Value Investing in Growth Companies

How to apply the value investing model to today's high-growth Asian companies

This revised edition of Value Investing in Growth Companies serves as a step-by-step guide that lets investors combine the value investing and growth investing models to find excellent investment opportunities in emerging Asian companies. Though these two investing styles are very different, the authors' proprietary "jigsaw puzzle" model integrates them into a holistic investing approach that will help readers enjoy the kind of extraordinary results that investors like Warren Buffett or Peter Lynch built their fortunes on. This model focuses on four vital criteria that, when combined, pinpoint excellent companies in which to invest. Those criteria are: simple business models, quality management, healthy financial numbers, and accurate valuation. This book shows investors how to find growth companies in Asia that combine these four criteria for nearly surefire profits.

• Offers a sensible and stress-free investing strategy that is ideal for anyone looking for investment opportunities in fast-growing Asian countries
• This revised edition includes new case studies focused specifically on Asian companies and their unique characteristics
• Perfect for investors who want to focus on high-growth, small-cap companies that offer excellent potential returns

Foreword xi

Preface xiii

Rusmin Ang’s Journey xiv

Victor Chng’s Journey xvi

How We Met xvii

Overview of the Contents xix

Acknowledgments xxi

Chapter 1 The Making of a Value-Growth Investor 1

The Common Journey of New Investors 1

Short-Term Trading to Long-Term Investing 2

Growth Investors 4

Value Investors 6

Value Investors versus Growth Investors 7

Value-Growth Investors 9

Warren Buffett’s Journey 10

Value-Growth Investors 12

Definition of Growth Companies 13

Common Misconceptions about Growth Companies 14

Myth 1: The Higher the Growth Rate, the Better the Company 15

Myth 2: Fast Growers Are Companies in Fast-Growing Industries 16

Myth 3: You Cannot Buy Growth Companies at Bargain Prices 16

Myth 4: Fast Growers Are Companies That Have Small Market Capitalization 17

Myth 5: Small and Fast-Growing Companies Are Not Covered by Analysts and Institutions 18

Myth 6: Growth Companies Pay Very Little Dividend 18

Why Value-Growth Investing? 19

Capital Appreciation or Intrinsic Value Appreciation 20

Dividend Growth and Passive Incomes 23

Summary 26

Chapter 2 The Secrets of Successful Value-Growth Investors 29

Healthy Thoughts Lead to Sustainable Results 29

Mindset 1: Understand the Power of Compound Interest 29

Mindset 2: Start Young! 33

Mindset 3: Be a Long-Term Investor! 35

Mindset 4: Never Leverage to Invest in the Long Run! 36

Mindset 5: Exercise Independent Thinking 38

Mindset 6: Be Emotionally Stable 39

Mindset 7: Think Contrarian When Investing 41

Mindset 8: Understand Mr. Market (Effi cient Market Theory versus Mr. Market) 43

Summary 46

Chapter 3 The Jigzaw Puzzle—Four Pieces to Value-Growth Investing 47

The Jigsaw Puzzle Model 47

The Art and Science of Investing 49

Looking for the Right Information 53

Information Released by the Company 53

Information from Outsiders 57

Summary 58

Chapter 4 Business—The First Piece of the Puzzle 61

Understand a Company’s Business Model 61

Simple Business 63

Circle of Competence 65

Going Beyond the Limit 67

Competitive Advantage 70

Knowing the Competitors 73

Think Like a Customer through the Scuttle-Butting Process 74

Finding Future Growth Drivers 76

Understanding Risks—What Can Go Wrong? 78

Summary 79

Chapter 5 Management—The Second Piece of the Puzzle 81

Management Forms the Cornerstone of a Business 81

Criterion 1: Trustworthiness 83

Criterion 2: Candid in Reporting 86

Criterion 3: Aligned with Shareholders’ Interests 88

Criterion 4: Track Record/Experience 90

Criterion 5: Visionary Managers 92

Summary 96

Chapter 6 Numbers—The Third Piece of the Puzzle 97

Numbers Do Not Lie 97

Numbers to Look at When Reading the Income Statement 98

Revenue 98

Cost of Goods Sold 100

Gross Profit 100

Expenses 102

Net Profit 103

Earnings per Share (EPS) 106

Numbers to Look at When Reading the Balance Sheet 109

Noncurrent Assets 110

Current Assets 112

Noncurrent Liabilities 114

Current Liabilities 115

Shareholders’ Equity 116

Current Ratio 117

Return on Equity 118

Debt-to-Equity Ratio 120

Numbers to Look at When Reading the Cash-Flow Statement 122

Cash Flow from Operations 123

Cash Flow from Investment 124

Cash Flow from Finance 127

Summary 129

Chapter 7 Valuation—The Fourth Piece of the Puzzle 131

The Valuation of a Stock 131

Price-to-Earnings Ratio 133

Types of PE Ratio 136

Price-to-Earnings-to-Growth Ratio 137

Discounted Earnings Model 141

Intrinsic Value 141

Margin of Safety 148

Undervalued 149

Fair Value 149

Overvalued 150

Summary 154

Chapter 8 Screening—Buy—Monitor—Sell 155

Screening (Using Numbers against Competitors) 155

Stage 1: Consistency in Key Performance Indicators 156

Stage 2: Comparing the Compound Annual Growth Rate 157

Stage 3: Finding Consistency or Increases In Margins 158

Stage 4: Digging Further into a Company’s Debt and Cash Position 159

Stage 5: Digging Further into Other Numbers to Confi rm Your Pick 159

Conclusion 161

Buy, Monitor, and Sell 162

Buy, Buy, and Buy 163

Monitor, Monitor, and Monitor 166

Online Monitoring 169

Offl ine Process 170

Sell, Sell, and Sell 171

Summary 177

Chapter 9 Portfolio Management for Growth Companies 179

Understanding Your Portfolio 179

Types of Diversifi cation 180

Personal Diversifi cation 181

Company Diversifi cation 182

Industry Diversifi cation 183

The Sky Is the Limit 184

Summary 185

Chapter 10 Avoid Common Mistakes 187

The Dos and Don’ts of Investing 187

Mistake 1: You Think You Are a Long-Term Investor but You Are Really a Speculator 187

Mistake 2: Timing the Market 189

Mistake 3: Investing in High-Technology and IPO Companies 190

Mistake 4: Investing in Companies that Are Not Consistent 192

Mistake 5: Buying a Growth Trap (Not Focusing on the Quantitative Side) 194

Mistake 6: Buying a Value Trap (Not Focusing on the Qualitative Side) 195

Mistake 7: Sell Your Winners; Keep Your Losers 198

Mistake 8: Diversification Mistakes 199

Summary 200

Chapter 11 Case Studies and Conclusion 201

Bibliography 205

About the Authors 207

Index 209

Rusmin Ang and Victor Chng are the Chief Investment Analysts at 8 Investment Pte Ltd. Together they specialize in unearthing high-growth, small-cap companies. 8 Investment was founded in 2008 with the founders' intention of inspiring investors through the sharing of successful learning experiences in business and investing. Driven by the values of integrity, responsibility, mastery and growth, the company has achieved excellent financial results with an average 139% growth in revenue annually over the last three years. Subscribing to its FASS business model (Feasibility, Adaptability, Sustainability and Scalability), 8 Investment has built one of the largest networks of value investors in Asia and developed a comprehensive range of investing books, CDs and digital learning programmes to cater to this growing audience. Their seminars and courses have been attended by over 70,000 people throughout Asia in the last six years.

If you're looking for a surefire, get-rich-quick stock trading scheme, this book is not for you.

If you're in the market for magic algorithms, bullet-proof charting techniques, automated trading systems or other financial gimmickry designed to separate you from your hard-earned money, look elsewhere, because you won't find any of that here.

Here's what you will find in this book: A low-stress approach to building up a fortune steadily, over an extended period of time. It's an approach to investing intelligently and methodically, using similar techniques to those utilized by the world's most successful investor, Warren Buffett.

Buffett has used this approach to amass a fortune in excess of $46 billion, making him the third-richest man on the planet. But if you're like most people, you don't want to become the next Warren Buffett. You'd be happy to quietly make millions in your spare time.

And that's exactly what authors Rusmin Ang and Victor Chng offer you an opportunity to do. They introduce you to a unique value/growth investing strategy based on their proprietary Jigsaw Puzzle approach—an approach that lets you identify the best investment prospects and build up a solid portfolio of high-yield growth stocks that will increase steadily from year to year.

You'll assemble a highly accurate picture of a company before deciding whether or not to invest in it; you'll drill deep into the heart of a business to uncover stellar growth potential; and you'll know when and how to buy into high-growth, small-cap companies at pennies on the dollar for market-beating compound returns.

Writing in plain, jargon-free English—with a generous dose of humor—the authors walk you, step by-step, through the value investing basics. Then, with the help of real-world examples and five, full-length case studies focusing on Asian markets, they fill you in on how to:

• Develop good value investing habits and financial discipline
• Analyze a company's business model and its management structure
• Make sense of its financial statements and get a clear picture of its financial health
• Accurately calculate a company's future earnings potential
• Decide whether to buy or sell a stock
• Screen a stock that could become the next big money-maker
• Manage risk and maximize returns in a growth stock investment portfolio

Based on the authors' philosophy that "Anyone with a nine-to-five job and the diligent application of value investing can retire with millions," Value Investing in Growth Companies is your ticket to the wealth and financial independence you want and deserve.

"There is no such thing as the right formula for investing. There is, however, the right mindset for better investing. In the search for Asian value stocks, Ang and Chng lay out some fundamental guidelines and observations for successful stock picking. Investors who are eager to gain exposure to the Asian market should read this book."
—Ronald W. Chan, CIO of Chartwell Capital Ltd, author of The Value Investors: Lessons from the World's Top Fund Managers

"Bottom-up investing is all about discovering value early, getting into the stock well before the crowds and exiting as mainstream investors move in and push up the valuation. The techniques outlined herein are timeless and can be referred to over and over again as you progress in your investment journey. This is is an enlightening read and thoroughly enjoyable for those interested in learning about value investing and starting their investing journey."
—Digby Falkiner, former Indonesian research director at Deutsche Bank, former regional research operations head at Societe Generale, private investor and lead trainer for MIP Advanced

"Rusmin and Victor have broken down the complex and arcane art of stock picking through fundamental analysis into easy-to-understand concepts and examples. Most of the examples used were of Asian companies and that made it easy for me to relate to them. I highly recommend this informative book to everyone who wants to learn more about value investing."
—Lim Dau Hee, Group IT Director of ShareInvestor Pte Ltd

"Value Investing in Growth Companies is a solid piece of work where you will find real-life tried-and-tested strategies to help you become a successful value investor if you're looking into high-growth, small-cap companies. Rusmin and Victor have unleashed everything they know about picking companies that will multiply in value many times over. The book is easy to read and keeps things simple to understand for the everyman—you can only find golden nuggets of investing wisdom between its covers."
—Adam Wong, coauthor of the national bestseller Lucky Bastard!