Keeping the base covered first

Scouring the Internet nets you plenty of investment lessons and advices, but this article from Forbes.com entice me to publish a very common but important principle central to the Partnership's workings when it comes to investing our capital. To quote:

"Contrary to conventional wisdom, the key to investment success isn’t getting higher returns. It’s keeping your losses within your comfort zone, so you don’t panic and sell out at the wrong times"

We shall keep our capital intact (short-term fluctuations notwithstanding) before we can really aim for above-average return on invested capital. After all, we can't grow the capital if we have none. Yes we can leverage, but aren't we leveraging to have/create the capital?

Very much looking forward to share the Partnerships's first half of 2012 mistakes and lessons.

What stocks does the Partnership invest in?

Firstly the question may also be written as “What kind of business does the Partnership invests in?”. Remember, when one buys stocks of a company, one is buying a part the company, effectively becoming a part-owner of the company. Hence the term ‘public-listed company’ – the company is listed so that the general public can purchase part of the company previously owned only by the private owners/founders of the company.

On behalf of AIN Partnership, I invest the Partnership’s capital in stocks of good-standing Syariah-approved listed companies in Bursa Malaysia. In general, there are two types of companies which we are likely to invest in their stocks:

a) Stocks belonging to companies with foreseeable growing profit year after year that at the same time generate cash to their coffers. Remember, the reason why everyone wants to start a business is because they want to earn money, the same reason on why everyone had to work just to earn cash at the end of the month to buy foods, groceries, go vacation etc. In a business, these earnings is translated into how much cash can the business generate after all expenses, to keep the business grow and generate more cash in the future. And to generate more cash every year a business has to (at least) make sure they are more profitable every year. This is the kind of business that a sensible investor or individual wants and should own, but not at just any price. However, sometimes their stocks are temporarily mispriced against its true value. This can be due to unfavorable market sentiment or folly actions by current stockholders who may sell the stocks down because a chap in USA said something terrible about Malaysian economy (what does the fellow had to do with your invested money in a supposedly good company here in Malaysia?). Whatever the reasons are, I will only buy the stock at a mispriced pricing that I am very comfortable with. This is to ensure any mistakes that I make during the purchase of the stock will not be punished severely but if I am right then the potential profit is substantial to the Partnership.

b) Stocks of companies who may not fulfill my criteria above, but are severely mispriced against its balance sheet valuation. This type of stocks demand the greatest amount of careful analysis, because as a small fry retail investor like us, we may not know the exact reason the price is so low. For this reason, an investor must require a bigger margin of safety (a bigger discount to its supposed value) just to ensure that if he or she is wrong on the purchase, the losses may not be so terrible that the investor can lose sleep at night. In the other way, if the investor is right, at some time the price will be corrected by the market so he or she can sell the stocks at a decent return.

Personally I believe that cash employment to purchase stocks will generate the most favorable return when the price one pay for the stocks is fair, relative to its current valuation and the earnings potential of the company. Of course – the cheaper, the better.

About the Partnership

I spoke to a few people about AIN Partnership, raising a few questions regarding the Partnership. I may have answered these questions casually, so let me ‘blog’ here clearly for my future reference as well.

1) Is AIN Partnership a legitimate and registered business?

AIN Partnership is a legitimate and registered business with Suruhanjaya Syarikat Malaysia (SSM), Business Registration No. 002093548-P.  The ‘Type of Business’ is stated as ‘Investment and Ownership of Stocks of Listed Company in Malaysia’.

2) What does the Partnership do?

Partners will pool their money meant for investment (not for savings purpose) into AIN Partnership to purchase and sell stocks of listed companies in Bursa Malaysia with the sole aim of earning a rate of return on its investment greater than the rate of return from the same amount of capital invested in Amanah Saham Bumiputera (ASB) fund in a given calendar year.

3) My role in the Partnership.

As the General Partner and majority partner of the Partnership, I make all decisions on the stocks the Partnership invests in. This includes analyzing the company’s financial structure, placing the buy and sell orders through a brokerage account and keeping records of our investment. Similary, I am responsible to my partners on the rate of return from the Partnership’s investment in Malaysian stocks (see above paragraph).

4) Why invest on your own? Why not just give your money to ASB/unit trusts and let them invest it for you? Or why not Swisscash/cicak tokek (gecko)/gold investment and get rich in a very short time, buy a BMW 3 Series and go holiday in Australia?

Reason is because I believe that stocks investment represents a wonderful chance to grow your money at a greater rate of return than most readily available investment instruments around us. A right company’s stock at a right price and a right time will turn your money many times over positively, letting you sleep well at night knowing the money you make now, will grow and help you live a comfortable life in the future. Some people can get rich from their ventures in what I listed in the question, but I firmly believe in stocks investment and I intend to do well in it with my partners to achieve that greater return.

5) But stocks are risky, and the price can go up and down.

Yes indeed.  But how can one reduce the riskyness? There are plenty of essays/writeups on the Internet about risk but allow me to make it simple at least from my point of view - if you know what you are investing in, why invest in it, and how do you invest in it, then you have made the risk look like a tame, cute kitten that roars at you but you know very well how to hold it by its neck and place it back in the cage. (The kitten will grow and be fond at scratching you but by then you already know how to cut their nails)

A stock price fluctuates up and down, that’s a certain. Your action as an investor is to simply look at stock price fluctuations like someone who knows very well the taste of McDonald’s Prosperity Burger and desires it, waited every year to buy it everytime Chinese New Year is near, but clever enough to buy the McValue Meal only from 12pm to 3pm any day because the price is cheapest at that time.

6) Does the Partnership guarantees positive return to its partners?

No, the Partnership does not guarantee any returns (positive or negative) to the partners nor does it provide capital guarantees. But what the partners are guaranteed of is the fact I will continue to have a substantial stake in the Partnership and I seek to preserve the initial capital provided by all partners before earning any return on it. I dislike losing money to stupid investment decisions, like everyone else too.

Dare I point out that if one is eager and joyous to see 15-20% returns on their stocks but worry and will lose sleep at the sight of losing 15-20% from stocks although their analysis, reasoning and the company is still right, then one must not invest their hard-earned money in stocks directly. To this investor, ASB is the best because they provide capital guarantees and a decent dividend return of 7-8% for the past few years consistently.

Of Syariah-approved Stocks

Upon thorough checkings and verification, The Partnership in the first week of January 2012 had just sold an entire holdings in Stock F based on the sole reason that it is not a Syariah-approved stocks as deemed by the Securities Commission. That aside, I still think that Stock F has the potential of upward earnings in years to come, as the company gain more rights to act as agents and distributors in Peninsular Malaysia, apart from their presently admirable position as a major distributor of many FMCG brands in East Malaysia.

Alas, as long as a stock of a listed company in Bursa Malaysia is not deeemed as a Syariah-compliant stock, the Partnership will refrain from employing its capital in the stocks of the company.