Seeking 'fundamentally strong' firms, he considers CEOs' character among other factors
Doctor Daniel Kao may have been introduced to investing as a young adult, but it took marriage for him to realise it was a vital life skill.
"When my wife and I struck out on our own after getting married in 2012, I realised I was in serious trouble as my savings were not increasing.
"Luckily I realised that early in life. Some people don't realise that for years. That was one of the factors that led me towards investing," said Dr Kao, 33, who runs a clinic with his father.
He was introduced to stocks by his accountant mother as a 23-year-old medical student at the National University of Singapore, but took investing seriously only a few years later.
"It was 2009 when I first read and really learnt about stock investing. It was then that the first ideas of starting a business and becoming serious on learning how to invest in stocks came into my life.
"Back then, I couldn't grasp the concept that stock investing and business are actually one and the same. I was still a houseman then and working in a government hospital and I didn't have the time to take action, but the seeds were planted in my life," says Dr Kao, who is married and has a one-year-old daughter.
These days, he looks out for what he calls "fundamentally strong companies". He is also an executive director at a firm that teaches value investing.
He says firms should have a business model that is scalable and fast with a great product, great financials including liquidity and solvency - he looks at things like debt and equity - and a business model that is protected by competitive advantage, among other things.
Q Moneywise, what were your growing-up years like?
A My family had no financial issues as my father had a stable income. However, this led to me not understanding the true value of money and how difficult it was to make money.
During my earlier years, I splurged unnecessarily on material things. My wife came from a less wealthy background and when we were dating, she asked me many times to save my money, which I simply couldn't because of my spending habits.
Q How did you get interested in investing?
A Eventually, I discovered that investing is not merely a skill domain on the stock markets. It's a wisdom that you apply to your lifestyle as well. When you work and spend, you are trading your time for money.
My initial foray into the stock markets was largely fuelled by a desire to earn more money. This is no longer the case, as I learnt so much more about why investing has impacted my life positively.
In 2011, I learnt I could sell options around stock prices to generate returns. I started off with this strategy on flash memory chip producer Western Digital, my first stock. I started off in 2012 by selling options around the stock's price, which I felt was fairly valued at that point. Eventually, I was assigned the stock when it hit about US$50, some time in early 2013.
Q Describe your investing strategy.
Worst and best bets
Q What has been your biggest investing mistake?
A I invested in the shares of fashion brand Coach in 2014 and lost about US$6,000. I overestimated its competitiveness.
My biggest mistake was underestimating the importance of an economic moat - a term popularised by investor Warren Buffett, referring to the competitive advantage a firm has over others in the same industry.
Q And your best investment move?
A Probably the best investment move was to buy into Singapore stocks late last year, as a lot of businesses were undervalued compared with the US market. I probably gained about 20 per cent over the three to four months from those stocks.
I also invested in a private business which I believed was at a tipping point to profitability. The owners are absolutely fantastic leaders with passion, drive and foresight. It is doing very well and growing exponentially.
I don't have an exact valuation for the private business I took a stake in, but I believe there is potential that the owners will grow the business by at least 10 times, in terms of revenue and profits from its current state where profits are starting to come in.
A When I wanted to learn about investing, the first thing I did was to go on Amazon and look for bestsellers. Lo and behold, one of the best-selling investment books was The Intelligent Investor by Benjamin Graham.
After reading it, I was incredibly struck by how logical it sounded. That was when I gravitated strongly towards value investing. I also learnt from my mentor Sean, now my partner at Value Investing College, to piece together what I learnt about value investing from books and the Internet.
I've learnt technical analysis including candlestick charting (a financial chart that shows price movements of financial instruments like stocks).
About three to four years into investing, I was incorporating it into my strategies. These days I use only technical analysis for selected actions and positions that I'm not gunning for the long term, such as selling short tenure options.
Other things I look out for in a fundamentally strong company is that it has to be cashflow generating, while looking at the management such as the chief executive's character and management remuneration. It also has to be efficient in generation of returns, so I look at the return on equity.
Q What's in your portfolio?
A In the last 12 months, I received an estimated $70,000 in terms of dividends, capital gains that were cashed out and option premiums.
I still put my money into my stock account but not directly into equity. I've been very conservative in the recent one to two years, opting to build a war chest for what's coming, and I'm holding mostly cash right now.
I'm extremely selective in what I buy into in this current climate and have sold most of my previous portfolio - which used to be a mix of US stocks and options that generated about 16 per cent in 2015.
Investors probably shouldn't be putting their money all in at this time. I'm currently holding three counters, one in the United States and two in Singapore.
One is footwear company Skechers USA that I bought at US$27.50. It was at US$24.60 in May, and it's about US$27.17 now.
NOT GOING FOR LONG-TERM POSITIONS
Being selective, if I invest now, the business must be incredibly good or show certain short-term upsides. I'm not going for too many long-term positions, unless I'm worried I won't be able to get back the stock at the current price.
DOCTOR DANIEL KAO, on his immediate investment plans.
I am gunning for the long term and I believe there is significant upside potential for this business.
Q What does money mean to you?
A Money to me is a means to buy time with my family and people I love in my life.
Q What's the most extravagant thing you have done?
A Travelling to Iceland for two weeks with my wife and two other friends. It was about $7,000 to $8,000 for each person.
I did it because I love nature, the cold and quietness. I'm a huge introvert and dislike crowded places. Iceland is really very beautiful, it was like a dream.
My wife and I still talk about it till today. I believe that paying for experiences is something that is worth it because it forms memories with the people you love!
Q What are your immediate investment plans?
A I've an investment amount of $300,000 to $400,000 set aside to go into the stock markets once the opportunity arises.
Being selective, if I invest now, the business must be incredibly good or show certain short-term upsides. I'm not going for too many long-term positions, unless I'm worried I won't be able to get back the stock at the current price. My priority is to keep the capital available for larger opportunities to come.
I'm aiming for small-cap companies that display high growth properties. High growth stocks are often expensive, and for good reason as you are paying for intangibles in the business model. I'm hoping to pick them up when the market crashes.
Q How are you planning for retirement?
A Retirement is something I've thought of, but I realised I'd rather carry on doing what I'm doing. I love to speak, teach and be part of businesses either as an investor or entrepreneur. However, I would love the opportunity to travel and stay in quiet, temperate and mountainous areas when I'm old.
Q Home is now...
A A four-room HDB apartment in Punggol.
Q I drive...
A A blue Nissan X-Trail.
A version of this article appeared in the print edition of The Sunday Times on August 27, 2017, with the headline 'How this doctor diagnoses investments'. Print Edition | Subscribe
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