Investing: Keeping 40% cash at all times

This article first appeared in Wealth, The Edge Malaysia Weekly, on May 24, 2021 - May 30, 2021.
“I started to invest mostly in overseas markets four to five years ago. While there are investment opportunities locally, such as glove and semiconductor stocks, since last year, I see more values elsewhere in general.” > Ng

“I started to invest mostly in overseas markets four to five years ago. While there are investment opportunities locally, such as glove and semiconductor stocks, since last year, I see more values elsewhere in general.” > Ng

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Many investors suffered huge losses when they sold off their stock holdings at low prices at the height of the Covid-19 pandemic last year. Alex Ng, master trainer and speaker at Value Investing (VI) College, shares how he weathered the market turmoil.

The key to surviving and even thriving during an unprecedented crisis is simple, he says: Stay invested, but do not be fully invested at all times.

Ng always keeps a cash level of about 40% regardless of the market conditions. He would top up his share account whenever the cash level falls below that threshold. This provides him with the much-needed mental stability and confidence to stay invested when markets crash.

“Many people sold their shares in 2020. What if they had the cash and confidence to hold on to those stocks and not do anything? They would have recouped their losses and even made money,” he says.

Furthermore, with ample cash in his account, Ng was able to bargain hunt when markets collapsed. It is in times like these that values emerge. “I want to make sure that I have enough dry powder to enter the markets when prices come down. As a value investor, you are happy when prices go up. But this is not enough. You need to be happy when prices are battered,” he says.

Following such a principle, Ng was able to buy up various technology stocks last year when the global markets were awash in a sea of red. The cash level in his investment account dipped to about 20% from about 40% at one point, but he quickly topped it up with his monthly savings and other sources of income.

As a disciple of the legendary investor Warren Buffett, Ng says he does not sell stocks in haste to maintain the ideal cash level. He prefers to hold on to good-quality companies as long as their fundamentals remain intact.

Thus, he invests prudently and is disciplined in saving up his monthly salary to maintain the desired cash level in his investment account.

As at April 28, Ng had invested 95% of the money he allocated for equities in foreign markets, mainly the US and China. These are technology companies and household names such as Facebook Inc, Apple Inc and Alibaba Group Holding Ltd. 

He also favours other less familiar names in the technology space such as Cloudflare Inc, a US-based web infrastructure and website company, and Fastly, a US company that provides cloud computing services.

NIO, a Chinese automobile manufacturer that specialises in designing and developing electric vehicles, is also one of his favourites. This is a less common choice for a value investor like Ng, as the company’s financial position is not as solid as tech giants such as Facebook and Alibaba. But he has his reasons.

“The company, widely seen as the rival of Tesla in China, is poised to benefit from the growing electrical vehicle market. And the Chinese government is investing heavily to grow this market by providing subsidies and incentives. NIO is well positioned to benefit from such a macro backdrop.

“However, the key reason is [that] I had experienced the company’s product before. I had the opportunity to meet a friend driving a NIO car in China three years ago. It surprised me in terms of quality,” he says, adding that the share price of NIO is more reasonable than Tesla’s.

A quick search online shows that the company was listed on the New York Stock Exchange in September 2018, selling its shares at US$6.26 apiece. As at April 29, its share price had shot up 558% to US$38.99.

In its 1Q2021 financial results (released on April 28), the company announced that it had delivered 20,060 vehicles, up 423% year on year. Its revenue hit US$1.218 billion, up 481% y-o-y, while suffering a loss of US$45.2 million. 

The local market has become less attractive to Ng in recent years. He says the FBM KLCI has far underperformed other indices such as the Standard & Poor’s 500 index and Shanghai Composite Index.

“I started to invest mostly in overseas markets four to five years ago. While there are investment opportunities locally, such as glove and semiconductor stocks, since last year, I see more values elsewhere in general,” he says.