Interview With Adam Khoo: My Investment Hits, Misses, and 2023 Watchlist

So firstly I’d like to thank the great folks over at iFAST TV for the wonderful interview they had with me recently.

I shared quite a bit about myself and my trading & investing philosophy during the interview, so I really want to share it with all of you here as well!

“Can you introduce yourself”

Most of you probably already know me, especially those of you from Singapore. 

I’m Adam Khoo, and I’m the chairman of the Adam Khoo Learning Technologies Group (AKLTG), which is an educational business.

I’m also a full-time investor, and I’ve been investing for the last 32 years, since 1991 when I was only 17 years old. I’ve been teaching investing since 2005 through the Wealth Academy Investment Classes, and now in more recent years, through Piranha Profits Online Trading & Investment School.  

“What Got You Started On Investing?” 

So what got me interested was my grandfather. When I was young, my grandfather used to give all of his grandchildren ‘Ang Pao’ (red envelope with a monetary gift) every year and he didn't just give us cash — he would give us shares of the companies he owned, and in those days it was physical shares certificates of Malaysian companies. 

He used to lecture us for an hour every year and said “If I give you cash, you’re only paid once. If I give you shares of a company you're paid for the rest of your life,” because he said that when you own a share of a company, it's like you're owning a money making machine — they will pay you for the rest of your life. So I got very excited about shares because of him. 

My grandfather was kind of like my role model because he was not even a director or a business owner, he was a middle management person, he earned a modest salary, and worked for one company his whole entire life, but when he passed on at 95-96 years old, he was a multi-multi-millionaire and he created almost all his wealth through just investing, and that really inspired me. So in a way, he was kind of like my very own Warren Buffett.

So that's why I got very interested in investing since young. I started investing at about 17 years old, investing through my mom's brokerage account because I was still too young to open my own account.

“What was your first investment”

So aside from the shares I was given, the first stock I bought was in Kuantan Flour Mills — a Malaysian stock. The reason I bought it was because my uncle was a controlling shareholder of the company, and he talked a lot about it, so I thought “Why don't I buy shares in his company?”, and I sold it after a year or so and made a couple of thousand dollars on it! 

So I thought to myself, “Wow, it’s so easy to make money in the stock market!”, which is the wrong lesson I got because it was obviously not so simple.

Looking back, I made money not because I was smart — I was just lucky. After that, when I then started to buy other stocks thinking that I was great, I then started losing a lot of money like most people. So for the first 8 years since I started investing at 17 years old, I would say that I went around in circles, I made all the stupid mistakes that most investors make. So I made money, then I would lose money — whatever I made I lost it all back.

So in the end, I hardly made any profits in the first 8 years. So it was after that that I began to really educate myself. I said to myself “I have to learn how to invest the right way,” and it was the last 20-plus years that I really built my fortune in the markets, after the first eight years of hard lessons. 

I was a slow learner, I took 8 years just to get it right! 

“If you could turn back time, what would you have invested in?”

It's not so much what I wish I had invested in… looking back it’s more of “If I had just held on to the stocks I bought”.

Like for example, over 20 years ago I bought Microsoft, I bought Apple, I bought all these great companies at that time and in my early years, I used to jump in and out of investment positions. 

It's like the moment it goes up a bit, I would take profit and then hope I can get back in at a lower price. So I jumped in and out repeatedly, and yeah while I did make money doing that, but looking back now if I didn't jump in and out if I just held on to my positions for the last 20 years and slowly dollar cost averaged, I would be 5 times richer today! 

Apple Stock (AAPL) since the year 2000 (Image Source: Tradingview)

So that's the main lesson. That's what I teach my students today! 

When you own a great business, don't jump in and out. Just hold on for the next 10, 15, 20 years, and that's how you build generational wealth! 

People would say “Then when do I sell?”

I say “You sell when you need the money!” 

If you need the money to buy or renovate a house, or you have a medical emergency or anything, then you sell. But if you don’t need the money, just let the compound. If you sell it and you get the cash, then you would have to buy something else, you’d have to find another company that is just as great as the one you own, and in the world out there there are not many great companies. 

It's like once you find the man of your dreams or the woman of your dreams, it's not easy, right? But once you find that person, you’d want to be with the person for the rest of your life! 

“What is your best investment to date?”

I wouldn't say that there's only one best investment because I always invest in a portfolio of companies and over the last 20 years I've had the discipline to only invest in extremely safe and very profitable businesses. 

Collectively, they've all done very well, but if I have to name some, some of the ones would be Microsoft, Apple, Alphabet, Amazon, the household brand names, and also McDonald's, and Domino's Pizza.

So I tend to invest in what we call Consumer Monopolies. 

I like to invest in companies where there's little or no competition, either monopolies or duopolies. So I invest in Visa / Mastercard, it's a duopoly, or McDonald's, Yum! Brands, and Domino's Pizza.

“What are 3 factors to look out for before making an investment?”

Before I buy a stock of any business, I've got 7 criteria that the business has to meet before I buy. But I'm gonna focus on just 3. 

So the first criterion is that I only buy companies that have a history of consistently increasing sales revenue, net profit, and cash flow from operations for at least 5-10 years, preferably 10 years. 

That means I want to see that in the last 5-10 years, year after year, the revenue is growing, the profits are growing, and the cash flow from operations is growing. Because if the company can achieve that, that means the company is predictable and it’s resilient.

So for example; I love SIA (Singapore International Airlines) as a customer but it fails my criteria because if we look at the last 10 years SIA’s revenue is not going up consistently. Sometimes it goes up, it goes down, even before the pandemic. Some years they make profits, other years they’d lose money, and their Free Cash Flow — if I'm not wrong — 7 out of the last 10 years was negative Free Cash Flow, so if it fails even at first criteria. 

Singapore Airlines Ltd Financials, SGX:C6L (Image Source: Gurufocus)

So as much as I love SIA as a customer, I must be very objective in investing. It's not about emotions, but it’s about looking at numbers. 

So what I invest in is, for example, MasterCard. I invest in Alphabet, I invest in Microsoft because they pass my first criteria year after year they make more profits, year after year their free cash flow increases so it's it's recession-proof, it’s resilient, it's consistent.

The second thing I look for is the most important thing.

I buy companies that have a sustainable competitive advantage that protects them from competition. So what this means is that even if their competitors cut prices or offer a better product, your business can retain the customers because it's got a brand monopoly, it's got a strong brand that people are loyal to like Nike, like Apple. People still buy Apple or Nike even though there are cheaper alternatives. 

So that's one source of this Economic Moat. 

 Another source is what we call ‘High Switching Costs’, which means the moment a customer uses their product, it becomes very difficult for them to switch to another company’s product. 

If you're an Apple user like me, my iPhone syncs to my Apple watch, Airpods, and my Macbook. So would I buy a Samsung phone even though it's cheaper and more beautiful? No, because it can't sync to my other products, so it pretty much locked me into the ecosystem. 

So I like companies that lock in their customers. The customers have got no choice, they have to keep buying their products. 

It’s the same case with Microsoft. Since we were young we are so used to using Microsoft Excel, Microsoft Word, and so on. Would you use another product? We are too lazy to relearn everything right, so it locks us in. 

The third key would be to invest in companies that have got Conservative Debt.

So this means companies with a lot of cash on their balance sheet, so they are able to buy competitors when times get bad, and they have got relatively low debt. If you’ve got no debt or low debt, you can't go bankrupt. 

So if you look at all the companies that went bust right, whether it’s Hyflux, Noble Group, or Credit Suisse, what do they all have? High leverage! 

So if you avoid companies with high leverage it's impossible to go bankrupt.

“What are 3 investments that are currently on your watchlist?”

Currently, I've got close to 40 stocks in my portfolio and my priority is always adding more shares to the existing stocks THAN adding more stocks to my portfolio. 

I don't want to have too many different stocks. It's like having too many children — it’s hard to keep track of all of them. 

But if you ask me what stocks I'm watching that I would like to add more shares of — but I already own them — it would be Apple shares. I don't have enough Apple shares, so I want to buy more, but I'm not buying it yet because it's not cheap enough.

One of my rules is that I only buy when it is sufficiently undervalued. 

Another stock I want to add more shares of is Lowe’s. Lowe’s is the competitor to Home Depot, they are the second largest home improvement retailer in the US. I've got a small position, which I want to build more, but it's not cheap enough, so I'm patiently waiting. 

(Image Source: Lowe's Companies)

Another stock would be UnitedHealth, which is the largest health insurer in the US. They pass all my criteria. Out of all the sectors like Technology, Healthcare, and Financials, Healthcare is one of my favorite sectors to invest in because Healthcare is both defensive (recession-proof) and it has got relatively good growth potential. 

(Image Source: UnitedHealth Group)

So within Healthcare, I tend to avoid pure pharmaceuticals like Pfizer and all that because pharmaceuticals are quite unpredictable. If the drug patent runs out, they have to make more drugs, and if they fail the drug trial, the stock price can go up and down a lot. So I don't like that volatility. 

I like to invest in medical devices, and health insurance because it's very predictable — people have got to pay their premiums every year, and even in a recession you’d still have to pay your premiums.

So that's why I like these kind of companies.

“What are 2 other stocks you would buy and hold”

So one of them is Intuitive Surgical [ISRG].

I don't own it yet. I would love to own it, but it's just too expensive.

So Intuitive Surgical makes robots that assist in surgery. So nowadays doctors when they perform surgeries, they have these robots that assist them in the surgery with AI. So Intuitive Surgical is the leader in making all these robots. 

I’d love to own them, but again, it’s currently too expensive, so I'm waiting for it to get cheaper.

Another one is IDEXX [IDXX]. 

So they are the leaders in diagnostic equipment for animals, that means pets and livestock. So if you have a pet and you bring your pet to the vet, they have to find out what's wrong with your pet right? They diagnose your pet to see if they have cancer or things like that, and so the leader in making all these diagnostic medical equipment is IDEXX. 

Great company, a market leader, but too expensive to buy. I'm patient, so many of these companies I can watch them for years and years, waiting like a lion waiting for the deer to be weak or off-guard before attacking. But if the deer is strong, then it might outrun me. 

“What would be another asset class you would recommend?”

It depends on your objective. If your objective is to grow your wealth, then equities, because in the long run, stocks and equities outperform Commodities, Real Estate, Bonds, and Gold. 

So for me, I focus on equities but when I've got cash that I’ve not deployed yet, then I buy short-term bonds, I buy investment-grade bonds, but I normally buy in the secondary market and I normally buy less than a year and a half in maturity because I always hold bonds to maturity.

If you don't hold to maturity you've got market risk. If interest rates go up, that bond price goes down, and I don't want the market risk so I just hold to maturity. I buy short maturity so that anytime I've got bonds maturing, and if the stocks are cheap, then I can start buying stocks.

“What does money mean to you?”

Money to me basically means freedom.

With money, you're free to live life the way you want. I can wake up whatever time I want, I spend all the time with my kids and my wife, I do whatever I want to do, and I don’t have to answer to anyone.

To me that's money — money is freedom.

Once you’ve made a certain amount, beyond that another few million dollars, it doesn't make you more free. 

So beyond that point, to me, money is just a way to keep score. It's a game. It's like playing a computer game and the money is just the points. 

“What is your definition of financial freedom?”

So Financial Freedom is when you have enough money such that you can choose to not work for the rest of your life and be able to pay all your expenses. 

So I use the word “choose” because it doesn't mean that you don't work.

You might realize that people who have reached financial freedom, they in fact ironically work harder than a lot of other people. Warren Buffett works very hard, Elon Musk works very hard.

Why? They had all the money. It’s because you need something to do. 

So you’d find that the moment you have nothing to do, how long do you think can you sit on the beach for? How long can you go shopping with your wife before you go mad, before you're so restless?

So it's having the choice of not working — you’d still work — but you work on things you enjoy, you work on things that you're passionate about. 

That’s why I enjoy what I currently do.

“What advice would you give to aspiring entrepreneurs?”

I would say the first advice is to invest in yourself. You are your greatest investment. 

So before you think of investing in any stock, bond, or real estate… invest in your education. And I don’t just mean your formal academic education like University, but also reading a lot, and learning through videos. Invest in yourself first. 

The second thing is to never be afraid to fail. 

I mean it's been such a cliche right but it's really true. It's like learning to ice skate; if you're afraid to fall, you can't ice skate. If you are afraid to fall, you can't learn to ride a bike. 

You have to not be afraid to fall, and the good thing is that when you start young, you start early, and you fall — you make mistakes — the mistakes are small. It's better to make all the mistakes when you're small when you have little money. 

It’s better to make all the mistakes when you’re younger and have little money than to make mistakes when you’re older and have more money. 

“Can you share with us your investment motto?”

My investment motto is that I'd rather not make money if there's a chance of losing money. 

So it's all about Capital Preservation, and again it's not something new. It's something that I've learned from reading about Warren Buffett since I was young. The first rule is capital preservation, whether you are a long-term investor or short-term trader, it’s the same concept. 

So I do a lot of short-term trading as well while most of my investments are long-term. 

But even in short-term trading, the most I will risk is 1% of my capital on any one trade, because you’d never know which trade will win or lose. 

There's no such thing as a ‘sure-win’ trade. I don't care how good a trader you are, you will have losing trades, and you will still make a lot of money as long as the profits from your winning trades cover the losses of your losing trades. The important thing is when you have a losing trade, you cut losses fast to keep the losses small in trading. 

In investing it's about being able to diversify into great companies. Even when there’s short-term volatility, you’ll be okay because each company is only a small percentage of your portfolio.