Know what you buy and why you buy them

— Dr David Kuo

In October 2014, in a crowded and noisy Chinese restaurant, we sat down with the Chief Executive Officer of The Motley Fool Singapore, Dr David Kuo. The Motley Fool Singapore is a registered investment advisor with the Monetary Authority of Singapore (MAS). The company provides free investing education articles and paid stock recommendations to subscribing members through its website, http://www.fool.sg.

The Motley Fool is an international investment advisor, started from the United States by co-founders Tom and David Gardner. Today, The Motley Fool has offices in the US, Canada, United Kingdom, Germany, Australia and Singapore.

Dr Kuo has been with The Motley Fool UK for more than 16 years before coming back to Singapore to kick-start the first Asian office for The Motley Fool. Dr Kuo also appears regularly in the media, speaking about his views on the market and investing. He is well-known to have a unique way of describing investing, filled with unforgettable metaphors and funny stories.

He started late in becoming an investor. He only started active investing after he completed his PhD in Chemistry. Even after that, Dr Kuo admitted that he made many mistakes along the way before finding the investment style that suits him best; being an income investor. We talked to Dr Kuo about his investment style and what he thinks of investing in Asia.

Dr Kuo often describes himself as an income investor. This means that he is focused on dividend-paying companies. He looks for companies with strong cash flow generation and tends to avoid commodity-like businesses.

We asked Dr Kuo to describe more about his investment process and how he generates investment ideas. According to him, as he is a strict dividend investor, he tends to look for stocks with high dividend and then analyse if the dividend is sustainable. If the same company is something with a low price-to-book ratio, all the better. He commonly values his investment based on the dividend discount model or using ratios like the price-to-earnings or price-to-book. That is why in Asia, he is particularly interested in the Real Estate Investment Trust (REIT) market, given their higher yield and recurring revenue model.

We asked for his view about what would he consider to be his most- or least-preferred type of investments. Dr Kuo stated that he does not believe in finding the best investment in the market. This is because it is impossible for an investor to know which investment will end up giving them the best return. This is why he emphasises diversification. It is important for any investor to have a diversified portfolio so that they will not be caught out by huge losses just because one sector or company is not doing well. Having said that, Dr Kuo tries to avoid commodity-like business, as he feels that these businesses do not have pricing power in their products and might easily be affected by macro factors.

As Dr Kuo has generally invested in the European market in the past, we wanted to know what he thinks is the key difference between Asian companies and companies from the western markets. Dr Kuo replied that he does not feel that there is a huge difference between the two. However, in Asia, there are still many companies that have majority shareholders with an extremely large stake. This means that these major shareholders might be too big, implying that there is little need for them to prioritise the interests of minority shareholders. Investors in Asia need to be aware of this. For Dr Kuo, he avoids such companies altogether.

We wondered if he felt that it is a challenge for Asian firms to expand outside of their home countries due to the rich cultural diversity in Asia. However, Dr Kuo does not see it this way. Instead, he felt that expanding regionally or even internationally is not a barrier to Asian firms. Most companies that have successfully globalised, he observed, require a very strong local base before they can attempt to expand outside their home countries. One example is the banks in Singapore. Although all three Singapore-based banks can be considered as regional banks, they are extremely dominant in Singapore, which gave them the resources and confidence to venture overseas.

Given his experienced investing in multiple markets, we sought his opinion on what he thinks are the key misconceptions about investing in Asia. With a cheeky smile, he replied that people still see the Asian market as a big casino. Moreover, he felt that many investors still tend to believe that there is a secret formula that can make us a great investor straight away. Dr Kuo believes that it is very important for investors to understand that there are no magic formulas. The market will reward you if you are disciplined enough in your process and have a long-term horizon to your investment.

In our research, we came across many companies listed in Asia that are almost perpetually trading at a huge discount in terms of their book value. We sought Dr Kuo's advice on why he feels this is happening. Dr Kuo described these companies as value traps. He reminded us that not all “cheap” companies are great investments. Many of them are traps for investors and we should avoid them. He said common reasons for their perpetual discounts can vary, but typically some of these companies might have issues including very poor liquidity, no growth or cases where the main shareholders have such a large stake in the company that minority investors would be completely at their mercy.

We learned a great deal during our two-hour chat with him. Before we parted, we asked if he has some advice for investors who just starting out. David thought about that question for a while and gave us four investing tips we can all live by:

1. Know why you buy and what you buy.
2. Start an investing diary to keep track of your thoughts and reasons for investing in a company. Refer to it regularly to see how your thought process changes.
3. Be patient with investing. Study, understand and hold your investment for the long term. Do not rush into an investment.
4. Always invest with your spare cash. Do not invest with leverage or cash that you might need in the next few months.