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Ken Chee: 3 Reasons Value Investing Works Even During Market Downturns
Aspire, Thought Leaders | 27 November 2015
By: Vance Wong
Articles (74) Profile

Co-founder and executive chairman of 8 Investment Pte Ltd, Ken Chee said that one of the most common things most retail investors say when they invest is, “the market seems to be going into a recession” or, “but prices seem very high now”.

Little do these investors realise is that most of the time their perception about market is largely based only on the Straits Times Index (STI). The STI is a good indicator of how the general market is faring, but it is not always the only and best way to decide if it is a good time to invest.

According to Ken, even when the market is in a recession, it is still a good time to invest – in value stocks. Value investing is a concept first made popular by billionaire investor, the Oracle of Omaha, Warren Buffett, who is also Ken’s idol. Ken talks about three reasons why value investing is relevant, even during market downturns.

1. Fundamental Needs of Humans have to be Fulfilled

In a recent interview with us (video above), when Ken was asked if value investing is still relevant even when the market is bad, he responded with a question directed back at us: “do you eat when the market is good? How about when the market is bad?”

The answer was, of course, yes. Ken’s point is humans have fundamental needs regardless whether the world is booming with growth or in a recession. There are businesses with strong competitive advantages or “moats” against their competitors in respective sectors.

These are the companies that you would want to unearth and invest in. Their stocks will outperform the general market when economies spiral into crises.

2. Good Businesses Might Become Undervalued

When the general market consensus is bad, most investors would tend to sell their holdings. This is the time when stock prices will start plunging, regardless whether the business is strong fundamentally.

Undoubtedly, businesses who are heavily in debt and without a good business model would find it hard to recover from a recession, some might even end up collapsing. However, businesses with strong fundamentals and balance sheets would recover very quickly.

Thus, when the general market is bad, it might actually be one of the best times to scout for such businesses that are selling at prices way below its actual value. According to Ken, this is the essence of value investing.

3. Actual Value VS Potential Price; Fundamental VS Technical Analysis

Technical Analysis (TA) involves looking at charts, analysing certain indicators about historical and potential prices. According to Ken, value investing does not require retail investors to look at charts; it is about analysing businesses’ fundamentals, as discussed in the previous point.

When a country is in recession, it is natural that the charts of most stocks would look pessimistic. Analysing charts would prove to affect emotions of most retail investors, which is why most investors hurry to sell when a recession hits, although it would probably be too late.

In value investing, Ken says that looking at charts and observing Price-Earnings (P/E) ratios are not needed. Looking at financial reports, however, is important. This is how we can evaluate if a company is doing well fundamentally and if its stock price is below its actual value.

Investors’ Takeaway

As much as investing in companies with the “potential” to have their stock prices shooting through the roof, it is always hard to predict the future. To Ken, predicting the future is a lot riskier than looking at the actual value of a business.

If its stock price is way below its actual value, which you will know with enough research, the risk involved in buying the stock is a lot lower than buying another stock that seems to have potential to rise to a certain price.

Nevertheless, there are keys to value investing success, like patience and frugality. Ken Chee demonstrates that very well in his daily life and will share more about how value investing can work for everyone in his upcoming Value Growth Workshop!

With a Communications background, Vance has the passion to write with a purpose - to provide content supported with substantial evidence to vested readers.

Please click here for more information about this author.

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