Student seeks high and stable return on equity

PHOTO: DANIEL NEO FOR THE SUNDAY TIMES

Nanyang Business School student Chua Chung Yeow is already learning how to manage an investment fund, thanks to some extra-curricular activity.

Mr Chua, 23, who is pursing a double degree in accountancy and business, is vice-president of the research and education department at the Nanyang Technological University (NTU) Investment Interactive Club.

The unit manages a student fund with virtual money, allowing the 50 students on the team to experiment with their approach to investments.

He says: "I put my team members into five groups, and each group does research on three industries in the Singapore Exchange to come up with stock recommendations, based on a top-down fundamental approach.

"We also have a technical team that focuses solely on technical analysis, where they are currently in the process of developing a technical system for stock selection."

DO YOUR HOMEWORK

I learnt to always re-check the company's business models and products, and the governance of the countries it operates in, before I look at new industries. Otherwise, stick to what you're familiar with.

MR CHUA CHUNG YEOW

He says the market value of the club's invested portfolio is at least US$400,000 (S$541,000), with a return of 9.25 per cent for the year to date, excluding dividends.

"It's a way for us to experience what it'll be like if we are in an investment firm. We officially started documenting records this year, so over the years, I want our members to see what kind of style performed the best," he adds.

Mr Chua, who was inspired by his father to take up investing, initially planned to join a fund that does value investing but he has decided to try other things, including running his own business.

"I'm quite open to options, and thought about running my own businesses. In fact, I started an e-commerce business a few months ago. I'm trying to see what else can be manufactured to be sold on Amazon. I'm still trying to find out what I want to do in future but I decided to start a business, to quickly force myself to try."

Q Describe your investing style.

A I follow, mainly, a mix of Benjamin Graham and Warren Buffett's style of value investing. Basically, I look for companies with strong balance sheets, cheap price ratios and sustainable business models.

Q How do you choose the companies that you invest in?

A I generally use fundamental analysis. I choose only companies that are churning out good cash flows, and are currently trading at a fair multiple.

When I am screening stocks, I look for these criteria: availability of free cash flow, low price-to-earnings compared with the industry average and their own historical average, and a high return on equity where more than 10 per cent is my screening criterion.

I also look at stability in terms of the return on equity, which means, it doesn't fluctuate too much. I prefer less long-term debt as I am risk-averse so, current assets should be worth more than long-term debt.

I also look out for visible year-on-year earnings growth.

After selecting the companies that pass my screening, I look at the management, whether they are also owners of the business, and the business model of the company.

This will help me see if I feel comfortable that their current financial statements will be similar in future, and this way, I'm more certain of my investments for the long term.

Q What is in your portfolio?

A My portfolio is worth five figures, across two brokers. I hold only United States stocks.

My holdings include Apple, IBM, ConocoPhillips and Western Digital. I currently hold 10 stocks in my portfolio.

Most of the time, when I buy a stock, I intend to hold on to it until there are better opportunities.

Q What were your best and worst investments?

A My best investment, so far, is Apple, which I bought more than two years ago when it was at a low. The paper return is about 120 per cent so far, since I have not sold a single share.

The worst investment for me happened 18 months ago. I invested in oil and gas company Ecopetrol (EC), which is in an industry that I had no experience in. But the financial statements looked decent at the time.

Once oil prices came down late last year, my EC holding came crashing down, from $35 to $12 today. The large fall in price is also attributable to the fact that it operates in unstable regions.

Two big assumptions that I made, due to my inexperience in the industry, led to my losses. I missed the instability in oil prices, and underestimated the impact of being in a volatile environment.

I learnt to always re-check the company's business models and products, and the governance of the countries it operates in, before I look at new industries. Otherwise, stick to what you're familiar with.

Q What was the one that got away?

A The one that got away for me was Cisco, 18 months ago. Through my screening, it came through as a good opportunity but I missed it because I chose EC instead. Cisco is up about 50 per cent since I screened it, and it is also paying a 3 per cent dividend yield.

Rachael Boon

A version of this article appeared in the print edition of The Sunday Times on July 12, 2015, with the headline 'Student seeks high and stable return on equity'. Print Edition | Subscribe