KLCI MARKET PE 28.8.2021

KLCI MARKET PE  28.8.2021

Company Mkt Cap (m)    Earnings (m)     Dividend (m)

MBB 97,873.2       6,749.9       6,068.1 

PBB 81,136.7       4,858.5       2,515.2 

PCHEM 65,600.0       1,600.0 984.0 

TENAGA  59,436.8       3,602.2       4,576.6 

IHH          55,747.1 199.3 334.5 

CIMB 48,969.4       1,206.1 489.7 

PMETAL  43,369.3 457.0 173.5 

HLBANK  41,186.6       2,640.2 782.5 

AXIATA 37,057.7       3,669.1 630.0 

MAXIS 36,783.5       1,382.8       1,324.2 

DIGI 33,821.3       1,221.0       1,217.6 

PETGAS 32,174.2       2,010.9       2,509.6 

TOPGLOV  32,088.8       1,910.0 962.7 

NESTLE 31,587.2 553.2 537.0 

MISC 31,246.6 -          1,468.6 

SIMEPLT  28,838.5       1,191.7 807.5 

PPB 26,403.4       1,320.2 660.1 

IOICORP  25,643.6       1,401.3 666.7 

HARTA 24,850.1       2,889.5       1,068.6 

KLK 23,025.7 777.9 529.6 

TM          22,868.6       1,016.4 548.8 

MRDIY 22,658.5 -    -   

RHBBANK  22,416.7       2,056.6 717.3 

HAPSENG  20,988.0 749.6 629.6 

HLFG 20,770.0       1,871.2 436.2 

PETDAG  19,670.4 276.7 373.7 

GENTING  19,113.1 -             573.4 

GENM 17,337.4 -             866.9 

SIME 15,986.0       1,427.3       1,023.1 

DIALOG 15,187.0  544.3 182.2 

TOTAL        1,053,835.4     47,582.8     33,657.6 

Company PE DY Price (RM)

MBB 14.5 6.2 8.37

PBB 16.7 3.1 4.18

PCHEM 41.0 1.5 8.20

TENAGA 16.5 7.7       10.38

IHH       279.7 0.6 6.35

CIMB 40.6 1.0 4.89

PMETAL 94.9 0.4 5.37

HLBANK 15.6 1.9       19.00

AXIATA 10.1 1.7 4.04

MAXIS 26.6 3.6 4.70

DIGI 27.7 3.6 4.35

PETGAS 16.0 7.8       16.26

TOPGLOV 16.8 3.0 3.91

NESTLE 57.1 1.7     134.70

MISC 0.0 4.7 7.00

SIMEPLT 24.2 2.8 4.17

PPB 20.0 2.5       18.57

IOICORP 18.3 2.6 4.08

HARTA   8.6 4.3 7.25

KLK 29.6 2.3       21.30

TM         22.5 2.4 6.06

MRDIY   0.0 0.0 3.61

RHBBANK 10.9 3.2 5.51

HAPSENG 28.0 3.0 8.43

HLFG 11.1 2.1       18.10

PETDAG 71.1 1.9       19.80

GENTING   0.0 3.0 4.93

GENM   0.0 5.0 2.92

SIME 11.2 6.4 2.35

DIALOG 27.9 1.2 2.69

MARKET 22.1 3.2

PE and DY are based on the latest financial year accounts

28.8.2021

KLCI 1601.38

Market PE 22.1

Market DY 3.2

Here is a plan. Let us develop a strategy that helps keep us from making our mistakes.

What we must also have is a plan for HOW MUCH to invest n the stock market in the first place.

It makes sense for almost everyone to have a significant portion of their assets in stocks.  Just as important, few people should put all their money in stocks.  Whether you choose to invest 80% of your savings in stocks, or 40% in stocks depends in part on individual circumstances and in part on how human you really are.

An investment strategy where 100% of your assets are invested in the stock market can result in a drop of 30%, 40% or even more in your net worth in any given year (of course, many people learned this the hard way in recent years).   Since most of us are only human, we cannot take a drop of this size without opting for survival.  That means either panicking out or being forced to sell at just the wrong time

In fact, if we start with the premise that we cannot handle a 40% drop, then putting 100% of our money in the stock market is a strategy that is almost guaranteed to fail at some inopportune time down the road.

Obviously, if we invest only 50% of our assets in stocks, a market drop of 40% would result in losing "only" 20% of our net worth.  As painful as this still might be, if we maintain the proper long-term perspective, some of us might be better able to withstand a drop of this size without running for our lives.

Whether you choose to place 80% of your assets in stocks or 40%, that percentage should be based largely on how much pain you can take on the downside and still hang in there.

Pick a number. What percentage of your assets do you feel comfortable investing in stocks?

The important thing is to choose a portion of your assets to invest in the stock market—and stick with it!  For most people, this number could be between 40 percent and 80 percent of investable assets, but each case is too individual to give a range that works for everyone.

Whatever number you do choose, though, I can guarantee one thing: at some point you will regret your decision.  Being only human, when the market goes down you will regret putting so much into stocks. If the market goes up, the opposite will happen—you’ll wonder why you were such a chicken in the first place.  That’s just the way it is. (Actually, according to behavioral finance theory, that’s just the way you is!)

So here’s what we’re going to do. Against my better judgment, we’re going to give you some rope to play with. Once you pick your number, let’s say 60 percent in stocks, you can adjust your exposure up or down by 10 percent whenever you want. So you can go down to 50 percent invested in stocks and up to 70 percent, but that’s it.  You can’t sell everything when things go against you, and you can’t jump in with both feet and invest 100 percent when everything is rocking and rolling your way. It’s not allowed! (In any event, doing this would put you in serious violation of our plan!)

Small investors will have a huge advantage over professionals

And here’s the big secret: if you actually follow our plan, small investors will have a huge advantage over professionals—an advantage that has only been growing larger every year. Of course, you would think that with all the newly minted MBAs heading to Wall Street each year, the proliferation of giant hedge funds over the last few decades, the growth of professionally managed mutual funds and ETFs, the increasingly widespread availability of instant news and timely company information, and the mushrooming ability to crunch massive amounts of company and economic data at an affordable price, the competition to beat the market would actually be growing fiercer with each passing year.  And in some ways it is.  But in one important way, perhaps the most important, the competition is actually getting easier.

The truth is that it is really hard to be a professional stock market investor today.  

It’s just that it’s really hard to look at returns every day and every month, to receive analysis every month or every quarter, and still keep a long-term perspective.  Most individual and institutional investors can’t do it.  They can’t help analyzing the short-term information they do have, even if it’s relatively meaningless over the long term. On the bright side, as the market has become more institutionalized and performance information and statistics have become more ubiquitous, the advantages for those who can maintain a long-term perspective have only grown.

For those investing in individual stocks, the benefits to looking past the next quarter or the next year, to investing in companies that may take several years before they can show good results, to truly taking a long-term perspective when evaluating a stock investment remain as large, if not larger, than they have ever been.  

Remember from early in our journey, the value of a business comes from all the cash earnings we expect to collect from that business over its lifetime.  Earnings from the next few years are usually only a very small portion of this value. Yet most investment professionals, stuck in an environment where short-term performance is a real concern, often feel forced to focus on short-term business and economic issues rather than on long-term value. This is great news and a growing advantage for individual and professional investors who can truly maintain a long-term investment perspective.

This focus on the short term by professionals is also a huge advantage for individual investors 

Luckily, since it’s particularly hard for most nonprofessionals to calculate values for individual stocks, this focus on the short term by professionals is also a huge advantage for individual investors who follow an intelligently and logically designed strategy.  Because value strategies often don’t work over shorter time frames, institutional pressures and individual instincts will continue to make it difficult for most investors to stick with them over the long term. For these investors, several years is simply too long to wait.

Hanging in there will be tough for us, too. But as individual investors, we have some major advantages over the large institutions. We don’t have to answer to clients. We don’t have to provide daily or monthly returns. We don’t have to worry about staying in business. We just have to set up rules ahead of time that help us stay with our plan over the long term. We have to choose an allocation to stocks that is appropriate for our individual circumstances and then stick with it. When we feel like panicking after a large market drop or ditching our value strategy after a period of underperformance, we can—but only within our preset limits. When things are going great and we want to buy more, no problem, we can—we just can’t buy too much.

So there it is. We have a strategy that beats the market. We have a plan that will help us hang in there. 

And, as individual investors, we have some major advantages over the investment professionals. All we need now is a little more encouragement. Perhaps a final visit with Benjamin Graham will help push us on our way.

In an interview shortly before he passed away, Graham provided us with these words of wisdom:

The main point is to have the right general principles and the character to stick to them.… The thing that I have been emphasizing in my own work for the last few years has been the group approach. To try to buy groups of stocks that meet some simple criterion for being undervalued—regardless of the industry and with very little attention to the individual company.… Imagine—there seems to be practically a foolproof way of getting good results out of common stock investment with a minimum of work. It seems too good to be true. But all I can tell you after 60 years of experience, it seems to stand up under any of the tests that I would make up.

After so many years, we still have an opportunity to benefit from Graham’s sage advice today.

We now have a great plan for how to invest in the stock market.

Finally, for the portion of our money that we choose to invest in the stock market, we should have a better idea 

1. of how company valuation is supposed to work, 
2. of how Wall Street professionals should work (but don't), and 
3. of how we can outperform the major market averages and most other investors.

How are we going to figure out value? How can anyone? Do we have the answer yet?

Valuing a company you are investing into.

For simplicity, we will assume that the business in question will earn $10,000 each year for the next thirty-plus years.

Intuitively, we know that collecting $10,000 each year for the next thirty years is not the same as receiving all $300,000 today.  

Present value 

=  Annual Cash Flow / Discount rate

= $10,000 / 0.06 

= $166,667

(In reality, we should look for how much cash we receive from the business over its lifetime.  For the purposes in this post, we will assume that earnings are a good approximation for cash received.)

So, earning $10,000 a year for the next thirty-plus years turns out to be worth about $166,667 today.   

In practice, predicting so far into the future is pretty hard to do.  

You will probably pay less for those estimated earnings than if they were guaranteed.

How much less?  

That's not exactly clear, but we would certainly discount that hoped-for $10,000 by more than the 6% we used when the $10,000 was guaranteed - maybe we'd use a discount of 8% or 10% or 12%, or even more. (the amount of our discount would reflect in part how confident we were in our earnings estimate).  

Value of the Company

At 6% discount rate

$10,000 /0.06 = $166,667

At 8% discount rate

$10,000 / 0.08 = $125,000

At 12% discount rate

$10,000 / 0.12 = $ 83,333

As it turns out, using a 12% discount rate, the value of the company is only $83,000.  

What is crystal clear, however, is that using different discount rates for our estimated earnings can lead to wildly different results when we try to value a business.

Figuring out the right discount rate isn't our only problem, we also have to estimate earnings. 

Many businesses grow their earnings over time, while others due to competition, a bad product, or a poor business plan, see their earnings shrink or even disappear over the years.  

Let us see how funny the math gets when we try to value a business using not only different estimates for discount rates but we throw on top of that some different guesses for future earnings growth rates!

Value of the Business

At 4% growth rate, 8% discount rate

$10,000 / (0.08 - 0.04) = $250,000

At 4% growth rate, 12% discount rate

$10,000 / (0.12 - 0.04) = $125,000

At 6% growth rate, 8% discount rate

$10,000 / (0.08 - 0.06) = $500,000.

Annual Cash Flow / (Discount Rate - Growth Rate) = Present Value

According to finance theory and logic, the value of a business should equal the sum of all of the earnings that we expect to collect from that business over its lifetime (discounted back to a value in today's dollars based upon how long it will take us to collect those earnings and how risky we believe our estimates of future earnings to be).  

Will earnings grow at 2%, 4%, 6% or not at all?  Is the right discount rate 8%, 105, 12%, or some other number?   

The math says that small changes in estimated growth rates or discount rates or both can end up making huge differences in what value we come up with!

At 2% growth rate, 12% discount rate

$10,000 / (0.12 - 0.02) = $100,000

At 5% growth rate, 8% discount rate

$10,000 / (0.08 - 0.05) = $333,333

Annual Cash Flow / (Discount Rate - Growth Rate) = Present Value

Which numbers are right?

It is incredibly hard to know.  Whose estimates of earnings over the next thirty-plus years should we trust?  What discount rate is the right one to use?

The secret to successful investing is to figure out the value of something and then - pay a lot less.  

How are we going to figure out value?  How can anyone?  Do we have the answer yet?  Hopefully, we have learned some very valuable lessons even if we cannot answer them yet.

Behavioural Finance: We are hardwired to be lousy investors.

1.  We are hardwired from birth to be lousy investors.

Our survival instincts make us fear loss much more than we enjoy gain.  We run from danger first and ask questions later.  We panic out of our investments when things look bleakest - we are just trying to survive!  We have a herd mentality that makes us feel more comfortable staying with the pack.  So buying high when everyone else is buying and selling low when everyone else is selling comes quite naturally - it just makes us feel better!

We use our primitive instincts to make quick decisions based on limited data and we weight most heavily what has just happened.  We run from managers who performed poorly most recently and into the arms of last year's winners - that just seems like the right thing to do!  We all think we are above average!  We consistently overestimate our ability to pick good stocks or to find above-average managers.  It is also this outsized ego that likely gives us the confidence to keep trading too much.  We keep making the same investing mistakes over and over - we just figure this time we will get it right!

We are busy surviving, herding, fixating on what just happened and being overconfident!  Maybe it helps explain why Mr. Market acts crazy at times.

2.  So, how do we deal with all these primitive emotions and lousy investing instincts?  

The answer is really quite simple:  we don't!

Let's admit that we will probably keep making the same investing mistakes no matter how many books on behavioural investing we read.

3.  How to invest in the stock market?

Traditionally, stocks have provided high returns and have been a mainstay of most investors’ portfolios. Since a share of stock merely represents an ownership interest in an actual business, owning a portfolio of stocks just means we’re entitled to a share in the future income of all those businesses. If we can buy good businesses that grow over time and we can buy them at bargain prices, this should continue to be a good way to invest a portion of our savings over the long term. Following a similar strategy with international stocks (companies based outside of the United States) for some of our savings would also seem to make sense (in this way, we could own businesses whose profits might not be as dependent on the U.S. economy or the U.S. currency)

4.  These words of wisdom from Benjamin Graham

In an interview shortly before he passed away, Graham provided us with these words of wisdom:

The main point is to have the right general principles and the character to stick to them.… The thing that I have been emphasizing in my own work for the last few years has been the group approach.  To try to buy groups of stocks that meet some simple criterion for being undervalued—regardless of the industry and with very little attention to the individual company.… Imagine—there seems to be practically a foolproof way of getting good results out of common stock investment with a minimum of work. It seems too good to be true. But all I can tell you after 60 years of experience, it seems to stand up under any of the tests that I would make up.

That interview took place thirty-five years ago. Yet we still have an opportunity to benefit from Graham’s sage advice today.

I wish you all—the patience to succeed and the time to enjoy it. Good luck.

Book:  Joel Greenblatt:  The Big Secret for the Small Investor (2001)

The secret to successful investing is to figure out the value of something and then pay a lot less!

Valuing a company you are investing into.

For simplicity, we will assume that the business in question will earn $10,000 each year for the next thirty-plus years.

Intuitively, we know that collecting $10,000 each year for the next thirty years is not the same as receiving all $300,000 today.  

Let us analyse and see what thirty-plus years of earning $10,000 per year are really worth to us today, using a discount rate of 6%.

Present value 

=  Annual Cash Flow / Discount rate

= $10,000 / 0.06 

= $166,667

(In reality, we should look for how much cash we receive from the business over its lifetime.  For the purposes in this post, we will assume that earnings are a good approximation for cash received.)

So, earning $10,000 a year for the next thirty-plus years turns out to be worth about $166,667 today.   

We have just figured out something incredibly important.  

A business guaranteed to earn us $10,000 each year for the next thirty-plus years or so, is worth the same as having $166,667 cash in our pocket today!

If we could be guaranteed that all of our assumptions were correct and someone offered to sell us the company for $80,000, should we do it?  If someone offered to give us $166,667 right now in exchange for $80,000, should we do it?  

Given all of our assumptions, the answer is easy:  of course we should do it!  

This is an incredibly important concept.  

If we can really figure out the value of a business, investing becomes very simple!  

The secret to successful investing is to figure out the value of something and then - pay a lot less!  

In fact, it couldn't be simpler:  $166,667 is a lot more than $80,000.

In practice, predicting so far into the future is pretty hard to do.

Are you really going to trust my predictions about what earnings will be over the next thirty years?

But will earnings actually shrink over those years?

Will they grow?

Will the company even be around in another thirty years?

In practice, predicting so far into the future is pretty hard to do.  In addition, many businesses are actually more complicated.

In fact, forget thirty years - it turns out that Wall Street analysts are actually pretty bad at predicting earnings for even the next quarter or the next year.  

You will probably pay less for those estimated earnings than if they were guaranteed.

Since no one rally knows for sure what earnings will be over the next thirty-plus years, whatever we use for estimated earnings during that time is just going to be a guess.   Even if this guess is made by a very smart, informed "expert", it will still be a guess.  

In practice, investors discount the price they will pay for future earnings that are based only on estimates.  

If there is no guarantee that you will actually collect that $10,000 after the first year of owning the business, you will probably pay less for those earnings than if they were guaranteed.  

In the above example, where next year's earnings of $10,000 were guaranteed, we discounted that payment by 6%, reflecting the fact that we had to wait a year to collect our $10,000.  Now, with only an estimated $10,000 coming in at the end of the first year, we will pay less.

How much less?  

That's not exactly clear, but we would certainly discount that hoped-for $10,000 by more than the 6% we used when the $10,000 was guaranteed - maybe we'd use a discount of 8% or 10% or 12%, or even more. (the amount of our discount would reflect in part how confident we were in our earnings estimate).  

But when we apply that higher discount to the next thirty-plus years of earnings estimates, that's when things really start to get silly (yes, it's true, math can be hilarious).

Value of the Company

At 6% discount rate

$10,000 /0.06 = $166,667

At 8% discount rate

$10,000 / 0.08 = $125,000

At 12% discount rate

$10,000 / 0.12 = $ 83,333

As it turns out, using a 12% discount rate, the value of the company is only $83,000.  We are starting to get in trouble!  It is no longer so obvious that a purchase price of $80,000 is such a bargain!

Figuring out the right discount rate isn't our only problem, we also have to estimate earnings. 

What is crystal clear, however, is that using different discount rates for our estimated earnings can lead to wildly different results when we try to value a business.   But figuring out the right discount rate isn't our only problem.  For simplicity, we have made some other assumptions that don't really hold up in the real world.  

For instance, as you might intuitively guess, most companies don't earn the same amount each year for thirty straight years.  Also, many businesses grow their earnings over time, while others due to competition, a bad product, or a poor business plan, see their earnings shrink or even disappear over the years.  

Let us see how funny the math gets when we try to value a business using not only different estimates for discount rates but we throw on top of that some different guesses for future earnings growth rates!

Value of the Business

At 4% growth rate, 8% discount rate

$10,000 / (0.08 - 0.04) = $250,000

At 4% growth rate, 12% discount rate

$10,000 / (0.12 - 0.04) = $125,000

At 6% growth rate, 8% discount rate

$10,000 / (0.08 - 0.06) = $500,000.

Annual Cash Flow / (Discount Rate - Growth Rate) = Present Value

According to finance theory and logic, the value of a business should equal the sum of all of the earnings that we expect to collect from that business over its lifetime (discounted back to a value in today's dollars based upon how long it will take us to collect those earnings and how risky we believe our estimates of future earnings to be).  

Will earnings grow at 2%, 4%, 6% or not at all?  Is the right discount rate 8%, 105, 12%, or some other number?   

The math says that small changes in estimated growth rates or discount rates or both can end up making huge differences in what value we come up with!

At 2% growth rate, 12% discount rate

$10,000 / (0.12 - 0.02) = $100,000

At 5% growth rate, 8% discount rate

$10,000 / (0.08 - 0.05) = $333,333

Annual Cash Flow / (Discount Rate - Growth Rate) = Present Value

Which numbers are right?

It is incredibly hard to know.  Whose estimates of earnings over the next thirty-plus years should we trust?  What discount rate is the right one to use?

The secret to successful investing is to figure out the value of something and then - pay a lot less.  

How are we going to figure out value?  How can anyone?  Do we have the answer yet?  Hopefully, we have learned some very valuable lessons even if we cannot answer them yet.

Summary:

1.  The secret to successful investing is to figure out the value of something and then pay a lot less!

2.  The value of a business is equal to the sum of all of the earnings we expect to collect from that business over its lifetime (discounted back to a value in today's dollars).  Earnings over the next twenty or thirty years are where most of this value comes from.  Earnings from next quarter or next year represent only a tiny portion of this value.

3.  The calculation of value in #2 above is based on guesses.  Small changes in our guesses about future earnings over the next thirty-plus years will result in wildly different estimates of value for our business.  Small changes in our guesses about the proper rate to discount those earnings back into today's dollars will also result in wildly different estimates of value for our business.  Small changes in both will drive us crazy.

4.  If our estimate of value can change dramatically with even small changes in our guesses about the proper earnings growth rate to use or the proper discount rate, how meaningful can the estimates of value made by "experts" really be?

5.  The answer to #4 above is - "not very."

Additional notes:

These concepts involve a discussion of the time value of money and discounted cash flow.  

In reality, we should look for how much cash we receive from the business over its lifetime.  For the above purposes, we will assume that earnings are a good approximation for cash received.

The Big Secret for the Small Investor

This is the third book by Joel Greenblatt.  It is well worth reading.  He shares many good investing points in a short and easy to read book.  It was published in 2011, 1st edition.

What have I gathered from this book.

It is important to know how to value an asset.  Equally, it is important to pay much less than its fair value to own it.  Those are the fundamentals of investing safely.

He spent many good paragraphs on how valuation is indeed difficult, both for the professionals and the novice.  After spending a great deal explaining the many ways to value stocks (discount cash flow value, acquisition value, liquidation value and relative value), he concludes that these are difficult and not easy.  He gives many good reasons of how small changes in your judgements of various factors can lead to big changes in the valuation.  Also, one is often faced with a lot of uncertainties in many of your assumptions.  

I particularly like his section on earnings yield.   Buy using the earnings yield.  A company with a higher earnings yield is a better one than the other, assuming all else being equal.  He asks his readers to compare this with the risk free investment return, using the bond rate of the 10 years treasury bond.  Stick to a minimum of 6%, even if the present rate is much lower.  If the 10 years treasury bond rate is higher than 6%, for example, 8%, you should use the higher rate in your comparison.  He advises investors to aim for returns higher than the 6% in their investments.  Search for a company, a good company with a good business, that is available at a bargain and from your analysis can give a return of greater than 6%.  Find a second company using similar criteria.  Now you have 2 companies which you think are better than the treasury bond.   Compare the two companies to each other and invest into the better one.  This method is simple and practical; and it rhymes with the earnings yield method of Buffett where he treats his stocks as bond equity equivalents.

Another chapter on how much money to invest was particularly useful too.   How much money do you wish to have in stocks?   If you have 100% of your assets in stocks, will you be able to "stomach' a 40% decline in your portfolio value?  Perhaps, you should only have 50% of your assets in stocks and the rest in other different assets.  Then a 50% decline in your stock portfolio value will only caused a 20% decline in your overall total asset value, assuming your other assets were not similarly affected.  Maybe you can "stomach" this 20% decline without selling out of the stock market in panic.  The author advise each investor to decide on the percentage of their total asset to be in stocks, perhaps 40% to 80%.   For example, an investor may have 60% of his total asset in stock; at certain times he may increase this to 70% and at other times reduce this to 50%.  He caution that this adjustment should infrequent, preferably occur not more than once a year.  Also, no one should be completely out of the stock market at any time, as in the long run, stocks offer the best returns of all investable assets. 

Joel Greenblatt shares a good chapter on Behavioural Finance, another very important topic indeed.  All investors are wired poorly for investing, he mentioned.  They tend to panic and they tend to follow the herd for comfort.  Reading this chapter will certainly benefit many readers in their investing.

There are also many sections on investing in mutual funds, ETF, index funds and others.  Also, he has described well the different types of indexes which are market weighted, equal weighted and value weighted, giving their advantages and disadvantages.  Those who invest in funds will find this segment useful.

There are many valuable lessons I have learned from this book and hope you will find it likewise.  It is a small readable book.  It can be completed a few hours for a fast reader with some basic understanding of investing.

Not inappropriately, Joel Greenblatt is sometimes referred to as our modern day Benjamin Graham, the Benjamin Graham of the 21st Century.

Please read a good summary of this book here:

https://frankploegman.blog/2011/10/30/the-big-secret/