Q: How do you start looking at which companies to invest in?

Mr Yeoh: We start off by using our in-house quantitative screen based on valuation, growth, momentum, expectations, and quality. This starting point will help us increase our chances of picking a company that will do well in the future. If you look at our screening criteria, you can see that ideally, we would want to invest in companies that are priced cheaply, have some growth, are well-managed, are highly profitable and have some momentum.

Often, companies would only have some of the criteria. For instance, a well-managed and highly profitable company may not be priced cheaply. On the other hand, a small company in a highly competitive environment with low margins may be priced cheaply. The portfolio manager will then have to use his judgement on which criteria are more important and together with further research decide to go forward. This is also a good starting point for individual investors.

Q: How do you tell if a company is likely to do well in the future?

Mr Yeoh: Following our screening, we will then look at the company on a fundamental basis. This involves assessing the industry that the company operates in and where the company is within the industry. If the industry outlook is good, there is a higher chance that the company will do well in the future. It is easier for a company to grow in an industry that is on the rise rather than one where the industry is stagnant.

The other thing to look at is the competitive advantage of the company within the industry. If a company has an edge and currently has a low market share, it would have a greater potential of growing through market share gains. Of course, one of the challenges of investing is that our evaluation of the industry can be wrong. Still, looking at these factors will increase our probability of selecting a company that will do well in the future.

Q: What are the red flags you pay attention to?

Mr Yeoh: One of the red flags that we look at is related party transactions. Companies that have a high amount of related party transactions often have poor governance.

For instance, these companies may buy private assets from related parties at inflated prices, which is not good for minority investors.

Another red flag is when the company continuously raises funds from the markets. Companies do raise monies for expansion and there is a genuine need to tap capital markets when the needs arise. But when it happens on a regular basis, it becomes a cause for concern for a few reasons.

Firstly, the core business is not very profitable or cash flow generative, and therefore it requires constant injections of funds to grow. Secondly, companies that engage in frequent fund raising often do so to cover up fraud or other bad business practices.

For example, a company may look like it is growing fast in terms of earnings, reporting growth in sales, but perhaps the sales were to parties that are unable to pay for the goods. The purchases from this company may even be fictitious.

Therefore, to maintain the impression of growth, the company will have to raise funds from the capital markets in order to keep the company afloat as it is unable to collect cash from the sales of goods.

Q: When do you exit an investment?

Mr Yeoh: We will exit the investment once we believe our investment thesis for the company can no longer be fulfilled. This can be triggered by various reasons.

One, the industry dynamics may have changed, and the industry outlook has become negative. Two, the company may no longer be competitive and grow as expected, or is in a turnaround situation where it's unable to make the improvements required to compete. Three, the company share price may have appreciated to such an extent that it no longer reflects the value of the business.

Q: Are macro or micro factors more important to you when it comes to selection criteria?

Mr Yeoh: We believe that both factors are equally important and macro factors have become more important compared to 20 years ago. This is because of globalisation and the lower rates of economic growth today. In the 1990s, economic growth in each country was relatively high and there was only a need to focus on the micro factors and factors at the company level.

Now because of globalisation, we need to look at the bigger picture. Many companies have customers and markets that are located around the world. So we now need to incorporate macro factors into our analysis. Furthermore, with growth prospects lower, we also now need to pay attention to the macro factors as economic growth cannot be taken for granted.

Bonus question: Do people ask you for tips? Any tips for iMSavvy readers?

Mr Yeoh: Yes, I often get asked for tips. However, I am reluctant to give specific stock tips because the investing environment can change quickly in today's climate. So it wouldn't be appropriate or responsible to provide stock tips.

But one tip I can give is to have diversified portfolios as diversification will allow investors to generally benefit from economic progress.

Companies that perform well will be incorporated by funds and indices. Investors can either buy retail funds or ETFs to gain exposure to diversification. If the investor is willing to put in more work, the investor can do research and select 10 to 30 stocks for his or her portfolio. It is easier than ever to invest in stocks around the world given the range of online investment platforms in the market, including Maybank Kim Eng. Investing in just one or two stocks is risky as even the best investors make mistakes, but a diversified portfolio helps them recover from mistakes.