Traits of Good Companies

 "Stocks do well or poorly in the future because the businesses behind them do well or poorly - nothing more, and nothing less."
[Some famous investor said this phrase, you know who? I hope you know :)]

• Cheap Valuation - P/B, P/E, discount to NAV etc
• Business Economic Moats - high barrier to entry, unique product(s) or service(s) such that the company will always be needed and still be around for decades
• Growth - sustainable consistent growth
• Profitability -  ROE, ROA, increasing FCF NOT net profit only, net profit margin
• Financial Health (net cash or little debt, unless company got high earning powers to offset)- see gearing, debt to equity, quick/current ratio, interest coverage ratio
• Dividend - 2-3% p.a. with <40% dividend payout ratio. History of increasing dividend payout ratio over the years as business grow
• Risks - think of negative aspects of business
• Management assessment - compensation(executive pay is linked to company performances), character, experience

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Extracted and updated the above bullet points from my ex-page. If you manage to find good companies, please feel free to share :)

FA Valuation?

In FA, there are many ways to value a stock. P/B, P/E, cash return, DCF etc. Some investors also look at things like net debt/net cash, free cash flow, ROE, ROA, dividend payout ratio, EPS growth rate etc for the financial health of the company and the total return of money to investors. Some also look at economic moats of the companies business, managers, CEOs of the companies for the qualitative aspects. Personally, I kept one excel sheet to keep my calculation of these terms simpler. I am lazy to press calculator everytime. Haha!

Regardless of which method you use, its important to understand the meaning of these terms and acknowledge the fact that these are "tools" to help you and they are not the "holy grail" to investment success.  Personally,  I believe emotion is the hardest to manage.

Let me introduce some of these terms:

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 P/B ratio, I guess many have heard of this ratio before. Anyway, this is one way of valuation of stock to see if you are paying a premium to its book value.

 What is price to book ratio?

A ratio used to compare a stock's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share. Book value is basically net tangible asset value which is total assets - intangible assets - total liabilities. This ratio also gives some idea of whether you're paying too much for what would be left if the company went bankrupt immediately.

Good read below:

http://business.asiaone.com/Business/My%2BMoney/Building%2BYour%2BNest%2BEgg/Investments%2BAnd%2BSavings/Story/A1Story20091005-171848.html

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 Enterprise value

A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is calculated as market cap plus debt, minority interest and preferred shares, minus total cash and cash equivalents. Think of enterprise value as the theoretical takeover price. In the event of a buyout, an acquirer would have to take on the company's debt, but would pocket its cash. 

Some use FCF/enterprise value to see if the companies are generating good FCF from its enterprise value. 

FCF = free cashflow = net cashflow from operations - capex 

(Credits to investopedia for the definition of these terms)

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Patience

The market has been raising for past few weeks. For those who are in the market, congrats! Huat ah! May you huat more!

For those people like me who still has lots of cash, this will be a good test for your patience. Do you feel that your money is rotting in the bank with the pathetic interest rate? Feeling heartache and got desire to re-enter the market to join in the fun and earn some kopi money? Sometimes I still has this desire and it is not easy to overcome this greed, but must train!! Patience!

However, I hope that the market can rise up further although I still have lots of cash rotting in bank :)

As for why I hope so even though I have lots of cash? Guess?

Which method(s) should I use?

Many of us including me are always wondering which is the best method to invest/trade? Which books should I read to learn more? Which guru's seminars should I attend so that I can invest/trade better? Which blogs should I visit?

SO the QUESTION is:

Which method should I use? FA? TA? value investing? value growth investing? dividend investing?

Actually regarding of which methods you use, just make sure it suit you and it works!!

How to know that it suit you? -> make sure you can sleep well every night without worrying about the buy/sell
How to know if it works? -> like what cw always said, measure your performance!

As a summary: 

不管是黑猫还是白猫，能够捉老鼠的就是好猫！

金玉良言（2） - correct?

multibagger follow cw, reits follow ak

金玉良言

In general: Blue first to crash in bear but first to chiong in bull!

But not all blues follow the above rule, becareful the blues which you choose!

My story -Typical know nothing to know a little thing investor

When I first started work in June 2008, I listen to my friend aka financial adviser and bought ILP because I just started work and I know that I need investments and protection but I was total noob in finance. (This ILP still haunt me today. Pls see: Best Bargain: Must buy: ILP)

Then I read up more and think that investing by myself is better. (Rich dad Poor Dad changed my mind. Previously, I hated anything to do with finance.) Hence, I bought unit trust in March 2009. I tried different kind of funds including method such as RSP.

I was lucky as March 2009 was market bottom and sold them in Oct 2009 for a bit of profit when I realised that I am actually feeding my profits as annual expense to the rich fund manager. Then I switched to stock.

In Oct 2009, I don't know anything about TA and FA. I listen to radio, see tv, see CNA market forum, see news etc and whacked my first stock golden agriculture at 0.45. In the next few days, the price drop to 0.42 and I felt worried and kan jiong. In the next few days it went back up to 0.46 and I sold it for low $xx profits as my emotion cannot take it.

Since then I started to buy and sell many stocks, but only dare to hold for a few days to few weeks because I do not have any plans or method. I have no confidence in my buy and easily panic as it is my hard earned money. In addition, I am easily influence by the media. The worst investment which I made during that period was blinding following BB Peter Lim, that mistake is still haunting my portfolio.

Since then till today I keep reading up books on FA and TA, learning all the methods which I could in stock investing. Somehow when I go through financial blogs, I discover LP's cbox and started to chat and learn from the people there.

I thought I had already learn many methods in investing such that it will make me a better investor. However, my performance is not good at all. I tend to buy and sell quite fast. I also tried forex but loss badly and read up on warrants but luckily did not tried that. I also wanted to try CFD, I got the account form but end up I never sign up.

Slowly slowly I realised that knowing the methods - TA and FA is not enough and in fact there is no holy grail in the methods. No matter how well verse you are in TA and FA, there is no way which you could predict the market movement.  Hence I started to give up listening to all these noises.

I learnt that I need to manage my portfolio well and do asset allocation. This directly and indirectly link to the emotion in my mind. I learnt and know that how much money I should and can put in each individual stock such that I will not panic when the market drop heavily. I learnt that I should and can only do average in but not average down. I learnt and know that when Mr Market is in panic, I should not panic. Instead, I should start whacking some good stocks slowly according to my asset allocation plan. When Mr Market too optimistic, I know I should start selling and should not have seller remorse.

Overall, now I know that I need to have a strategy. A carefully planned strategy such that I will have asset allocation according to my risk level and what I will do if market goes up and what I will do if market goes down. There is no point to predict market movement. The so called gurus also made so much mistakes, how can a layman like me do prediction? Nowaday, I started to buy slowly and sell slowly. Although it is hard, I force myself to stick to the rules which had planned.

However, I still have 2 past mistakes which is still haunting my portfolio. The school fees incurred in this process of learning is painful. Hopefully, Mr Market will give me a chance to repent.

I hope I am on the right track and I think my XIRR will tell me how I fare in future. All the best to me!

Lastly, thanks to all those had gave me guidance and I will continue to learn as much as I could so that I can improve! Thank you!

Could sell and buy back cheaper later

Very often, you would heard someone said "Could sell and buy back cheaper later".

Sometimes, someone may also said "If I should have sold it at at x price, and buy back at x-0.5 price. Then I would gain xxx instead of lose yyy."

However, this is all based on hindsight.

Irony is, how many times did the share went up further after you sold? How many times did the share crash after you decide to hold it and think it would go up further? How many times did share you bought drop more just after you just bought it?

If it is so easy to predict the up and down of the market, all of us would be billionaires and don't need to work right?

If you are so zhun, can you please predict and tell me when the market will crash and at which date will it rebound back?

If you are so zhun, can you please predict and tell me if the market will U-turn given the current bad economic conditions?

One classic advice:

Slowly buy, slowly sell. You can never sell at the exact top or buy at the exact bottom - always buy and sell in stages. (The top tick of a rally is the most expensive tick inthe market - fortunes have been lost hunting for it.)

Economic news?

Remember this news?
http://opposethetrend.blogspot.com/2011/09/good-news-bull.html

What about this?
Remember that yesterday and last friday, STI was in red?

What about today?

So is market going up or down?

I guess many people are thinking of bull or bear or sideway everyday?

But do you really have control over these?

Is there a simple formula news A + news B - bad news C = market up?

NO!

It is too complex. Even the so called economic experts or guru couldn't get it right.

It is impossible for layman like us to get it right?

Since you cannot control the market, cannot control the news, what can you do?

CONTROL YOUR OWN PORTFOLIO AND YOUR MONEY!
Place yourself in a way that suit you and could take advantage of both the up and down.

Dream!

When I was in secondary, I started to dream of this and this:

I saw other people have it, thus I also want it - My older brother and sister and other friends own the thing in first picture. (wait did I say owned it? Technically it should be own it with loans.)

When I first graduated from university, I still dream of the above. I want to work hard to earn and own it.

I saw many of my friends own the thing in the first picture. But what puzzle me is how did they manage to own it? where did they get so much $$$ to buy it in the first place? (At time time, I was noob. I did not know that they owned it with debt that kills a large portion of their pay.)  Nevertheless, that time I was jealous and hope that one day I can own it too!

However, around 2 years ago till today. I did not dream of above anymore even though my friends now own more than the first picture, they own the thing in the picture below and they complain to me that it eats up all of their cpf and their take home pay. Some even told me that they scare of losing job and have to work hard to secure their jobs for 30 years or even longer. But is there really job security nowaday?

Today, I only own the thing below with little debts. (maybe 1/3 or 1/4 of what their owed banks for the above nice thing.)

Look old and sluggish right?

I may seems to be cheapo to my friends, but....

I know that half of my monthly cpf can cover the monthly installment. (for your info, my pay is not high. In fact much lower than peers.) Although I don't have the so called luxury, but I am happy and content because I know that I can clear the above debts in at most 10 years using both mine and my wife's cpf if I want to or I can clear it immediately with all the cash and cpf both of us have currently. In addition, I do not need to be a slave to my job but I still want a job because i need $$$ to play with Mr Markets for the rest of my life :)

I forgot to mention. For my transport, I have this:

By the way, do you know what is BMW?

In future, I will aim for the second picture which I posted earlier but not for my stay :)
So ultimately, one day I will own something which my friend owned when they first grad but at much later date.

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End of story. So what is the moral of the story? I can think of a few. Please feel free to add on.

1. Be content with what you have
2. Plan your finance well. Others may looks glamorous in front of you, but you don't know what happen at the end of month when the bills are in. A debt free person is a happy person. A galmorous person may not be
3. Delay gratification helps
4. Have a dream
5. Know the difference between wants and needs
6. Live within your means

Some wise words...

Kungfu and/or? inner strength

This post is specially dedicated to BB AK in Cbox. As many already known, his blogs are famous and he has many readers who ask him finance related questions. To many of us readers, we admired his kungfu. However, not many of us have his inner strength. 

In stock market, different traders and investors have different kungfu. It may be easy to know and learn other people kungfu but applying it is not that easy.

As a summary, BB AK’s kung fu is:

• Buy more when price hit new low at resistance and with positive divergence.
• Don’t sell when the prices form new lows, instead reduce exposure on rebounds.

However, normal people like me cannot keep buying more when price hit new low. We don’t have enough inner strength. If we did that, the % of that stock out of our entire portfolio will be too high such that it causes us sleepless night. Subsequently, many of us will just panic sell when the price keeps hitting lower low, while BB AK keeps buying from us HAPPILY. (Quoting from beary, "AK will win money no matter what.") When rebound really come, we will all regret on hindsight.

Therefore, this boils back to the very fundamental issue of mind and money – the need to train your mind to sit tight when price high and not to panic sell when price goes lower.

Personally, a very good way not to panic sell in bear is to manage your money allocation well. For example, if you have 100k, you put 5k into each stock. This stock only takes up 5% of your portfolio. In addition, due to your prior experiences with losses (see http://opposethetrend.blogspot.com/2011/05/sharing-on-how-to-be-emotionless.html) and the fact that you know how long you can replenish that money from your working income, you will not easily panic sell and can sleep well in night. If you are comfortable with 10% per stock, you can add 5k later to average in. (not average down.). Do not keep averaging down if you do not have enough inner strength. You will 走火如魔，死无全尸。

In short, plan your money allocation well first as this will indirectly train your mind to follow the most simple rule - buy low sell high. 

Remember, you can only be invincible if you have great kungfu with good inner strength and mind.

See the similarity?

I think I should stop being greedy for little gain. Should sell slowly into rebound.

Its time to restart and be patient and wait.

Best Bargain Must BUY: ILP

I had just received my ILP half yearly statement today.

I bought this policy from my friend when I first graduated from Uni when I have zero financial knowledge.
I was told that is good as it incorporate both investment and protection. It sound so wonderful to me then.

Let me share how "wonderful" this ILP is.

It is the "best" investment that I had ever invested in.

Policy Title: Manulife Flexi Aggressive portfolio.

Started from Aug 08, deducted $200 every month.
Change to $150/mth on Dec 09

Total premium paid to date: $6250
Current cash value as of July 2011: $1801.45
% gain/(loss): -71.18%

Where can you find such marvellous investment? Even my healthway which is currently at 40% loss cannot fight the 71.18%. Furthermore, you have no control over it.

This is the best investment cum protection plan that you can ever have. Please remember to sign up for it and get free 71.18%!

IPOs - reflection

Recently, there are quite a number of IPOs coming up. Malacca trust, kitchen culture holdings, 800 super holdings etc.

When I first started 2 years ago, I thought IPOs was very exciting. Within a day it can rise so much and fall so much. Howver, I didn't dare to buy any of these IPOs as I am scare. After seeing some of the IPOs ran up so high on the first day of trade, I sort of regretted why I didn't participate in them.  (but do note, it is on hindsight.)

Recently, I have a different mindset as I realise something. TA and FA rely on historical data which IPOs lack. TA rely on historial phychological support/resistance while FA looks at the fundamental, numbers, business of the company and whether it show good historical durable comparative advantage.

IPOs do not have much historical data. IPOs do not show how the market perceive the price vs value of the company.

Although IPOs is very exciting, but I think it is not the cup of tea for me.

I still prefer:
money management 10-15% per stock/sector-> current market sentiments (be greedy when other are fearful, be fearful when others are greedy) -> FA screen -> TA good price to enter

(Haha, I am really a science student instead of art student, do things must one step follow by another step.)

Book summary - Alexandra Elder - Sell and sell short

 As usually, I like to record what I had read in blog just in case I forget it in future.(only read front portion of books so far.)

• Limit your loss on any trade to 2% of equity in your trading account.
• Whenever the value your account dips 6% below its closing value at
  the end of last month, stop trading for the rest of this month.

(meaning if you got 100k in total, per trade max can only lose 2k. If you lose 6k in that month, stop trading, take a break and look though and learn your mistakes.)

His money management rule is so strict. No wonder he can preseve the captial in his portfolio so well. However, I don't think I will follow the above two rules strictly unless I am doing active trading daily.

Instead, I am currently trying to restructure my portfolio with the aim of controlling the amount of money which I put into each type of stocks. I only understand the important of this idea recently. I aim to have around 10-15% per type with no more than 60% invested in current market condition.

Mr Market, please give me a chance to succeed in rearranging!

Reminder to myself: Don't average down without proper money management

Reminder to myself

Cheap can get cheaper.

Sharing on how to be emotionless

This afternoon many of us are chatting on cbox.

Suddenly came out with a logic on being emotionless in trading.

If you seen $XXX,XXX loses before, you will not feel "kan Jiong" on $XX,XXX losses.
If you seen $XX,XXX loses before, you will not feel "kan Jiong" on $X,XXX losses.
If you seen $X,XXX loses before, you will not feel "kan Jiong" on $XXX losses. 
If you seen $XXX loses before, you will not feel "kan Jiong" on $XX losses.

That's why big shark can easily eat you and cause you to feel "kan Jiong". (They are not "kan Jiong" but you are.)

Thus, I think money/portfolio Management is more important. It is crucial to take calculated risk and put the amount that you will not feel so much emotional strains on each stock that you have. As such, you will not "kan Jiong" on buying as you scare of losing profits. Similarly, "Kan Jiong" on selling as you felt pain on the losses and wanted to cut loss.

I am at "If you seen $X,XXX loses before, you will not feel "kan Jiong" on $XXX losses." Where are you?

Which is a more realistic way of calculating portfolio return?

 Came out with some hypothetical numbers to calculate investment return.

Should I just include cash from earned income + investment gain as part of calculation? 

Or should I only include investment gain to calculate?

Or simply just calculate how much is your absolute profits? which in the example above is 63400-60000=3400