Value investing: grit, timing, compounding - and a dash of volatility

Singapore

IMAGINE this: You are middle-aged and planning for your retirement. Instead of letting your hard-earned cash sit around in the bank, you make the wise choice to invest your life savings - say, a million dollars - in a bid to produce even more dollars.

What if you invest your entire savings in an all-equities portfolio, and actively ignore 'safe' instruments such as bonds and fixed deposits?

What if you could withdraw a part of that sum for your own expenditure - say, S$50,000 a year - and at the end of 30 years, your portfolio would consist of about S$7 million, all while you were spending the equivalent of your original capital of a million dollars?

Sound like a get-rich-quick scam? A Nigerian prince lurking somewhere in the background, perhaps?

But a portfolio as described above is entirely possible through value investing - along with grit, good timing, a dash of volatility in the markets and compounding, a panel of experts said on Saturday at a retirement seminar.

The seminar was jointly organised by The Business Times and Aggregate Asset Management. Value investing basically entails picking up bargains in stock markets and holding on to them until prices rebound, fund manager and executive director at Aggregate Asset Management Eric Kong said during the panel discussions.

One way to find such bargains is to divide the share price of a particular firm against its book value per share; a 'bargain firm' would be priced lower than the book value of the assets - such as cash, property and inventory. In contrast, an "expensive counter" trades several times above the net asset value, Mr Kong said.

He espoused the potential dangers of investing in those counters. "If you are paying 10 times the asset value of a company, when earnings take a dip or when there is bad news, nine times of that can disappear. "That's because the nine times consist of goodwill, and goodwill can disappear instantly."

To mitigate risk, Mr Kong advocated for investors to diversify their portfolios across many firms across different industries and indeed, across different countries.

Aggregate, for instance, has investments in more than 500 counters, Mr Kong said, reducing its average exposure to individual stocks to about 0.2 per cent each.

Since its inception in 2012, its flagship fund Aggregate Value Fund (AVF) has returned a compounded 8.5 percentage points a year, and has outperformed the MSCI Asia Pacific All Countries All Caps Index by 6.1 per cent on an annualised basis, Mr Kong said.

AVF has more than S$300 million in assets under management.

Yet, the investment process is one that investors can undertake on their own.

"To begin the process, you need to know how much you need to invest in for your retirement," said Mr Kong.

The general rule of thumb is for investors to multiply their annual expenditure during retirement by about 20 times. "So, if you need S$50,000 to spend during your retirement annually, you need to invest S$1 million," he added.

With the capital on hand, an investor would then look for stocks trading at a discount to the value of its assets; when hunting for these assets, volatility - often a hated term - plays an important role, Mr Kong said.

During periods of volatility, stocks may trade at discounts due to over-reaction from the market, and those periods are when value investors can swoop in to "buy low, hold until it recovers and then sell high".

Indeed, it is that grit to hold a longer-term view that can bring the best results; Aggregate's research shows that an investor who bought into discounted stocks in Singapore - starting from 1983, for instance - would see his initial capital grow by seven times over the next 30 years. This contrasts with negative returns from investing in the market as a whole.

When asked by a member of the audience on why the investment strategy ignores growth stocks like "the Alibabas of the world", Aggregate executive director and head of research Teh Hooi Ling said: "When a stock is growing very quickly ... and has a high valuation, you pay top dollar for it, but the future that it will be there 10, 20 years down the road - you can't see it.

"When you buy stocks based on assets they actually own today at discounts, the possibility of your investment capital still remaining after, say, 10, 20 years, is quite high."