp150 million, then you may need a quite long time to be able to sell it at the price of Rp200 million. The story would be different if you sell it at a price of Rp150 million, where the car would probably sold successfully in just one day.

The same thing is also happening in the stock market. Usually value investors will only buy stocks when the market is in bearish period. But when they successfully obtain some of stocks at undervalue price, it does not mean they can immediately sell it at a higher price the next day, as the market usually require time to recover, to become bullish again. In fact, in the short term the stocks can still go lower, because the bearish period has not yet ended.

Therefore, investing using this method requires patience. Patience is needed not only to wait to sell the stock (which has been acquired at a bargain price) at a high price, but also
to wait when there is no stock that is cheap enough to be purchased (so the investor had to wait for the down market, or at least not bullish again).

And because most investors and traders in the stock market does not like to wait (tell me, who does?), so the value investing is not popular and is also not preferred. Even for those who so called fundamentalists, most of them are growth investors, instead of value investors.

But in fact, the billionaire investors like Warren Buffett, Seth Klarman, Chris
topher Browne, to Lo Kheng Hong (LKH, an Indonesian successful investor), they are all value investors. For example, LKH, his decision to go into the coal and oil palm plantations sectors, about a year ago, reap the question of many parties: Are you nuts? Both sectors are in bad state! But LKH was only answered, the stocks in both sectors are already undervalue, that's all. And the fact that a year later, aka today, the stocks in the coal and oil palm plantations sector did start to climbing up.

And, believe it or not, in any business, successful entrepreneurs are those who are able to apply the concept of value investing. I may need to underline the word able here, because not all entrepreneurs/investors are able to do so.

For example, Erick Thohir. This
young businessman, along with his two colleagues, Rosan Roeslani and Handy Soetedjo, some weeks ago have successfully acquired 70% stake in Internazionale Milano football club at the price of around US$ 475 million, and it is certainly a relatively low price for a football club at a size of Inter Milan. 

Then how did Erick could get ‘good stuff at discounted prices'? There are two things. First, the performance of Inter Milan is not good, they did not even qualify for the Champions League, so on this day, at this time, Inter Milan can not be labeled as a 'good stuff'. Because what was so good about this club? Let alone win the Champions League trophy, they did not even participate in the competition. So just like stocks, this year the stock price of Inter Milan is dropping as its performance was poor. 
Just like if Manchester United had shares in the stock market, then some months ago when Alex Ferguson replaced by David Moyes, it was almost certain that the shares will fall, and will fall further after yesterday's defeat by Everton at home.

That is first. The second, Inter Milan previous owner, Massimo Moratti, was needed funds quickly because his oil business was in
heavy debt. So we may say that Moratti was an investor who buy stock use margin money, then apparently the stock is drop until eventually he had to sell it (force sell). While Erick is the investor who buy the force-sell-stock, of course at a discounted price.

There is one interesting thing when I learned Erick Thohir’ action, i.e., there are many people who think that Erick did a wrong decision for purchasing a bad club in the bad league, the Inter Milan in the Serie A. If indeed he had the money, why did not he buy Bayern Munchen? Who won the Champions League? 

But people may forget that if Erick buy Bayern, then it is not possible to get such a discount price like when he bought Inter. Like a stock, Bayern is now in a bullish condition as they just won the treble, and consequently
the stock would definitely very, very expensive. The problem is, who can guarantee that Bayern will be champions again next year, and the year after? 

While Inter, right, it was on a bad state, and that's why it was sold at a low price. But do not forget that in the year 2010, Inter has also won three titles at once, and overall the club has a very good history with a large number of loyal tifosi around the world. We talk about Inter Milan here, not Chievo or Cagliari!

Meanwhile, if Erick decided to buy Inter in 2010, when the club was in best shape after winning three titles at once, and Moratti’ financial condition was also not in trouble, then he would not possible to acquire Inter at a
bargain price, evenmore Moratti wouldn’t sell it. Maybe if Silvio Berlusconi was the one who needed immediate fund, then Erick would acquire AC Milan. But as the opportunity was at Inter, then why not?

The poin
t is, we certainly do not know whether Erick Thohir’ investment will be successful or not, but if he decided to acquire Bayern Munich rather than Inter, then it would be a much more risky decision because of that reason: It is not possible to acquire Bayern at a discount price. While for Inter, if later Erick successfully led the club to be the winners of Champions League again, then he will pocket some great gainsBut if he is not? That wouldn’t be a problem, because from the beginning he acquired it at an undervalue price.

Aaaaaand.. more or less, that’s what is called the 'value investing'. 


However, once again the greatest difficulties in
this method of value investing is how to determine the reasonable or fair value for a particular stock, how to identificate undervalue stocks rather than ‘garbage stocks’, and perhaps most importantly, how to be patient. Well, but since this article is just an introduction to the basic concept of value investing itself, then we will discuss it later.

No comments: