Why I Stopped Value Investing

There are many definitions as to what value investing is, it is the kind of question that you will get different answers depending on who you ask.
Generally, there are 2 kinds of value investing.

1. Asset-based: invest in companies selling below their net asset price
2. Income-based: invest in companies selling below their earnings potential

The kind that I stopped doing, is asset-based value investing.

Case Study with Properties:
You deal with buying and selling of properties.
There was a house that you were previously considering buying but did not do so because it was selling at $500k, which you think is not cheap enough.
However, due to a recession in the economy, the owner is now willing to sell the property for $400k if you are willing to sign the deal within 1 week.
This presents you with the opportunity to buy the house for $400k, then take your time and wait for the economy to recover, then find a buyer who is willing to buy the house at $500k, earning a good $100k in the process.
While waiting for the economy to recover, you also made some rental income ($10k per year) renting out the property.

The above scenario happens frequently in the stock market as well.
Just replace the words 'property' with 'stock', 'rental income' with 'dividend'.
A company can have net assets (total asset - total liabilities) of $500k, but the market capitalisation (price) can be $400k.
This presents an opportunity for investors to purchase the company at a discount, and earn a good return on investment when the stock market recognises in the future that it had previously undervalued this company.

Do a quick search on any stock screener and you will see many companies in Singapore selling at below their company's book value (net asset value).
On SGX, there are 156 companies that are selling at half their book value.
Does this mean they are all good investments?

Source: SGX

Recommended Read: CPF Accumulated Accrued Interest

Problems with Asset-Based Value Investing:
1. Time:
It takes time for the market to realise that it had undervalued the company, and subsequently revise the price to make it equal its value.
However, this can take some time, it could be in weeks, months, years, even never.
I have seen a fair number of companies who are undervalued and have remained undervalued for half a decade or more before they are priced to value in the stock market.

2. Worth More Dead Than Alive:
Net Asset Value (NAV) is the remaining value left in the company after all its assets are sold and all its liabilities paid.
It is kind of like declaring that the company is dead, you will cease operations and sell everything.
If you as a person, bought a $1 million dollar life insurance policy, do you call yourself a millionaire?
Well, you are not, but if you do pass away, your beneficiary will become a millionaire.
Same can be said for a company with huge NAV - unless it ceases operations, sells everything, and return those value to shareholders, shareholders will almost never get the value.
But, the chances are, a normal company even though worth more dead than alive, is never going to close itself down; just like how a normal person would not kill themself so that their beneficiary can be a millionaire.

I Still Value Invest
Don't get me wrong, I still do value investing.
Just that instead of asset-based value investing, I do income-based value investing.
To me, investing in a stock is like choosing a life partner, would you prefer

1. a partner who is earning more every year, or 
2. a partner that has a $1 million life insurance with earnings that has not been growing

I'll pick the first one any time, any day.
What about you?
Which will you pick?
Let us know in the comments below!



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