Author: Tee Leng Goh

Tee Leng started his investment journey in 2011 based on the teachings of Benjamin Graham and David Dodd. He holds an honours degree in Economics from the University College of London, London (UCL). As a student, he won numerous trading awards and represented UCL in the UK Investment Banking Series M&A Challenge, emerging 4th in UK. Currently, he is the Co-Editor of ValueEdge LLP and an Investment Director of TwinPeak Capital, overseeing the investment decisions of the private family office with 7 figures under advisement that has achieved above market returns since inception.

The Value Edge

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Using A Net-Net Strategy

Over the years of investing, my partner and I have experimented with various valuation models. From the simplest of just investing based on dividend yields to one of the most complex models by Colombia Business School. The purpose of my article today is not about sharing all the various models we have used but just one – the NCAV strategy.

NCAV – Net Current Asset Value is argued by Graham to be approximately the company’s liquidation value. The strategy is just screening for all companies trading below their NCAV and investing in the best 20 companies. With so many more complex valuation models out there, many may be skeptical about such a simple strategy. However, I would like to point out that success with investing is not based on the complexity of your valuation model but rather how strong your logic is.

Of course, words are all meaningless without results to back it up.

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Over the period of 3 years, it can be seen that the NCAV portfolio not only outperformed the S&P500 but by did so by a huge margin of approximately 5x.

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Over the next 3 years, it can be seen that the NCAV portfolio under performed the S&P500. However, the important thing to note would be the underperformance is very marginal.

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On the last period, it can be seen that the NCAV portfolio once again outperformed the S&P500. Interestingly to note, while the NCAV portfolio was affected much more than the S&P500 during the Global Financial Crisis, it recovered at a much faster pace as compared to the S&P500. Whether this is an one-off incident or a trait for a NCAV portfolio, I do not have sufficient results to prove it.

Over these 3 periods, it can be seen that whilst the NCAV portfolio does under perform the benchmark 33.3% of the time, the cumulative results still outstrips it.

Credits are given to Jae Jun of Old School Value for conducting the backtesting of a NCAV strategy.

3 Lessons From Investing

The thing I enjoy most about investing is the complexity and how it never ceases to amaze me. It is fundamentally finance related, yet has elements of different fields of studies – politics, real estate, law, human dynamics, psychology etc. One day I could be reading a research by Joel Greenblatt, a renowned value investor and another day it could be by Michael Mauboussin, an expert in the field of behavioral finance. After close to 4 years of investing, I have decided to list the top 3 key points I learnt from investing.


Nothing comes free, especially knowledge. Every successful person in his/her own field did not get there by sheer luck. With value investing, it requires a huge amount of reading, and that reading never ends. Every day, there is something new to read. Reading the latest company news, analyst report, value investing article, the list is endless. One would think great investors like Lee Cooperman, having spent nearly 5 decades of his life doing investment research, now has it easy when it comes to investing. However, that isn’t the case. With a lifestyle starting from 5.15am, he spends nearly most of it working, till before bed at 11pm. That is definitely dedication.

“Unfortunately one day they’re going to find him slumped over at his desk and that’s going to be it. He’ll die happy.” – Michael Lewitt

While I am not saying that we all need to be like Cooperman, however, to excel in investing, one needs to put in their fair share of work. The basics such as financial jargons, an investing framework and investing theories are all the essential work one has to initially put in. That read of Intelligent Investor for value investors starting out is mandatory, despite how boring it may be. Leading the research team in my University’ investment society, I have constantly been told to make my analysis more appealing and simpler so that even someone without any investing knowledge would be able to understand it. However, many a times, I find this extremely difficult as there are certain basic financial jargons that one is expected to at least have taken the effort to read up on.


A sad but hard truth about value investing is that it isn’t for people who have a constant need for change. Sorry to disappoint, but that adrenaline rush each day of entering in and out of the market one is seeking, is not something you would be experiencing with value investing. With value investing, you are in it for the long game. The secret to value investing is patience. To be honest, it is not really much of a secret since it is a well known fact. However, the reason why value investing still works is that patience is not a trait everyone has in today’s world. With the speed at which everything is changing these days, how many really has the patience to just sit there and patiently wait for the stock to reach fair value. Furthermore, when does the stock price really hit its fair value? That is really a mystery as Graham would say. Would a stock remain undervalued forever? I hope not, but it is not impossible. A fine example would be Guocoleisure (SGX:GLL), a well known deeply undervalued stock. The reason why this stock is undervalued would largely be due to market skepticism over value-unlocking drivers. Many institutional investors like Third Avenue Asset Management and Marathon Asset Management, long time investors in GLL have too sold down their stakes. While the stock may remain undervalued for an indefinite amount of time, however, what we can do is just position our portfolios and just wait. As of today, GLL have started trending upwards given how management started taking steps in unlocking the value in its assets.

Great Supportive Network:

Have a great supportive network. No matter how intelligent you are, there is no way that you have considered every single aspect to a certain issue/investment. In discussions, I rather have more people differing than supporting my view. For every argument you break down, it just strengthens your argument – a great read on this would be the ’12 Angry Men’ experiment. I have always believed in the right of freedom of speech. With freedom of speech, it allows good ideas to thrive and bad ideas to just fade away. Through this process, one’s thought process would definitely mature. This is the same with value investing. Having people provide constructive criticism on your investment idea, allows one to improve their analysis in the future. Furthermore, through the mistakes of others, it helps one speed up their learning process.

Starting out investing, I would say that I was extremely lucky. Not only did I have my father to look through my investment thesis to check if it was sound, I had my best friend who had a common investing mindset. Given that it is the 21st century, I had a vast amount of online resources to read – investment bloggers who were did equity research write-ups and all. Special thanks would definitely have to be given to Musicwhiz and Kyith who replied to my ‘Help’ email on how I should begin investing. I guess it was thanks to the presence of these blogs was I able to skip various beginner mistakes – valuing a company using a DCF model.

To sum it up, for readers just beginning their investing journey, I hope this article would serve as a good starting point. Fret not, for what is bitter to endure, is sweet to remember. While to the rest of us more-seasoned investors, it is always good to look back at this journey of ours, spend some time reflecting on our mistakes and how we have emerged stronger from it.

Market Timing

Two concepts widely debated on would be timing the markets. Essentially, the former refers to individuals entering and exiting the market at crucial moments to effectively maximize their returns. While the latter just refers to individuals entering the market and holding on till the stock has reached its fair value. Despite being a value investor, even I have constantly questioned myself regarding this issue.

What if I sold King Wan Corporation when it hit the previous high of 34c, and bought back when it reached the low of 25c?

Honestly speaking, following such a method I would have made a huge load more money. However, the crux is that this is all in hindsight. Would I know back then to sell? Did I even have the inclination to sell? The answer would be NO! Given that we are just merely mortals, how are we able to effectively time the markets? Aside from technical analysis, and other factors such as market psychology and economic news, with that many variables how does one perfectly time the market? To date, I have yet to have met someone who has been able to effectively time the market.



I would like to highlight a research done by Schwab Corporation on market timing. (Click Here)

Key Summary:

The best results goes to the individual who was able to time the market perfectly for the research period of 20 years, accumulating $87,004. While the individual who did not time the market came in second with $81,650 – only $5,354 less that the winner. For the amount of effort spent by the first individual compared to the second to only outperform marginally, is he truly the winner?

To conclude, this article isn’t about which method is ‘right’ or ‘wrong’, but rather the difficulty of timing the market especially with the amount of emotions involved. Essentially, the most realistic strategy for the majority of us would be to just invest in stocks immediately, assuming that we are comfortable with the margin of safety at that point in time. More of than not, procrastination can be worse than bad timing. Just waiting for the price to drop by that 0.5c may just have cost you that 2 or 3 bagger. Lastly, one of the oldest yet safest methods would probably still be using a dollar cost averaging method, which in the long run would still perform relatively well.

Accounting Fraud – A Common Theme

Value investors are constantly sourcing for undervalued companies in every possible way, setting our filters to help us screen out that initial list of companies. I believe many out there would agree that majority of these undervalued gems would come from Asia, Chinese shares in particular, be it A-shares, P-chips or S-chips. However, shares are never undervalued for no apparent reason. These Chinese shares have fallen out of favor given the numerous corporate scandals.

Back in 2006, when China initially opened her doors, S-chips were investor’s darlings, where we see companies like Fibrechem Technologies having a run up in prices. However, such enthusiasm quickly faded as earnings started falling short of estimates. Many have had their fingers burnt when these share prices plummeted when problems such as accounting frauds and defaults started surfacing. Personally, I have witnessed friends having all their money locked in such shares and unable to exit due to the stocks getting suspended.


With this growing fear that Chinese companies will just disappear when their over inflated sales figures, empty coffers and huge debts comes to light, it is no wonder that there are so many Chinese companies trading at such cheap valuations. Just applying a net-net filter for the Singapore Market, 65.5% of the counters are China companies.

Talking to my colleagues in Shanghai, many have admitted that they too suffered losses in the Chinese stock market due to Chinese companies cooking their books and have ever since stopped investing in the stock market. In my opinion, many have decided to not touch any China related stocks to avoid any possible risks, given the difficulty to differentiate which are the good ones and which are the black sheep.


However, should we value investors just give up on all Chinese stocks and pass up on discovering hidden gems like Sino Grandness? Given how such stocks were able to pass the audit checks of reputable audit firms, many would be thinking, what then can we retail investors do? Talking to auditors from the Big 4, I do believe that it is definitely not easy for us retail investors to spot accounting frauds. However, this does not mean that it is impossible. Over the years, we would notice the trends and similarities in companies that have been suspected and found for corporate frauds.


While I may have presented common themes amongst Chinese companies found of fraud, it is not some hard and fast rule but merely a guideline for us to use when investing. Nonetheless, only invest in companies that you are able to feel comfortable with.

Disclaimer: The author is long T4B.SI

CDW Holdings

cdwCDW Holding Limited is a Japanese-managed precision components specialist serving the global market focusing on the production and supply of niche precision components for mobile communication equipment, gamebox entertainment equipment, consumer and IT equipment, office equipment and electrical appliances. Being a reliable outsourcing partner with Japanese precision, CDW Holdings has grown from a private trading company in Hong Kong back in 1991 to what it is today.

Before I begin my analysis, all figures are in USD.

Fundamental Analysis:

(I)              Earnings:

cdw_isThe company is split into 3 business divisions, namely LCD Backlight Unit, LCD Parts & Accessories and Office Automation, with the LCD Backlight Unit being their core business segment taking up two-thirds of their revenue. Within their LCD Backlight Unit, it can be further split into two segments – Backlight Units for Handsets (mainly smartphones) and Gamesets (including digital cameras and global positioning systems for automobiles). While their LCD Backlight Unit is their core business segment, the company is focused on the production of backlight units for gamesets compared to handsets.

Over the years, the company has been performing relatively well, keeping gross profit margins consistent yet increasing their net profit margins. This reflects how management has been effectively managing operating expenses through methods such as vertical integration, evident by the recent acquisition of Mt Wuxi. In FY2013, we observe the dip in revenue due to their major customer starting to wind down orders for phased out products. In terms of the LCD Parts & Accessories, we see sales declining by approximately 40%, which is the main reason for the 10% decrease in revenue. The LCD Backlight Unit remained relatively stable due to their major customer releasing new models and maintaining order volumes in 2H2013. While for the Office Automation, their smallest division recorded a 4.1% increase in sales. This is attributable to the company restructuring this division, consulting with their customers, eliminating loss making products and commencing production of higher margin and profitable ones. While gross profits have declined in FY2013, net profits remained relatively stable due to 2 one off gains – disposal of the Suzhou Plant and the USD2mn gain on the acquisition of Mt Wuxi.

(II)              Balance Sheet & Cash Flows:

cdw_bsCDW Holding’s balance sheet is relatively clean with minimal debt, with cash increasing year on year. As of 1Q2014, the company’s cash position has increased to USD64mn, increasing its net cash position to USD55mn, a 2.3% premium over its market capitalization. Given how management has been quite ambiguous regarding who their major client is in their Annual Reports, the cash conversion cycle might be something that we have to pay close attention to. However, as of date, I do not think there is anything to worry about.

(III)              Financial Ratios:

cdw_ratioQualitative Analysis:

(I)              Business:

Gamesets being the company’s key revenue driver is heading downwards and it might not be something temporary given how the technology landscape is changing. From the images on their website, I am assuming that one of their customers would be Nintendo and we all know that Nintendo isn’t the Nintendo of the past anymore. Days where every kid owned a GameBoy or what they call Nintendo 3DS now is no longer relevant today. Today, we see strong competition such as tablets and smartphones taking over the role of gamesets be it in terms of Gaming/Camera/GPS. Looking at Nintendo, not only has their projections been off lately, they have been way off. Nintendo’s prediction of 18mn 3DS handhelds fell short of actual sale of 12.24mn, reflecting the declining of such gaming products.

“We already witness the effects of changing consumer behavior in the technology space. With advances in smartphone technology and increasing consumer preference for smartphones over other handheld devices for gaming, photo-taking and global positioning capability, the demand for gamesets is on the decline…we do not think the reduced orders for gamesets is simply temporary but indicative of a larger, permanent trend,” an abstract from AR2013.

Screen Shot 2014-07-13 at 6.52.07 pmTracking the production of Backlight Units for both Handsets and Gamesets, it is indeed true that the production of gamesets have been on the downtrend, while handsets have been slowly growing. Additionally, it is important to note how production is greatly skewed towards the production of gamesets.

(II)              Economic Moat:

Looking at the consistency in gross margins, I would say that the company enjoys a relatively sizable economic moat. Furthermore, with only a 3% swing between the high and low gross margin values, it is a relatively tight range, showing how the company is able to maintain its relationships with her customers and suppliers.

Furthermore, in terms of production of gamesets, they are a key supplier in the wake of the reduction in number of suppliers, as abstracted from AR2012. While the gamesets are on a downward trend, it is still evident that the company commands a strong economic moat in withstanding competition, economic cycles and maintaining itself.


cdw_valuation cdw_valuation2At the current market price of SGD0.143, which translates to USD0.113 the company is definitely trading at low valuation multiples. With a P/E Ratio of 4.72, EV/EBITDA of -2.12 and normalized FCF yield of 13.6% definitely does indicate that the company is undervalued. Furthermore, if we were to base our calculations of Graham’s version of net-net, the company would fulfil it as well.


CDW Holdings is an undervalued company backed with solid financials and fundamentals. However, the company has not indicated any plans on how they plan to tide through this difficult period, especially how it is not a temporary issue. Putting myself in management shoes, I would start focusing more capital in strengthening my production of backlight units for handset, given the current growth in the smartphone industry. However, I am no expert with regards to this and perhaps it is more complicated than just strengthening their production but difficulty in supplying to companies on the scale of Samsung, Apple and Xiaomi. Given how such key concerns not being addressed, at current prices, it does not offer a wide enough margin of safety for us to invest in it.

Disclosure: The authors have no vested interest in D38.SI

Market Valuations

Many are familiar with market valuation indicators such as trailing, median P/E ratio, P/B and dividend/price ratio. In this article, I am not explaining the use of such indicators but wanted to introduce one that is relatively not known to many these days. Personally, I only found out about it recently, given my preference of using the long favored market valuation ratio, one even Warren Buffett pointed out to be ‘probably the best single measure of where valuations stand at any given moment.’ That would be the ratio of Total Market Capitalization to US GDP (TMC/GDP), which would stand at approximately 1.241 as of today, indicating that markets are significantly overvalued.

Everyone would be familiar with the term ‘Net-Net’ coined by the great Benjamin Graham, which just means to a company being priced below the value of its current assets less all liabilities. While we understand the implications of a company being a net-net, what are the implications when used on a market level?

Based on research done, just from the number of net-net companies compared to the S&P 500 Return, we are able to have a feel of the valuation of the market.

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From the research conducted by Graham Theodore & Co. Ltd., we are able to observe the inverse relation between the number of net-nets in the market and the S&P 500 Return. The greater the number of net-nets, it would indicate a more bearish market, with market valuations on the low side and vice versa. With that said, looking at the current market today (NYSE MKT LLC, NYSE, NASDAQ) there are only a total of 59 net-net companies and the average annualized returns from 2012 to present would be approximately 21%. Compared to the initially mentioned TMC/GDP ratio, it would indicate that market valuations are indeed overvalued.

Looking at past history, the highest point TMC/GDP ever reached was 1.48 during the technology bubble in 2000. What does it mean for us going forward now? I am not saying that we should all start winding down our portfolios and sit on cash, however, it would be best that we hold a larger proportion of our portfolios in cash and consider realizing profits for companies nearing their fair value.