9 years and 11 months! That is how long I held on to a value stock known as Frencken. I recently sold it in Jun at $0.515, having first bought it in Jul 2007 at $0.535 when it was still known as ElectroTech. In between, I averaged down twice, at $0.33 in Jul 2010 and at $0.365 in Jul 2014. The figure below shows the share price performance since May 2005.

As you can see, for a very long 9.5 years, the share price never recovered to its previous levels, until only recently. In between, it changed its name from ElectroTech to Frencken and took over not 1, but 2 SGX listed companies (ETLA and JukenTech)! It has been a very long 9.5 years for Frencken shareholders who bought it as a value stock.

In value investing, you are often told that you have to be patient; that the day will come when your value stock will rise significantly and become a potential multi-bagger. The logic is appealing: buy a $1 stock for $0.60 and eventually the market will come to recognise its value and price it at $1 or beyond! However, what is not mentioned is how long do you have to wait for this to happen. And in the case of Frencken, it took almost 10 years for it to recover to its previous levels.

You might ask, did I make a mistake for identifying Frencken as a value stock and for buying it at too high a price? I bought it in Jul 2007, so my assessment was based on the financial statements for Dec 2006. For FY2005 and FY2006, the respective earnings per share were 9.59 cents and 8.65 cents, the book value was 46.0 cents and 52.4 cents, and the dividend was 2.68 cents and 2.60 cents. Based on my original purchase price of $0.535, these translated to P/E ratios of 5.6 times and 6.2 times, P/B ratios of 1.16 times and 1.02 times, and dividend yield of 5.0% and 4.9% respectively. These figures suggest that Frencken was a value stock when I first bought it and I certainly did not pay too a high price for it.

The point I am trying to make is this: value investing does not always work. It is not a case of buying an undervalued stock and eventually it will become a multi-bagger. It is not that simple. As I later figured out, being undervalued is only a necessary but insufficient condition for a stock to rise to its intrinsic value. Some other catalysts must be present for the rise to materialise, such as a bull run, recovery in earnings, asset sales with special dividends, etc. Being undervalued alone is not sufficient.

In the case of Frencken, the recent recovery in share price is due to 2 factors: a bull run in electronics stocks that swept up not only Frencken, but also other electronics stocks such as Hi-P, Sunningdale, UMS, Valuetronics, Venture, etc. The other factor is a recovery in earnings. For the latest quarter in 1Q2017, it reported a 437% year-on-year rise in quarterly earnings. This explains the doubling in share price from $0.24 since the beginning of this year.

If being undervalued is the only necessary condition for a stock to rise, why did I have to wait for not 1, 2, 3, 4, 5, 6, 7, 8, 9, but almost 10 years for it to rise?

I used to be a value investor too. When the value stock that I bought rose, I believed that value investing worked. When the stock did not rise, I told myself to be patient, that one day the market would eventually recognise the stock's value and give it its rightful valuation. When the stock dropped further and turned into a value trap, I thought that there must be something that I missed and should work harder to improve my value investing skills. Seldom did I think that there could be some other factors at work that would determine to a larger extent whether I make money or lose money on stocks. If the value stocks rose, value investing was right (never mind that there could be a general bull market as in the case of 2004). If the stocks did not rise, value investing was not at fault!

It was only around 2011 that I realised that something was amiss with value investing. I found out that the stocks that I bought during the Global Financial Crisis did not rise as much as I expected. It was then that I finally understood that value investing does not always work. Being undervalued is only a necessary but insufficient condition for stocks to rise. From there, I kept an open mind and branched out to other investing strategies, such as growth, turnarounds, dividend, etc. 

Having said the above, value investing did not totally disappear from my investment strategies. The principles of not overpaying for investments have continued to stay with me (see What is My Target Price?). And I am actually very grateful to have learnt value investing back then in 2001. It taught me a scientific method to value stocks instead of using gut feel. But value investing could only bring me this far. To continue my investing journey, I had to understand what worked for value investing and discard what did not.

10 years. That was how long I held on to a stock bought on the thesis of a winning formula. How many 10 years does anyone have in his investing lifetime to realise that his much cherished winning formula does not always work?

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