Small Change

Spotting the best investment ideas

Instead of chasing after flavour-of-the-day stocks, it may be better to invest in what you know - from observing trends and happenings

There is a lot of fear and uncertainty in financial markets these days, with investors groping for directions amid a string of bad news, from Brexit to the threat of another interest rate hike in the US.

It's even worse for those who have lost money chasing stocks in the oil and gas sector, where prices have plunged since the crash in oil prices last year.

Quite a few investors are also licking their wounds from investing in high-yield bonds whose issuers have defaulted on payments.

Given the cloudy outlook, I was not surprised to find a big crowd at the investment talk I gave recently at Library@Orchard. Many people had turned up hoping to get a sense of what is going on and hopefully receive pointers on how to invest their nest egg and deal with dud investments.

It turned out to be a highly engaging session that lasted two hours and could have stretched even longer, if not for the library's 9pm closing time.

The audience peppered me with questions on a wide range of topics, from buying an HDB flat to investing in foreign currencies.

Not that I minded. The session was part of a series of talks where readers can ask writers from this newspaper questions on a range of topics, from finance to healthcare. Speaking at Library@Orchard also holds a special significance for me as I live in the vicinity and spend some of my weekends there browsing through its rich collection of books.


ST ILLUSTRATION: ADAM LEE

Since I launched my first book - Small Change: Investment Made Simple - three years ago, I have started to speak more frequently in public. I find these talks fun and intellectually stimulating as I give plenty of time for a question-and-answer session.

The big draw about my talks is that they are free and I don't have an agenda to promote financial products of any kind, which is the bane of many other talks of a similar nature.

What I notice is that the audience is quite well-informed, usually raising issues that draw on the experiences I have accumulated in tracking the stock market over the past 30 years. This often leads to insights which I would otherwise have missed.

Take the library talk. I found myself discussing the great fund manager Peter Lynch, even though it wasn't part of my script, and the traits differentiating him from the rest of us that make him such a successful investor.

By relating how Mr Lynch gets his great investment ideas, the discussion also illuminated where many of us have gone wrong in our investment approach.

Mr Lynch's philosophy is simple enough: "Never invest in any idea you can't illustrate with a crayon" is a favourite catchphrase of his. It is a stark way of warning investors not to put money into businesses they don't understand. Another of his catchphrases is to "invest in what you know".

However, such advice will only safeguard our nest egg and ensure we don't run up big losses.

To really grow our nest egg, we need to have good investments and that is what I like best about another of Mr Lynch's suggestions - that we sometimes get our best ideas while we are out with our families, travelling or talking with friends and associates.

In his bestseller One Up On Wall Street and its sequel Beating The Street, Mr Lynch explains how he stumbled onto big winners such as Apple and Dunkin' Donuts.

He writes: "Apple computers - my kids had one at home and then the systems manager bought several for the office. Dunkin' Donuts - I loved the coffee."

I told my audience that, like Mr Lynch, I too had my eureka moment but, unlike him, when the investment opportunity came knocking, I failed to grasp it. As such, I can probably be held up as a good example to explain the big difference between him and the rest of us.

Four years ago, I travelled to my ancestral village of Fujian in China for the first time in more than two decades. My Chinese cousins, who had not seen me for years, were delighted to have me back.

The years had been kind to them and they had prospered. During my previous visit, they were so poor they could not even afford a telephone in the house but now they can't do without their mobile phones, which they carry with them everywhere they go.

They taught me to use an instant messaging app known as Weixin, then gaining widespread popularity in China, which also offered free video phone calls over the Internet that would enable us to keep in touch regularly.

At that time, I thought to myself that buying shares in the company that owns Weixin (or WeChat as it is now called in English) would be a great idea.

When I returned to Singapore, I looked up the ownership of Weixin and found that it belonged to a Hong Kong-listed firm called Tencent Holdings.

This is where I departed from Mr Lynch. Tencent had risen 56 per cent in the previous nine months when I looked it up, and since its price had appreciated so much, I thought it would be prudent to wait for a pull-back before investing.

Too bad for me, there hasn't been a significant correction since then. Its stock price has been on a roll, gaining 570 per cent in the past four years and making Tencent one of the 20 most valuable firms on the planet.

As I recounted my big miss to my audience, it reminded me of another of Mr Lynch's sage observations: "Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in the corrections themselves."

That wasn't the last to be said about Mr Lynch that evening. One participant asked how he can make money, considering that the stocks he owns are getting delisted one by one, leaving him holding a lot of cash but bereft of good investment opportunities.

My reply was that he should consider buying the shares of the offeror if it is listed, after evaluating its business model and the reasons for doing the takeover.

It harkens to another of Mr Lynch's suggestions: "The number of really brilliant companies is finite, so when you do have one, it might be better to buy more than to go out to find something else."

That is why I feel that in a takeover situation, when you get your money back from selling the shares to the offeror, rather than look for something else to buy, you should seriously take a look at the offeror itself.

In my case, this rationale has worked a number of times. When I got my money back in the takeover of Keppel Capital Holdings 15 years ago, I used it to buy the shares of the offeror, OCBC Bank.

I did the same thing with Overseas Union Bank, whose shares I swopped for those of United Overseas Bank, which bought the lender.

My only regret is not doing the same with Singapore Food Industries (SFI) when it was bought by Singapore Airport Terminal Services (Sats) in 2008. In the eight years since taking over SFI, Sats has almost quadrupled in price.

It goes to reinforce my point that sometimes the best investment ideas are right under our noses and there is no need to chase after flavour-of-the-day stocks that we don't understand. We can outperform the so-called investment experts if only we sit up and pay more attention to what is happening around us.

A version of this article appeared in the print edition of The Sunday Times on September 25, 2016, with the headline 'Spotting the best investment ideas'. Print Edition | Subscribe