How I Became a Growth Investor

IMPORTANT: Please read the disclaimer before continuing.

This was the exact conversation I had with one of you, I am duplicating it here for more readers to enjoy the content!

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There are two ways we can approach investing.

A) Buy a stagnant business worth $1 for $0.50.
B) Buy a growing business worth $1 for $1 but it may be worth $10 to $20 in the future.

What is the upside for scenario A? 100%.

When you purchased the stock at $0.50 and it moves up to $1, you would make 100%.

How about scenario B?

When you purchased the stock for $1 and it moves up to $10, you would make 1,000% at least!

I used to love businesses in scenario A then… I matured to scenario B.

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In the past, I was investing mostly in Singapore listed businesses. They are companies from industries such as construction engineering and property.

I came across companies like Heeton, Kingsmen Creative, LHT Holdings, Hor Kew, and Perennial Real Estate. I invested in them briefly and I fell into what I termed as value traps.

Since their earnings are lumpy, I tend to use book value per share as an approximate value of the businesses.

What I discovered… shocked me!

They were trading discount to their book value perpetually.

Stagnant Value versus Growing Value

Part 1

Consider Perennial Real Estate, it is trading at Price to Book Value (P/BV) of 0.37x. This means I am buying $1 worth of assets for $0.37! Sounds like a great value buy?

In principle, yes.

You will notice that the business did not increase its value between 2015 and 2018. In fact, the book value per share dropped from $1.63 to $1.60.

If I pay a P/BV of 0.37x, it means I’m paying 0.37 x $1.60 = $0.59 per share for the business.

If the business reverts to P/BV of 0.8x, it means the share price would rise to $1.28.

Take 0.8 x $1.60 = $1.28.

What are my gains? Take ($1.28 / $0.59 – 1) = 117%!

This is known as asset-play.

My issue with asset plays is you would never know when the market recognises the company and re-value it upwards accordingly.

And… since the book value of the company does not grow, it is stagnant. The maximum gains you can extract out of asset-play is capped.

After making the gains, you would have to hunt for the next one, then the next one, then the next one. It makes the entire investing operations very tiring.

Plus, you would never truly know the worth of the assets. During a downturn, the asset prices may fall — causing your margin of safety to fall.

Assuming that the book value drops from $1.60 to $1.25, you’re paying an actual P/BV of 0.47x instead!

Despite having a low P/BV, an anomaly is the share price of these asset-play companies continued to decline.

I was frustrated.

“Was everything I know about investing… wrong?”

I didn’t stand still. When I realised there are more to learn, I knew I had to evolve.

Part 2

Soon, after consulting my network of investors, I realised the markets appraise companies with growing earnings far far more efficiently as compared to companies with stagnant book value. This prompted me to select very stable and predictable businesses with growing earnings.

RELATED: How I Made Money on Auric Pacific 

I started to select companies carefully with a few criteria…

1. Best in class operations
2. Growing earnings

This brought me this company called HYPEBEAST. I wrote about it briefly in August 2017, the share price was roughly $0.20 HKD.

(source: https://hypebeast.ltd/documents/GLN20170814075.pdf)

Noticed their profit before tax? It exploded upwards by 60%! I did some valuation work before the results and bought some.

When the business continued to perform, I added more shares over time.

I averaged up my purchasing price because I felt the business was still undervalued. I also flew to Hong Kong to meet the founder, Kevin Ma. After I purchased the stocks, the business continued to excel and the earnings momentum continued.  The results so far has been amazing and my profits allowed me to do charity and re-invest for my next multi-baggers.

Unlike the first example of Perennial, I sat tight on HYPEBEAST and I made >250% returns. I did not have to make 60-80% in one stock, hunt for the next and repeat the cycle. It is easier to purchase businesses like that.

Reflection

I aim to have a correct process in identifying outstanding listed businesses and buy them. But there is never a correct process unless it is time-tested and you get a satisfactory returns.

Upon hitting a roadblock, I had two choices.

To keep investing in my old ways or unlearn and relearn new concepts?

I chose to embrace new investing concepts and evolve myself.

Warren Buffett also had to change his thinking by adopting Philip Fisher’s framework of buying wonderful companies at fair prices.

Every day, I am consuming tons of investing knowledge. I discard repeated content and questioned myself on new concepts.

Just like a caterpillar that goes through metamorphosis to become a butterfly, we must be willing to evolve continuously.

All of my stock picks need to fulfil my strict requirements and I won’t buy a new company unless it improves the overall quality of my portfolio.