Chapter 6: Leng Yan’s Investment Strategies

6.1 Discovering the Potential of Stocks

• The best stocks are those with growth potential.
• Growth potentials == Profitability are:
  1. High turnover
  2. High profit
  3. Future of the industry

6.1.1 Emphasizing Future

• No matter how well the company was doing in the past, the fact that the company could not fare well in the future means that its time to give up on the stocks.
• Making choices are inevitable in ensuring profit from investing.
• Only through choosing companies with potential that we could succeed in investing.

6.1.2 DO NOT NEGLECT THE FUNDAMENTALS WHILE PURSUING DETAILS

• Most investors placed too much emphaiss on the share price, volatility and fluctuation rate as the buy-in price while neglecting the fundamentals, resulting in recurring losses.

  Taking an example where stock is analogous to a tree. The growth potential is the “root” while the share price is the “leaves”. With deeper “root” (company understanding) comes better “yield” (profit) –> good stock; However, with shallow “root”, the tree will definitely wither no matter how blossom it is currently –> bad stock.

• There are too many factors that influences short-term share price of a stock:
  • politics
  • economy
  • emergencies
  • herd mentality
• Therefore, it is more practical to seek for the long-term potential of a stock.

6.1.3 Characteristics of Blue Chip Stock

1. Outstanding Management
   • The most important factor for a company’s success.
2. Satisfying Market Demands
   • The ultimate purpose of a business is to obtain profit from offered products.
   • Important indicator for growth potential.
3. Competitive Edge
   • Every successful company have their way of maintaining their lead (competitive pricing, quality product and services) in respective market.
   • e.g. Fraser & Neave (F&N), Nestle, Carlsberg etc

As stable as blue chip stocks are, the market had long matured. There will be not much growing space, but its ideal for converatives that seek for dividend.

6.1.4 新手法经营传统生意

1. Be realistic
2. Be logical
3. Use common sense

For business at initial stage, no realistic and reliable data available. Use 2. and 3.

Warren Buffett:

“I would rather be broadly right than precisely wrong”

6.2 Break-even

6.2.1 Conservatism

• Does not mean ensuring that the share prices will not drop, which is impossible.
• It means to ensure that the targetted stocks will not be problematic.
• e.g.: bankruptcy, persistent loss, capital shrinkage etc.

6.2.2 Risks with Market and Corporation

• 2 main sources of risk in investing (i.e. market and corporate)
• Market risk: FLuactuation of share market, inevitable, fck it.
• Corporate risk: Rise and fall of a company, limitted control by commoners. –> pay attention to cash flow.

6.2.3 Cash Flow is King

• Balance sheet –> the liabilities of a company
• Cash flow statement –> non-cash loss (e.g.： depreciation, foreign exchange loss. etc.)
• For the case where non-cash loss is the majority, the company is still losing moeny although having positive cash flow.
• But, the company will not experience turnover problem, thus, less likely for bankruptcy.
• On the surface, such companies seems risky, but in fact they are safer than profitting companies with cash turnover issues.
• Through proficient analysis on cash flows, the guts to purchase companies that suffer losses from foreign exchange during financial turmoil but with normal business operation companies will be present.

6.2.4 No Problem with High Liabilities

• Some stock analyst geh kiang go buy stocks with high cash with less liabilities during financial turmoil.
• However, author disagree with such strategy as liabilities are not the main factor that affect the survival of a company, but cash turnover is.
• Why not focus on companies with more cash even though having some liabilities.
• Although the best is to target the rarest/ most expensive (i.e. companies with high cash in-flow with huge reserves).
• Keep in mind that no matter how attractive is the return, if there is certain risk in losing the capital, then fck it/ nope.
• Only being conservative that we could steadily accumulate our wealth in the most secured way.

Factors causing Bankrupty

• Fraud
• Industry downturn
• Vicious competition
• Bad management
• Investment failure
• etc

6.2.5 Power of Compound Interest (复利)

• The path to wealth is through “no loss” instead of “earn more”.
• By achieving “no loss”, even with less earning, but consistency will snowball the earnings into huge amount through compund interest.
• Being conservative does not mean being passive, its using passiveness ass aggressiveness.

6.3 Fortune from RUG

R: Recovery stock
U: Undervalued stock
G: Growth stock

6.3.1 Cheap Stock /= Bad Stock

• It is true that most cheap stocks are bad stocks, however, among the cheap ones there are quality stocks hiding there.

6.3.2 Qualities of Bad Stock

• Do not use the high/low of share price to evaluate quality of stock, use the following instead.
  1. Persisting annuyal losses
  • Persistent losses indicates passive company management.
  • Except for special cases such as Financial Turmoil in 1997 that occurs unexpectedly causing good companies to suffer losses as well. (Does not mean that management is poor)
    1. Negative shareholder’s fund
  • Usually classified as financially distressed companies.
    1. High Debt
  • Coupled with persistent negative cash net outflow.
  • Unable to repay capital, unable to offer dividend, easy to suffer bankruptcy.
    1. Sunset industry
  • Grim future, high unlikely to turn things around.

6.3.3 R: Recovery Stock (复原股)

• Some companies, with good usual performance might suffer losses during unexpected events.
• However the losses are one-timed and temporary, very likely to regain profit afterwards.
• Suitable for medium-term investement (1-3 years).
• Not all plummeting stock is worth the investment, some might not bounce back afterwards [一蹶(jue2)不振]. (These are not recovery stocks)
• Since the plummet is one-timed, when considering the stock, it is best to consider 5-year averaged performance as evaluation standard to improve confidence.

6.3.3.1 Characteristics of Recovery Stocks

1. The company is usually making profit, the plummet is one-timed and unexpected.
2. Strong cash flow, usually net cash inflow.
3. Growing product sales.

Example 1: Notion

• 5 years before 2013, the annual profit is considerable, however, between 2014 - 2015 due to wrong decision of signing forex hedging [外币对冲] contract, causing losses in 2 consecutive years.
• The mistake caused the share price to drop from RM 1.30/ share to RM 0.35/ per share. But the drop is irrelevant to the core business of the company.
• In 2016, the expiration of arbitrage contract [套汇合约], the performance of the company improved and share price rebound to RM 1.00/ per share (over 100% of increase).

Notion 2009 - 2016 Performance

• * Loss due to arbitrage

Example 2: Eversendai

• From 2010 to 2015, the company had considerable profit.
• In 2016 the oil shares plummetted and the company was heavily affected for investing in O&G company in Singapore.
• The company sold all its invested stocks on the company and suffer huge losses causes RM 0.36 net loss per share.
• In the first half year of 2017, without the special losses, the business gained profit and rebound from RM 0.40 to more than RM 1.00 per share. (A classic recovery stock).

Eversendai Performance

• * Loss due to special loss

Example 3: LCTITAN

• The initial public offering (IPO) was in July 2017 at RM 6.50 per share.
• The 2nd quarter report was announced at August 2017, due to water shortage, the company experienced loss and the share price dropped from RM 6.00 per sahre to RM 4.20 per share within 2 days.
• After the waster shortage issue was resolved, the share price rebound to more than RM 5.50 per share within 2 weeks.

6.3.4 U: Undervalued Stock (价值被低估的股票)

• High quality stocks (Usually blue-chip stocks), due to their stable performance, wil usually stay at high price level.
• The growth of these stocks are usually stagnant or slow due to market saturation.
• Return of such stocks are usually not attractive.
• However, it is best to keep such stocks in your list and perform long term observation on them.
• There are chances that unexpected events occur causing the drop of share price making them undervalued.
• Most high quality stocks possess 4 of the 5 criteria in stock selection.
  1. Growth
  2. Provide dividend
  3. High ROE
  4. Strong cash flow
• Leaving only the 5th criterion, low PER.
• High PER indicate overvalued stock, causing hesitation in investment.
• In such cases, long term observation should be made to identify the trend of the share price.
• Once there are undesired one-timed or temporary event occurred, causing the drop of share price, its a buy-in chance. (e.g. LCTTITAN in Example 3)
• Such skill requires experience, which is why long term observation is needed.
• However, if the cause of the drop in share price is the declining profit, its not a good investing opportunity.
• Continuous study is the key.

6.3.5: G: Growth Stock (成长股)

• Companies with continuous rise in profit and income, if bought at reasonable pricing, should not let go at slight profit, should be patient and wait for more profit.
• Many such companies have PER of more than 50 times (sibeh overvalued), once price dropped, extremely hard to recover back to previous peak.

Example 4: KAREX

• Karex is a growth stock, in 2016, the share price was RM 3.00 per share at PER of 45.
• However, the performance was not satisfactory in 2017, causes the price to plummet till RM 1.50 per share.

6.3.6 Section Closing Note

• The RUG method is best to be applied together.
• Taking UMW’s 4 core business as example. (automotive, equipment, manufacturing & engineering and oil & gas.)
• Between 2015 - 2016 the drop of O&G and automotive industry causes huge loss to the company.
• The share price drop from RM 15.00 per share (in 2014) to less than RM 6.00 per share (in 2016).
• Contrarian [反向投资者] investors could refer to their sustainability report to seek for any investing opportunities.

6.4 5 Ranking Rule of Stock Selection

• To succeed in stock investment, the following 5 conditions must be satisfied:
  1. Growth
  2. Strong Cash Flow
  3. Logical PER
  4. High ROE
  5. Provide Dividend
• However, it is extremely rare to encounter stocks that fulfills all 5 conditions.
• Therefore, trade-off must be made in most cases.

6.4.1 Trade-off Rule of Thumb (Prioritise Lower Number)

1. Dividend is the first to be traded off. 
	As long as the stock value will appreciate, there is still opportunity for profit.
2. High ROE is the second to be traded off. 
	Although low ROE means high capital for small return, but there is still opportunity for profit.
3. Low PER is the third to be traded off. 
	As long as high PER stock has high growth rate, the PER will eventually drop in the long run, thus good investment opportunity.
4. Strong cash flow is the fourth to be tradedo off. 
	The survival of the company is still achievable when having long term negative cash flow through restructuring company management.
5. Leaving the final one growth as the most important condition. 
	Growth is the prime mover of the whole company, when growth is obvious, the remaining conditions will be achieved eventually.

6.4.2 Relationship Between Growth and ROE

• Companies with growing revenue and profit have better financing, lower capital, easier to achieve high ROE.

6.4.3 Relationship Between Growth and Cash Flow

• Growing company with increasing revenue will experience reduced cash flow due to increased storage and account receivables.
• Therefore, it is important for grwoing companies to strictly control their fash flow to prevent mismatching

6.4.4 Relationship Between Growth and Dividend

• Company with growth will have reduced CAPEX if the net inflow of the company is maintained.
• With high amount of free cash flow, the company is capable of providing stable dividend.

6.4.5 Relationship Between Growth and PER

• Growth stock usually have high PER, if such stock is held for long term, with annual net profit increase, the PER will decrease over time.
• Therefore, investing in growth stock with high PER is still viable for long term investment.

6.5 Looking at Long Term, Not Short Term

• The common notion of stocks is that the price fluctuation rate is very high.
• Which is the reason that the author emphasizes heavily on fundamentals and long term investing.
• Especially for those that is unavailable to a long period of time.
• The main idea is to stay away from the stock market, hearing less of the noises, thus making clearer decisions.
• People among the trend will usually be blinded with various influences.

6.6 Pay Attention to the Tides Instead of the Waves

• Nobody, not even the author is confident on the trend of stock price in short term (1 day - 1 week).
• Not even Prof. Irving Fisher could predict the Wall Street Crash of 1929.
• The stock market is analogous to the ocean.
• Short term fluctuation is analogous to the waves of the ocean, highly unpredictable.
• Long term trend is analogous to the rising and falling of the tide, highly consistent and predictable.

6.7 Focus On the Companies Instead Of the Market

• Author believes that, more than 90% of stock investors focuses on the stock market instead of the targetted companies.
• The reasons why stock market is more attractive than the companies themselves:
  1. The ever-changing stock market is more stimulating, that attracts gamblers.
  2. Fundamental studies are very tedious, not much investors could afford the time for it.
  3. Information scarcity. Even available information are not easy to understand in terms of language and jargon.
  4. 2 source of income from stock (i.e. share price and dividend). Buy low, sell high is the main profit from stocks which is fast and more. While dividend is slow and less. Moreover, some companies don’t even offer dividend.
  5. Most people tend to follow the majority.
  6. Disinterest in stock investing, hard to gain information regarding the field.
• Author advised not to rely solely on graphs when evaluating companies, include the fundamentals (best to do this first) as well.
• Author believe that the true value of the stock will eventually be the long term stock price.
• Therefore, the author’s attitude towards investing is to buy-in when the price is undervalued. If the stock is over-valued, no matter how good is the stock, its a failure.
• The extent of staying away from stock market is:

  Daily newspaper information/ Internet trades are sufficient. No need to check it every second.

• If the stock experience unusual changes, we must investigate it, and sell it if the business went bad.

6.8 Short, Mid and Long Term of Stock Investment

Shor Term: Buy and sell within 1 year.
Mid Term: Buy and sell within 3 years.
Long Term: Buy and sell after 3 years.

• Time is money.
• If investing in a stock give you 100% return in 2 years, 50% return per year, successful.
• If investing in a stock give you 100% return in 5 years, 20% return per year, remarkable.
• If investing in a stock give you 100% return in 20 years, 5% return per year, failure, same result as bank saving but with much higher risk.
• No matter what kind of term we are investing, the purpose if the same, maximise profit.

6.8.1 Short Term Investment

• Investing in shrot term stocks requires the following condition to secure success:
  1. Sufficient time to manage your portfolio.
  2. Thorough understanding of listed companies.
  3. Able to make prompt decision.
  4. High risk tolarence.
• Rules of thumb for investing in short term stocks:
  1. For short term stock, it is best to buy-in during bull market. Best to choose those with active trading volume, but with strong foudations and fudnamentals. Best to avoid those with low trading volume (hard to sell).
  2. Secondly, best to choose those with high fluctuation (i.e. stocks with high BETA value). However, most popular stocks are not good, as good stocks had been held closely by investment groups, thus usually not active.
  3. Thirdly, best to choose companies with director that is courageous, such stocks are usually active in seeking expansion opportunity during bull market, having explosive potential.
  4. Not to forget, choose those with strong fundamentals.

6.8.2 Long Term Investment

• Principles for investing in long term stocks:
  1. Must choose stocks with strong fundamentals.
  2. Stocks with growth potential.
  3. Under-valued stocks.
• Any mistake will cause huge loss in money and time.
• The easiest evaluation standard for long term investing is profit.
• Whether it could double the profit within 5 years? If yes, can try. If no, don’t.
• When buying in, evaluate whether it is worth the current price? How confident in gaining profit? How much is the expected profit?
• If its either way, then better skip it.
• Past performance are just for reference, not a definite reference for future performance.
• Other than past performance, remember to evaluate factors that are related to the industry.
• Rules of thumb for investing in long term stocks:
  1. For long term stocks, best to choose those with dividend. Increases stock holding power.
  2. Best to buy-in during stagnant market, at reasonable share price, with PER < 10.
• In the end, the aim of stock investment is profit. If feeling incondfident, better invest in other medium, stock is not the only option.

6.8.3 Section Concluding Remark

1. Not matter which term we are investing in, commoners (散户), must follow this one priciple, buying good quality stocks. Any sign of getting financially trapper should not be touched. Its easy to make mistakes, not worth it.
2. Selling or holding a stock depends on the following:
   • Growth potential. A company with annual increase in revenue and profit will always be profitable to keep it forever than repeated buy-in and sell-off.
   • Declining company performance. Even when suffering loss, should be sold off to avoid more losses.
   • Buy/Sell depend on the value. Undervalued –> Keep; Overvalued -> Sell.
3. Do not let the length of investing period affect your holding or selling decision.
   • E.g.: It is expected to double the profit after three years, initially when buying-in. However, due to unexpected condition, the share price had been pushed up, causing bull market with no obvious improvement in the company performance within short priod of time, indicating overvalued stock. The objective had been made, should be sold off immediately.
4. Expected long term investment, but the price value addition is faster thane xpected, making it short term is the best policy.; Expected short term investment, but the stock was forced to become long term investment is the backup plan.
5. Types of stocks that are suitable for a specific term of investment depends on individual condition. Either could bring profit, however, most of the time, buying in at low price and selling out at high price occur on mid/long term investors. For short term investors, its all about luck, as short term share price fluctuations are unpredictable.
6. If missed out on buy-in opportunity, instead of making impulsive move, its better to have some rest, rest is also a type of investment.
7. If the intended stock was purchase for long term purpose, but shortly after purchase, the performance plummeted, it must be sold immediately, not suitable for long term investment.
8. Choosing investing term (short, mid or long) depend on the performance of the company. (i.e.: should be flexible, if buy for short term, but afterwards realized its good long term investing opportunity, should keep it instead).
9. Long term is investing (投资), short term is manipulation (操作). These are the best strategy.

6.9 Investing in Bullish, Bearish or Stagnant Market

Bullish Market: Explosive growth in share price.
Bearish Market: Plummet in share price.
Stagnant Market: Slight fluctuation, inactive stock market.

6.9.1: Stagnant Market is the Best Buy-in Opportunity

• Experienced investors are heavy adopters of contrarian believes.
• When commoners are frantically chasing for a stock, the experienced one will steadily sell out their holdings, gaining huge profit.
• Hiding in shadows afterwards, waiting patiently for market crash.
• When the market is stagnant and the stock agencies are less crowded.
• This is their opportunity to strike, the best time to choose cheap and potential stocks rationally.
• Usually these kind of investors are usually casual investors, the invested capital are extra money intended for dividend from fixed depostis, but believe in gaining higher return from stocks.
• Its an irony where actively pursuing individuals do not get what they want, but the opportunity goes to those who are not that passionate.
• It is all due to the nature of passionate investors that constantly keep themselves close to the market, subjecting to various noises in the market, affecting their ability to make sound judement.

6.9.2 Gaining Huge Profit from Bullish Market

• During bullish market, with appropriate strategy, they will always be profit. The extent of profit depends on the ability to make use of the trend.
• However, no matter what type of market (bull/bear/stagnant), the main idea is still to focus on companies with good fundamentals and growth potential.
• Whenever mistake occur, such stock could still be kept for long term investment.
• Companies with high liabilities, must have strong cash flow with postive net operating cash inflow.
• Best to choose stocks with courageous director as such companies will make use of the opprtunity to expand their business, causing increase in their value.
• By considering the above strategies in bullish market, most risks had been calculated.
• Another viable strategy during bullish market:
  • Constantly keeping the capital value.
  • E.g.: Invested RM 100 M, during bullish market the value had increase to RM 150 M, sell the RM 50 M, keeping the initial invested value constant while reaping profit.

6.9.3 The Highest and The Lowest

• All investors should be mentally prepared with the following notion.

  It is almost impossible to buy stocks at the lowest price or sell stocks at the highest price.
  The is only one person for each case.
  It is considered huge success to buy/sell within the 10% of the lowest/highest point.

• The common problem with investors is the reluctance to cut loss during bearish market, causing huge depreciation in assests.
• When the stock had depreciated to extremely low price, the investor is unable to invest more to average the invested capital per share.
• Causing huge loss in loan interest or potential dividends.

6.9.4 Immediately Sell Off During Bearish Market

• During bearish, no matter how huge the incurred loss is, its best to cut loss.
• Howeevr, if the bearish market is just the adjustment during bullish market, it is still worth it to keep the stock.
• The market is unpredictable, it is hard to predict whether the dropping stock price is merely market adjustment or bearish.
• At time like this, it is best to evaluate using the “value” and “growth potential”.
• If the stock had not been overvalued and is still growing, its still viable to keep it, vice versa.
• To avoid huge losses, investor should perform, limit sell order to limit the losses. (e.g. 10/20% of the invested capital)
• Such strategy should be made use flexibly.
• E.g.: The initially purchased stock at RM 2.00 per share is currently at RM 3.00 per share, the limit could be placed at RM 2.70 per share (10% loss). Or RM 4.50 per share for current share price at RM 5.00 per share (10% loss).
• Keep in mind to invest according to your capability.
• Do not over invest as it will could irreparable losses.
• Do not be swayed by greed.
• Make proper planning before investing, do not bet too much on luck, nothing is free in the world.

6.9.5 Smooth Sailing (百战不殆)

• 2 profit engine in sotck investing:
  1. Rise of stock market
  2. Rise of profit of listed companies
• During bullish market, all stocks will rise, just like rising tide carrying rubbish along.
• As prudent investors, we should totally avoid rubbish stocks as they will sink into the deep sea during falling tide.
• Opportunity is everywhere, no point to risk it.
• Although success rate is not 100%, making use of the 2nd prime mover (profit), has comparatively higher success rate.
• The profit will usually push the stock push especially during stagnant market.
• E.g.: In 2016, Gadang, G Kent, Penta, JHM.

6.10 5 Rules of Making Loan

• In each round of financial turmoil, those that are affected the most are those who borrow money to buy stocks.
• However, borrowing money to invest in stocks is viable in some cases, these cases are worth to learn.
  1. Share price low, borrow more; share price high, borrow less
     • When the share price steer away from the fundamentals, the stock must be sold.
     • Use the sold amount to pay off the debts, do not linger around.
     • Reason being, borrowing money to buy stocks at low price have higher chance of success and comparatively safer at the same amount of debt.
  2. Only borrow to buy good stocks
     • Only borrow to buy stocks that have stable profit and dividend, those that are highly unlikely to bankrupt.
     • Author’s friend apply this method in buying plantation stocks, he believed that buying plantation stocks is equivalent to buying plantation land.
     • Land price only rise never fall, coupled with his standard of buying those with > 5% dividend leading him to success.
  3. Must Be Decisive
     • The first thing to do during market crash is to sell off the stocks regardlessly to pay off your debts.
     • Evaluate the next plan afterwards.
     • Indecisive investors should not borrow money for stocks.
     • During market crash, all stocks will plummet.
     • Unless you are willing to spend time following the progress of stock, and sell off if any undesired situation occurs.
     • This is to avoid bankruptcy following market crash that occur to many commoners.
  4. Do Not Speculate (投机)
     • Mortgaging (抵押) neccessity like house to speculate is equivalent to suicide.
     • Speculating is the same as gambling, borrowing money to gamble lead to bankruptcy.
     • It is the best to be realistic, invest according to capability, work step by step.
  5. Have Plans and Aims
     • Do not endlessly loan for stocks.
     • The best way is to sell half of it when the share price rises to reduce current liabilities.
     • At the same time, reducing the liability of the whole portfolio to < 20%.
     • Author advises to create a buffer zone between you and the stock price.
     • E.g.: If the initial buy in price is RM 2 per share. Selling 50% at RM 3 per share will reduce your invested capital to RM 1 per share.
     • This allows you to have enough time to sell off your stocks during market crash, creating a safer buffer zone.
• If reader could closely follow these rules, staying away from greed, the author advises to loan 30% of them for stock.
• Keep oneself safe and avoid it otherwise.

6.11 Beward of Asset Trap

• NTA was once one of the author’s 5 ranking rules of stock selection.
• However it was replaced due to following reasons:
  1. No matter how many asset the company have, at constant stagnant/ declining profit, the stock will crash as well.
     • Without growth and profit, high amount of asset will cause asset trap, trapping the money of investors.
  2. Theoretically, companies with high asset will give back more during liquidation.
     • Although making sense, sounds safer, the method still could not be established.
     • Because for company with high asset means that they are doing well, liquidation will hardly occur trapping investors money.
     • On the other hand, company with no asset with constant negative asset will suffer losses. Investors will still get nothing after liquidation.
  3. High asset but poor profit indicates that the management fail to efficiently make use of the asset.
     • This is a sign of poor management, leading to low return in most cases.
  4. Land is the best asset that maintains value.
     • Companies with strong assets are usually achieved through holding on lands instead of business profit.
     • This kind of company have less free flow cash, mostly do not have dividend/have negligible dividend.
     • If the share prices are not doing well, investors will gain nothing.
  5. Some strong asset companies will use capital from minority shareholders to privatise company.
     • The major shareholders will use the capital from the minority to hold lands.
     • The appreciation of lands create strong asset.
     • With sufficient asset, the majority shareholder will use company capital to buy shares from the minorities.
     • Leading to the majority shareholder holding 100% of the equity, privitising the company without any money. (资本回退)
     • In the end not benefitting the minority shareholders as well.
• Strong assets will only benefit the minorities under these conditions:
  1. The company core business gain profit from tangible assets.
     • E.g.: Industrial company will make profit from tangible assets.
     • With increasing profit comes increasing dividend, benefiting shareholders.
     • The only benefitting aim of purchasing asset is to increase profit.
     • Purchasing asset for other purpose is equivalent to poor management and misconduct, not worthy of investing.
• Most stocks have NTA far higher than stock price, creating illusion of being undervalued, but proved otherwise upon investment.
• Once the stocks without growth experience loss, the share price will plummet.
• Keep in mind that only with growth that asset will create profit.
• Withou this condition, its a trap, an asset trap.
• Therefore using NTA as evaluating tool is irrational.

6.11.1 Avoiding Asset Trap

• Answer: Purchse stocks with low asset, high return. (Asset Light Investment)
• Originated from 3 industries:
  1. Companies with high ROE will have lower fixed assets.
     • It is obvious after comparing the ROE across industries.
     • Comparing glove stocks and steel stocks,
     • The former has lower fixed asset, faster return –> Asset Light
     • The latter has higher fixed asset, slwoer return –> Capital Intensive
     • From past 10 years performance of industries, it could be found that at the same capital, the return of glvoe stocks is way higher than steel stocks.
  2. Product that has repeated consumers.
     • Some enterprises although with ordinary products, but with repeated consumers, the fixed asset had been depreciated till negligible compared to increasing revenue.
     • Good quality stocks such as: Nestle, Ajinomoto, 3A， Beer stocks etc.
  3. Profit from intangible asset instead of tangible asset.
     • E.g.: Technology stocks, Internet (software design), service stock (insurance), etc.
     • Improvement of economy will improve the percentage of service industry in the whole economy.
     • Service industries asre usually asset light, they profit from brain not from labour.
• Its a trend of improving economy.
• Therefore, the return of asset light stocks is better than capital intensive stocks.

Reference

[1] 冷眼, 30年股票投资心得. 马来西亚: 辉煌世纪, 2018.