How to Trade Stocks Like a Value Investor

In one of his annual letter in the 1960’s, Warren Buffett once said this, ‘Our business is to buy shares at a lowest possible price, so when we sell it later at a price that is not too high, we would still make a profit.' The example? In this case in the Indonesian stock market? Well,  I just found out a stock that is interesting because of its low valuation. The stock is Bank BTN (BBTN).

I will not explain about the fundamental of BBTN, because this article is not about the company, but more as an example of one of Buffett’s philosophy, 'Always buy stocks at a lowest possible price'. When this article was written, BBTN priced at Rp1,020 per share, and the price reflects 0.9 times of PBV. Then why the decision to buy BBTN at the current price could make a profit? Here's the explanation.

First of all, remember that even though we talk about 'stock trading' here, but do not imagine that you can buy the stock today, then immediately sell it the very next day to make gain 5 - 10%. What I meant by ‘trading’ here to buy stock at a certain price to sell it later at a higher price, but it could take a short period of time, say just a few days, or longer, say a few months or even years. But whether you successfully sell your stock after a week or have to wait until three months or more, your gain should be decent.

And for this BBTN, if you can hold the shares at least until April next year (it’s quite long, but still less than a year), then you will make a big profit if it rise to 1,500 in April, just like years before. Here is the data of BBTN stock price at the beginning of the year compared to its highest position in April. Data collected since 2010 (BBTN kicked off its IPO in 2010).

Year	1 January	Highest Position in April	Gain (%)
2010	840	1,580	88.1
2011	1,670	1,780	6.6
2012	1,210	1,410	16.5
2013	1,470	1,710	16.3
2014	870	1,405	61.5

All right, look. If you bought BBTN at the beginning of each year since 2010 until now, you will almost certainly make a sizable profit, and the profit would be greater if you buy the stock at its lowest price, in this case below Rp1,000 per share (see cases in 2010 and 2014). In 2011, the profit was relatively small because the enty point is relatively high, ie Rp1,670 per share. However, if you did buy BBTN at price of Rp1,670 per share at the beginning of 2011, and then you buy more stock when BBTN dropped to 1,200 a month later (we call this the action of average down, so that the average purchase price of yours become about Rp1,450 per share), then your profit will remain significant when you sold your stock later in April at a price of 1,700's. By this case you will understand that for value investors, a decline in price of a stock (a stock that have strong fundamentals, of course) is always an opportunity, not a disaster.

And BBTN, although its fundamental quality (financial performance) is less than Bank BRI (BBRI) or other top banks, but it wasn’t that bad too. BBTN is still operating normally and also still make decent profits. That means, as long as the purchase price is low enough, ie the price that reflects PBV 1.0 or less than that (the lowest PBV for BBRI is 2.1 times, aka much higher but reasonable due to its higher quality of fundamentals), then BBTN is worth to buy.

A little note, Buffett will not interested in BBTN because he prefers to 'buy a wonderful company at a fair price than a fair company at buy a wonderful price', because his investment horizon is looooong term. And in fact, over the last five years, BBTN did not go anywhere but only back and forth in the range from Rp850 to 1,700 per share. While BBRI? Has gained about 300%. However if you can take advantage from the stock price’s fluctuations where you buy BBTN at low prices (at the beginning of the year) and then sell it a higher price above (in April), then after five years, your compounded gain would be more than 300%, although you need to buy-and-then-sell the stock at least once a year.

There are a few things you need to consider after read the example above. First, BBTN once again was just an example. There are many other stocks in the Indonesia Stock Exchange, whether it from the banking or other sectors, which have a pattern of price movement that similar to BBTN. Currently there are a number of stocks, especially in the group of second liners, which were down so their valuations become low again.

Second, remember that BBTN, although it is not as good as BBRI, but it was also not a bad bank, so its low price (PBV 1.0 times, or less than that) is attractive at least for the short-term investment. I mean, if you find a stock that the price is so cheap as hell, let's say with PBV of only 0.5 times, but its fundamental is ugly as hell too, then of course you cannot buy the shares. For the case of BBTN, the management is quite honest in managing the bank, though not as competent as the management of BBRI or other bigger banks.

And third, BBTN tends to rise during the first four months (January to April) in each year driven by several factors, such as the January Effect and the distribution of dividends. Beyond that, BBTN tends to move sideways, or even dropped if Jakarta Composite Index (JCI) drops. But if you can buy the stock at the lowest possible price, let say below 1,000, then you will have a great chance to make a substantial profit eventhough you did not buy BBTN (at a price of below Rp1,000 per share) at the beginning of the year. Because remember that the most important thing here is not when you bought the stock, but at what price.

And by that I mean, although today is still July, but since BBTN already traded at lower prices (perhaps because investors were disappointed when BBTN was not acquired by a fellow but bigger state bank, Bank Mandiri), then you can pay attentions to the stock, for then buy it at prices of Rp800 - 900 per share (those are the lowest prices of BBTN throughout history, and yes those are bargain prices). In September 2013 then, when JCI dropped, BBTN also down to 850 but immediately rose back to 1,100 by less than a month later (up nearly 30%). So if you are lucky then you probably do not need to wait until the month of April 2015.

One more thing to note is that, unlike the other trading methods, the above method (trading the stock using an approach of value) offers a low risk. Because when you find stocks that, despite its financial performance is not too special, but on the other hand traded at an extremely low valuation, and the company itself is a mature and well-established company, then the risk of investing in its shares, or in this case its risk of trading, is low. If you notice, the valuation of bank stocks is relatively low compared to the valuation of other big cap stocks (the PBV of banking sector is 2.3 times in average, less than PBV of any other big caps that is more than 3.0 times), but even the valuation of BBTN is lower (PBV 0.9 times), even though the value of its equity and net income is still growing smoothly from year to year. Following the data, the numbers in the billions of rupiah.

Tahun	2009	2010	2011	2012	2013
Aset Bersih/Ekuitas	5,393	6,447	7,322	10,279	11,557
Pendapatan	5,730	6,499	7,556	8,819	10,783
Laba Bersih	490	916	1,119	1,364	1,562

So unless there is an event of force majeure, or JCI deeply slashed, then there is no reason for BBTN to go lower than Rp800 – 900 per share, because the valuation on the price is very cheap for a company that is still operating normally and also not having any trouble. This low risk can be regarded as a 'bonus' because on other side you will obtain a significant gain, so you do not need to say that stock trading was 'high risk high gain' (for more information on risk management in investing in stocks , you can read more articles about blue chip stocks vs. second liner, to calculate the risk of loss, as well as portfolio diversification strategy).

Okay, I think that’s enough for this week. Any questions?