I can barely believe my eyes.
Yes, I could reasonably expect one to double, but for the next stock to triple, seemed almost impossible. Especially in a Singaporean market, where one would expect it to be the sleepy backwaters of finance.
It’s always easy to look at what didn’t work in the context of investing, especially when you’re more likely to lose, than to win.
That’s why the likes of Warren Buffett have said,
Rule number 1: don’t lose.
Rules number 2: Never forget rule number 1.
What seems to work in the Singaporean market
Now, now, do you know what even works in this market?
Theory works, but what works better is life experience.
Just let me tell you how I’ve been burnt.
In 2018, I thought I was smart. I found this micro cap trading at 20 cents and thought it was an immediate steal. The Price/earnings ratio was 2.3, and I thought it was a bargain. I never thought why it was so cheap.
And it promptly fell, 80%.
When I exited, I lost $3000.
Don’t do what I do.
Here’s some better ways.
Know your macros, before you know your micros
In investing, it’s best that you know some themes you’re playing to.
But when I eventually added to these two positions, the themes were:
- Singapore will continue to be a magnet for wealth
- The rich will get richer, and will want to spend on signals of wealth (think luxury goods, fancy houses etc.)
It does help to know the overarching macro environment. Don’t get me wrong. You don’t have to know what ‘flattening yield curves’ means for your investments. All you need to do is
- Have a hypothesis
- Execute according to that hypothesis
- Execute with courage and conviction
For example, in a rising interest rate environment, you know that people are going to be more price sensitive. That might mean that consumer defensives like the supermarket Sheng Siong, might end up doing better than expected.
You might want to buy that then.
Market cap above $600m
When I first started using Stockopedia to screen for ones that had good fundamentals, I made the mistake of going for micro-caps.
That stung me badly, as you can see from this graph. I lost $3000, and possibly could have lost more as the share was suspended from trading.
If you’re choosing a stock today, whilst it may seem to make sense to go for ‘cigar-butts’ (those stocks that look like their value is underpriced within the wider investment community), you may end up with a soggy cigar butt that doesn’t give you a final puff.
What might work better is this.
Quality momentum seems to pay off better than quality-value-momentum
When I first entered PropNex, although the screen showed that it was high in its quality of earnings with a high profit margin, and an even higher return on capital employed, I was scared because it had reached an all-time high of 73.5 cents. It seemed as if it couldn’t go any higher.
I was wrong.
This is where the stock market can sometimes be hard to predict. In most situations you would expect a certain degree of ‘regression to the mean’, or a return to the level it first started at.
But with stocks, they are live, operating businesses that try to grow their profits.
Growing profits may mean growing share prices, as the market begins to realise their value.
Scalable (and simple) models
Propnex remains one of my personal favourites because of just how easy it seems to scale this particular business.
Their strategy is simple.
Get more agents, which equates to more commissions collected, and more profits in the bank.
I love this model because its deceptively simple, and has helped them to shoot past the 10,000 salespersons mark, to the 12,000 salesperson mark.
And it’s a simple way to scale their profits.
On the other hand, stocks that haven’t done as well for me are ones where the method of scaling profits is a little more complex.
Valuetronics, an electronic parts manufacturer, is another example. You might have thought its a simple case of just making more electronic parts. But it’s not that simple.
Each electronic part needs to be designed, before the factory is set up to make that part. And you will then need to ship the part out.
It seems to be more complex than just the act of brokering a sale between buyer and seller, in the property market.
For this particular season in the stock market, as of writing now, the themes I’m betting on are:
- People will get more price sensitive due to inflation, leading to an uptick in value for money goods, especially consumer retail
Sheng Siong, for its margins and operational efficiency
On paper, it sounds like an easy business. Grow the stores, grow the sales.
But supermarket retail is a fiendishly difficult business to operate.
Let me just show you how others have been massacred by Sheng Siong in the market.
And while FairPrice uniformly prices its goods across all stores – even for FairPrice Finest – Sheng Siong picks and chooses.
Depending on location and surrounding competition, prices differ at each outlet. With such price differentiations, “that perception of them being value for money is very strong,” noted Kee.
Discerning consumers who compare prices could find Sheng Siong cheaper in certain locations because of such variability in pricing. This is why there is a general misconception that Sheng Siong offers lower prices across all its outlets.
The Fairprice Story, by Sue Ann Chia and her colleagues at The Nutgraf
This has shown in the profits, with Sheng Siong announcing S$133.6 million in profits from a revenue of S$1.4 billion.
FairPrice? It just made S$99.8 million from almost S$4.3 billion in turnover the same year.
Of course, FairPrice is a social cooperative that aims to help Singaporeans with the rising costs of living. That’s why some of their initiatives this year has included absorbing the cost of GST.
If you look at Sheng Siong, their ability to eke out ever increasing margins from every store is incredible. For example, if you go to their store in Clementi, you would see that they have snacks along the escalator up, persuading you to just grab a snack.
If you look at the margins above, they also grew margins after COVID. I repeat.
You would have expected that after the stockpiling during COVID, their revenue margins would have tapered downwards. But it didn’t.
They continued to grow it.
They also are ruthless when it comes to closing stores that are underperforming, as seen below in the Q3 2023 report. They closed the Yishun Central store in 2022, refusing to allow a drag on their profits.
It shows an ability to be clearheaded about making tough decisions.
Food Empire for its ability to target emerging markets
If you hear a Singaporean company doing business in Russian markets, you might wonder what the hell it’s doing there.
Well, Food Empire is making money there.
Lots of it.
They have nearly dominated markets there, with their MacCoffee brand being one of the most popular brands in Russian-speaking markets such as Russia, Ukraine, and the Eurasian markets such as Uzbekistan, Kyrgyzstan and Belarus.
Their profit before tax tripled compared to the previous year. Whilst it attributed this to the growing consumer demand in Russia, it also acknowledged that its years of investment in South Asian markets (primarily India) had started to pay off.
Their profits in South Asia saw a 127% increase.
That’s simply incredible.
REITs, if you can hold out for a few years
REITs have been badly beaten down in the current interest rate environment, with many of them falling a minimum of 20% from the start of year. It also means that even if you close your eyes and pick one, you could possibly win.
But there’s a play there which you do have to go and see.
You can be smart, but the market needs to realise it
Nothing is as sad as an idea whose time has not yet come.
You can be right, but end up still losing for a long time, because the market doesn’t realise the value of the stock you’ve chosen. Don’t let that happen.
Choose stocks that have a substantial volume, because of its market cap. Ideally this would be above $600m, or you might risk having retail investors looking at it, trading a few thousand lots a day, and not really pushing the prices.
Having market caps that pass a billion give larger institutional investors the chance to invest, and grow the business with capital.
That might be a far better way than sitting on your hands, and waiting for the micro-cap stock to grow.