Interviewed By Emmanuel Daniel
In this RadioFinance session, self-styled investment guru, Adam Khoo, explained the investment philosophy which has allowed him to be continuously successful in different market conditions.
He compared traditional wealth management approach, which is product focused such as provided by insurance companies, banks, and fund/asset managers, against self-investment which he described as value investing. He also shared outlook on specific market like US and China and different asset classes.
Khoo, who is executive chairman and chief master trainer at Adam Khoo Learning Technologies Group, emphasised that “there is no free lunch” in this world. Self-investors have to be humble enough to achieve higher return in a sustainable way. The key questions an investor should be asking is not “Where the market will go”, but “What are the best businesses to buy” and “What is the rational price to sell at.”
The key discussion points include the following:
The following is the edited transcript of the session:
Emmanuel Daniel(ED): Adam Koo is perhaps one of the first people, outside the traditional industry, whom I'm starting to speak to, because I want to get a sense of how the industry is evolving from people who are not beholden to the current structures of banks and insurance companies and fund managers, and wealth managers and private banks, who are there to sell products and services to customers.
Adam, thank you very much for doing this chat with me and welcome to RadioFinanceSo let's start by getting a perspective on who you are.
Adam Khoo (AK): I've been an entrepreneur all my life So I started my first business when I was in school. In those days in the 90s, it was the mobile disco business. And during that time, I also had a passion for teaching. Because I was a wayward kid,I was an underachiever and I went to one of these motivational programmes back in the 80s. And that really changed my life by changing my belief system and I was very inspired bythat speaker.
So I started to read all about the psychology of positive thinking, and NLPAnd that's how I first started, by going out there and inspiring children on how to study and how to succeed in life.
I started doing a lot of corporate training, when I graduated from university. So my focus was actually in the insurance business. I used to do training for AIA, Prudential registerall the big insurance companies. I trained the insurance, people in self-motivation in sales, as well as recruit a lot of financial planners. And later on, I began to go into teaching people how to invest because that has always been one of my passions.
My background, is actually in finance from NUS Business School. I first started investing at about 17-18 years of age. Back then there was no internet. So, basically, for the first eight years I made all the stupid mistakes you can possibly make as an investor. Had no idea about how to value companies, no idea about the fundamentals, bought based on rumors, based on tips by the brokers, lost a lot of money. But the thing about it was I never gave up.And that motivated me even more to say, I have to master this stuff. BecauseI really want to be able to grow my wealth in a sustainable and consistent way. So I started to invest a lot on my education. I read every possible book I could find on finance on investing. And I read through all the different schools of thoughts, right, from value investing to growth investing to trading. And the methodology that really resonated with me initially was the Buffett methodology A lot of my investing approach is really grounded in value growth investing. And moving on from that I started to read a lot about technical analysis. I went a lot into trading techniques as well.
AK: I started teaching investing back in 2005 where I created this programme called Wealth Academy, and it was only very recently, which was 2016 that I started to put my teachings online, starting with YouTube. and I never, I have no idea how well it's going to be received. In fact, when I first went on YouTube. People told me, would they listen to you? We've got like 26 million views, 600,000 subscribers, so we're definitely the top five of investment channels in the world. One of the things that I think made me different from the thousands of gurus out there was number one, I give a lot of content on my free videos. My belief is that if the free videos, I give them so much value, and even from the free videos, they could get results, then they'll be thinking the free stuff is so good, what about the paid stuff. And it worked.The second thing that makes me different, is that I am one of the few guys that actually shows my account online. And I don't just show them my live account. I actually print out reports from my broker I print out quarterly and annual performance reports. And that has inspired my students to do the same.
ED: The third quality about you, which I thought distinguishes you from a lot of the other investment gurus was that you're actually a business owner.I like the moments when you describe your, your trading, not as a gambling or investing or just making a bet on the future, but as a business. And running business requires discipline. And I think that came across very well, in you as an investment teacher and you described it as a normal P&L, profit and loss statement, that any business owner will go do and that's something I read resonated with.You're not just taking the next idea and trying to make the most of it.
AK: I do both investing and trading.80% of my portfolio is investing and 20% is in trading. And I like it a bit to relationships. So, investing is kind of like getting marriedYou want the person with good fundamentals. good character, good, heart, intelligent, loving personSo when you invest, it's 90% fundamentals and 10% of the technical, which is the current trend of the market. Now, trading is like a stand. In trading, or in one-night stands, you don't care about business character. 90% is technical and 10% fundamentals. So the difference in trading is that you go in and up very fast. I don't do day trading, I do more like swing trading where I hold the trade for a few weeks. But in trading, use a stop loss. By investing, you don't use a stop loss, because you know, it's a great company. And the lower the price drops, the more you accumulate.When it comes to investing, one of my rules is that I only invest in the fundamentally strongest businesses in the market. There are 4000 listed companies in the US, less than 1% of them pass my criteria. I only invest in companies with a solid track record. Okay, so the companies must have consistent growth in sales revenue, net income and cash flow from operations and free cash flow. That first criteria alone will eliminate 95% of businesses out there. Tesla does not have consistent free cash flow growth. So I will never invest in in a Tesla
Why? Because when a bear market has a big correction, these are the stocks that are going to collect sweet 30, 40 or 50% because they are what we call like fairy dust, you know, unicorn stocks. But when you have a business, like what is an Amazon or Facebook or Microsoft, where they have the dividend yield to support the share price, they got a free cash flow to support the share price.They got high cash got very low cons with debt. These are the ones that are resilient, that will hold their own in corrections and bear markets and these are the only ones I invest in.
Step two is I only invest in companies with a sustainable competitive advantage that protects it from potential competition, which Warren Buffett calls it the economic moat. So what creates a moat would be example a brand monopoly.
ED: Where does this conservativism and this structure come in your investment personality?
AK: I've always been conservative actually.And people are very curious to me, if you're such a conservative person, why did you become an entrepreneur and why didn't you work for someone?.The reason I became an entrepreneur was because I felt that being an entrepreneur was safer and more secure than working for someone. That was my paradigm. Because I felt that if I work for someone, they are in control of my destiny, and I feel very insecure when that happens that I can get fired. Anytime that I could get replaced by someone younger, cheaper, faster than me. And I thought if I'm an entrepreneur, I'm in control.It was my conservative nature that got me to always be an entrepreneur.
ED: You've got thousands of students, and you've got students who actually work in banksI'm curious to know, some of the things that your students have talked to you about or asked you and had conversations with you.What is it that you know, that someone in a finance degree doesn't know?
AK: I actually wanted to do a CFA a couple of years ago and I gave up half way. The reason was because I found that a lot of things, I was learning in the CFA course was not relevant and not things I was interested in. I only read those sections that interest me. But having said that, I'm not knocking Business Schoolsfound that their content was good, but it was not practical, not relevant to real life making money.I approach the market as a supermarket of companies, where companies are on sale every day at different prices. And I focus on the fundamentals of the individual businesses, and I don't care about the macro stuff at all. If you buy great businesses that dominate the industries, and you buy them when you're selling at a discount, that's all you need, and have the patience to hold them to the short term fluctuations of the market, you will do well. A great business is one that would increase in value over time. It's as simple as that
ED: Okay. Now, so the people who come to you, some of them have this technical knowledge, what is so revealing?
AK: What I found over the years is that sometimes people come to my programme with zero financial knowledge.
The premise of economics is that people make rational decisions. But in reality, people don’t make rational decisions, the market in the short term is not driven by logic, is driven by emotions. And the trouble is, a lot of these people who trade in finance is that they have the technical knowledge, but they lack the psychology. So when the market is going down, 40 to 50% or 36%, in fact, that's the time that I get excited. I wake up all right, and start buying like crazy. But people may have that logical knowledge, but they freeze in fear.
ED: What do you make of today's market?
There's so much excitement and wonderment in terms of what is it that we are facing? How do I protect my wealth in this changing world? Is there something that I need to invest in to maximise it or protect it? Or should I just be cautious?
AK: When you buy a stock, you're not buying a lottery ticket. And no one can predict where the market is going. No one knows where the market will be in one day, one week, one month, no one knows, no one can predict. Everyone's guessing and no one knows where the market is going. All we know is that over time, the market will always go up. And you got to know that once a year, the market will drop at least 5% historically.Once every two years, you drop at least 10%. Once every five years, you will drop at least 20% we call it a bear market. Okay, now, when will that happen? No one knows. Okay, so just know that a market over time in terms of the index will always rise in the short term, it will drop once in a while. And those times when it drops are times when is an opportunity to accumulate shares of great businesses.
The main focus, like I said is when you buy a stock, you're buying a piece of a business, so focus on the business. Now to answer your first question, Where do I invest? And where do I see the market? For me, I've basically two main investment portfolios. The first is my capital gain portfolio and the second is my dividend portfolio. When it comes to capital gains, I only focus on US and China. To me, that's all I need. Because the US and China have the best secular growth companies. And in the US, like I said, out of the 4000 companies, less than 1% of them are on my watch list. So these are companies with consistent free cash flow, low debt, and they dominate in their respective industries. So I tell investors that at the very least look at the MAGAF stocks, Microsoft, Amazon, Google, Apple and Facebook. Because the MAGAF stocks dominate their respective industries that are changing our lives that all of us use. People classify them as tech stocks. I don't. To me, it doesn't make sense calling them tech stocks. If you call them tech stocks, let me tell you, in the near future, every stock is a tech stock.
So for me is Amazon a tech stock? No, Amazon is not a tech stock. It is an e-commerce retail company. Google Alphabet is not a tech stock. It is a communications company. So you got to think very definitive that way. To me, you should only invest in a company only if there's value and growth. It should not be an either/or, it should be both.So for example, if you look at Amazon, Amazon has growth. So how do you define growth? Growth means, it is growing at, say at least like 20% a year and its in a secular growth industry, not a cyclical growth industry.. And there are times when Amazon gets to be at value undervalued.
So it's how you value companies. The truth about a lot of people is they don't understand how to value companies like many people, they look at Amazon and say Amazon's expensive. They say it's $3,000. I say, you can't vet it based on the absolute price. Now a $3,000 stock can be cheap. And a penny stock can be expensive. Where they should buy expensive depends on the price versus its underlying intrinsic value. Some people, they look at P/E (price-earning) ratio and say, hey, Amazon's P/E is eight times, that's crazy. But that's very misleading. Because P/E ratio is share price divided by earnings. Okay, but you got to understand that a company like Amazon, their earnings are purposely depressed because of high depreciation. So you got to dig into the financials
ED: The people who are watching this session, for example, are traditional bankers and traditional fund managers and so on. And they are looking at you and saying, how can this guy who runs his own business, be as good as what we do, and take clients away from us, and so on. What I think impressed me is, you need to know what you're going to be investing in, a long before you've invested in it. The second thing that I think came across, what you're trying to say is that actually you're a good time-bad time guy, it means that you've invested in the good times and the bad times. And that's why I liked the way you look at investment, because it is a continuous source of investment income for you, regardless of how the market is, right?
AK: But it really depends on how you define good time and bad time.I don't look at the market is going down is bad going up is good. In fact, you have to rewire your mind to think very differently. So to me when the market is in a correction, the market is down 20, 30 or 40%, to me is good. That's when I start to deploy a lot of cash. In fact, in February, I was like hundred percent into equities. But as the market goes up, and things get more and more overvalued, I start to raise cash I start to sell to raise cash and then hold 20-30% cash. So you're right, I've always invested. So when the markets are very undervalued, you won't be fully in line in 90% in equities, right. But when markets overvalued, then you're50 60% in equities and the rest in cash waiting to redeploy when things get cheap again.
ED: Do you make a lot of money from your training programmes?Isn't that a source of income as well?
AK: Of course, definitely. Yeah. We make a lot of money in training programmes as well. The great thing about me teaching investing is that when I teach you how I trade and how I invest, and you make a lot of money, you don't become a competitor. Because when you make more, I don't make less. Because the financial markets are so big. So the great thing is I can teach you how I trade, you make money, I also make money, and I make money by teaching you.
ED: When you look at traditional banks, or traditional fund managers, or securities companies, or traders, being your competitor, what is it that you offer that they don't? And the traditional way in which wealth management is being sold today, what's the good and bad about it?
AK: I don't see them as my competitors at all. I know, I don't think they see me as their competitors, because I think we serve a different niche in a way. So I'll give you an example. Not everyone is interested to learn how to invest and to trade. And not everyone is willing to put in the time and the work to do it. And I think it takes time, it takes hard work. So if you're not willing to do that, go and get the bank to manage your investments. But understand that if you do that, you get lower returns, which is fair, because if they are doing your work, they deserve to be paid their fees. But then there are some people who say no, I'm willing to do it myself, I want to learnthat's where I come in And of course, when you do that, you can make a lot higher returns than buying traditional banking products. Why? Because you do yourself, you obviously get higher returns and you save a lot on fees.
ED: What are you seeing in terms of trends? Like who are the people coming to your classes now? Increasingly, how's the profile been changing?
AK: Roughly about half the people who come, have never bought stocks before.They may have bought some unit trusts in the past or some unit linked products, but never bought stocks themselves, right? 50%. And the reason they come is because they want to get a higher return from your investments. Because if you buy traditional banking products, or unique link policies, you're getting, what 3 to 5 percent a yearThe other half of the people who come to my programme they have invested before. And of course, half of those people who have invested before have lost money, because they have no idea what the heck you're doing. And I tell people that if you invest in a market without having the education, it's like driving a car, without going to driving school. It’s only a matter of time, you're gonna get hurt financially. So you got to learn how to drive, defensively, follow the traffic lights, seatbelt, airbags, and all that. And then investment becomes very, very safe. tTen the other half have made money, but they don't have that high returns. They're getting single digit returns, and they want to come to learn how to double or triple that in a sustainable way. And increasingly, I get more and more professionals. Recently, for some reason, I've got a lot of bankers joining my programme, right, a lot of private bankers, stockbrokers, financial planners coming, because they want to know how I do it.
ED: The questions coming through the chat right now is, how do I make sense of what the market is today? What can I learn? What should I know?, And in fact, what you're saying is the professionals are asking the same question as well.
AK: I think the problem is, a lot of people are asking the wrong question. You want to know, where's the market going a day from now, a week from now? And you know, no one knows where the markets are going.The right question to ask is, what are the best businesses to buy that are in secular growth industries that they are selling at a reasonable price? This is the right question to buy. So when people ask me, is the market overvalued? It's a very general question. Now, in general, yes, the market is overvalued if you look at it in terms of the S&P’s price to earnings ratio.But if you drill down to individual companies, and learn to value the individual companies, there are companies that still offer value
I look at businesses as I classify them under different categories.You need to have a balanced portfolio. So for example, a big part of my portfolio is in secular growth companies including Amazon, Facebook, Microsoft, secular growth companies.Now, these companies are not high growth. They don't grow at 20 to 30%, they grew at maybe 8-10 percent. But they are very defensive companiesThen I've got another growth company and I call them the deep cyclicals.Now, in general, I don't want to touch cyclical companies, but the only cyclical companies I’d touch are banks. Now, having said that, there are only five banks that I’d ever buy in the world, UOB, OCBC, DBS, JP Morgan, Bank of America, that's all I'm gonna buy. And I only buy cyclicals when they are selling near the bottom of the cycle. So I look at the historical price to book ratio, which I only accumulate when they're near the historical low the price to book and of course And then at the top of the cycle, I get rid of cyclicals. Then, another group of companies are speculative growth. So these are the ones that you know, high revenue growth, but not making money yet. These are the ones that I can be very careful with. I don't really invest in them but I may trade in them for the short term. Because they tend to be a lot more overvalued. And then, of course, we've got turnaround players. They are like, Boeing where it’s a great business but temporarily losing money because of short term issues. And these are the companies where you want some allocation, but not too much, because they're more risky.
So whether you buy a stock depends on your portfolio objectives, your own allocation and you can’t just ask if this the right stock to buy?
ED: You're an investment teacher. What is your portfolio outside of investments? Do you have property?What do you consider as being your total portfolio?
AK: I wish I could invest in property. I wish, but I can't because of the additional buyers stamp duty.
ED: So stick within your circle of competence.
AD: You want to buy companies that are resilient, regardless of the short term economic situation. Right. So I mean, during the pandemic, Apple’s sales increased. So you want these businesses that are pandemic proof that are not affected by short term cycles. You want these companies to be at the top of your portfolio. So there are certain industry example that I will never invest in. For example, I'll never touch airlines, because airlines even before the pandemic, are very price competitive.I don't touch auto manufacturers. I don't touch commodity companies. I don't touch real estate developers. Because those businesses are very competitive and they are very cyclical which I don’t like.
ED: You're a lot into options and I guess almost every mature investment guru talks about optionsBecause investing in equities directly is a capital cost to the investor and renting option is more like an insurance sort of, to get in and out as you like.For the sake of completeness, just a very quick comment on options.
AK: Whether you are an investor or trader, to me, you have to learn options. Because options allow you to increase your ROI, lower your cost, and lower the capital required, if you know what you're doing. You got to know what you're doing. So options are like a nuclear weapon, if you know how to use it properly, you will dominate the world, right? But if you don't know how to use it properly, can blow up in your face. So I share with you a very simple way in which I use options in my investments. Sell cash secured, put options on fundamentally great businesses. So for example, Apple is now at $120. I bought it in about 120 and I sold it at 450 and I more than tripled my money.But I want to get back in. But after the share split, right now apples at 120. My valuation is about $85. So I'll only buy Apple below 85, I'm not going to buy it above that. Now, I can wait for Apple to go below 85 until it gets there. So instead of waiting, what I do is now that Apple's at 120, I'm selling put options at 85. Okay, so when you sell a put option, what does it mean? It means that by selling a put option at 85, I'm obligated to buy Apple shares, if Apple shares go below 85 by the expiration on the options. And by selling the put option, I collect premium, and the premium averages up to 2% a month.So 2% a month is 24% a year. So my point is, is if Apple drops below 85. by expiration, I'm forced to buy Apple shares at 85, which is what I will do anyway, right? But Apple doesn't drop below 85, I don't get to buy the shares, the options become worthless, but I keep my 2% premium. So basically, that's what I do every day, I just keep selling put options, and very big discounts of companies I want to own and 99% of the time, my options never get exercised. All right, they all expire worthless. And just by doing that, my portfolio gains at least 20 to 30% a year just by setting those down options.
ED: And so you don't see your options purchase as a investment loss. You see it as a cost?
AK: A lot of people, when they start with options, they start by buying options. They use options as a speculative tool but I don't do that. Why? Remember, 90% of options expire worthless. When you buy an option to bet on the direction of the stock, you're only going to be right, less than half the time. Because options are decaying asset, right time works against you, you're you know, theta is negative, right? I make most of my money by selling options. I'm a net option seller. So I benefit from the decay of the options. Right? There's a big difference. So I don't buy insurance, I sell insurance in the market.
ED: That was my conversation with Adam Khoo, a very well-known investment teacher in Southeast Asia and a lot of different Asian countries. It is my own journey in trying to talk to people who are outside of traditional financial services, not the bankers, not the fund managers, not the private bankers and so on. But the people who are helping large numbers of ordinary people out there to manage their own finances, I was hoping to gain an insight on how people like Adam Khoo might well be transforming the financial services industry. But what I've learned is that these are people who are democratising an understanding of wealth management, and in democratising the process, the disciplines that leapt out at me. As Adam was speaking, included, the fact that all of us need to have an education in investment from a very young age. Number two, that each of us have to start understanding the assets that we are investing in, make the mistakes, learn from them, and then hone the skills over time. And number three, there is no alternative, but to go down to fundamentals of a business. So you don't think of investment as an opportunity to get rich quickly but an opportunity involves the same disciplines as if you are working every day, and incurring a cost to get to work on time and so on. And then from there, to be able to generate an income that you then accumulate, which becomes wealth over time. So having had a good sense of the disciplines that an investment teacher has in place, now helps me to tie it back to what traditional financial institutions are doing or should be doing to help that process of helping as many people understand your financial needs over time. And as Adam, appropriately answered to the question of how do I make a quick buck in today's market? The answer is that you're asking the wrong question. So many of you may be aware that as I get into conversations like this, I'm not just talking to people in the industry, but becoming wider and broader in my scope, in the quest to answer questions that I have in my own mind. So if you're following me my interviews, you're actually following me on a journey, where you may not understand why I may have picked up someone like Adam to be interviewed. And I will pick out other people like him over time, but they're all adding up to my idea of how finance as an industry will evolve, but also how history itself is evolving, and how entire economies will develop over time, and how all of us as individuals need to take stock of what our own discipline should be in preserving our wealth, growing it, and being responsible for our own assets.
So thank you very much. And join us again next time
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