Investing

How to be a Super Investor-Summary

 

My golden rule for share selection: The company must make more profit in the current year than last year and the share is selling less than P/E 10.

Before you buy the share, you must understand the company’s business and the company must make more profit in the last 2 quarters than in the corresponding quarters of last year and you can foresee that the company can make more profit in the current year than last year. Otherwise, the share price will drop if its annual profit is less than last year.

Never buy down trending stock because you do not know when it will reverse its trend so that you to make money. 

In the last few years, I have used my golden rule to find Latitude Tree which went up from Rm 1.00 to above Rm 8.00 within 2.5 years. I have also found VS Industry and Lii Hen which went up more than 500% within 2 years.

I have written many articles on share investment which can be found in my blog: koonyewyin.com. The following is a summary of all my articles:     

  • Factors to be taken into consideration in stock selection
    • Long-term profit growth prospect (with evidence, not based on hype),
    • Current year profit > last year’s profit,
    • Low projected P/E (preferably < 10, except large companies) and high ROE,
    • Competitive market advantage (good reputation, established records, etc.),
    • Financial health status (based on balance sheet, especially cash level),
    • Understand the business (know how and where the company’s profit is derived),
    • Undervalued,
    • Downside is protected,
    • Not many analysts write about it (or off their radar),
    • Reasonably good dividend (optional),
    • Shun stocks in the industry with oversupply problem (i.e. property, oil & gas stocks).
  • Stock selling criteria/reasons
    • The reasons we bought the share are no longer there or valid,
    • Raising cash to buy another better stock,
    • Fundamentals have changed,
    • The company is showing reduced quarterly profit (Q5 & Q6 EPS vs Q1 & Q2 EPS),
    • Shares which have gone up too rapidly. If the fundamentals are still intact, buy them back during correction,
    • Notes: sometimes it also depends on individual’s knowledge, understanding, experience, holding power, risk appetite and circumstances.
  • Factors affecting stock price
    • Current earnings (or EPS),
    • Consistent profit growth (or EPS growth – the most powerful catalyst),
    • Issuance of rights (its objectives must be examined carefully),
    • Bonus,
    • Free warrants,
    • Share buyback,
    • Share split,
    • Financial stability,
    • Dividend or distribution announcement,
    • Debt level (excessive debt will drive it down),
    • Share placement (not more than 10% of the total issued shares),
    • Announcement of a new substantial shareholder (acquisition from the open market),
    • Business expansion and M&A activities,
    • Investor relationship,
    • Growth prospects,
    • Company’s business model,
    • Company directors’ activities,
    • Announcement of contracts or awards (progress must be scrutinised),
    • Privatisation of the listed company (due diligence must be performed),
    • Macro-economic factors (currency exchange rate, political instability, etc.).
  • Common mistakes investors make:
    • Overtrading,
    • Speculating,
    • Loss aversion (psychological obstacle) – selling winners too early and holding losers too long,
    • Anchoring,
    • Allowing emotion to overtake logical thinking.
  • How to be a super investor?
    • Trait 1: Ability to buy stocks while others are panicking and sell stocks while others are euphoric. Be an intelligent contrarian investor.
    • Trait 2: A great investor is one who is obsessive about playing the game and wanting to win. These people do not just enjoy investing; they live it.
    • Trait 3: A good investor is one with willingness to learn from his or her past mistakes and to analyse them.
    • Trait 4: An inherent sense of risk based on common sense. You must have the common sense to realize the risk of buying any share which has gone up a lot and when all the analysts are recommending buy. Always take an analyst report with a pinch of salt.
    • Trait 5: Great investors have confidence in their own convictions and stick with them, even when facing criticism.
    • Trait 6: Ability to think clearly.
    • Trait 7: Ability to live through volatility without changing your investment thought process.
  • Useful insights, advice and ideas:
    • It is easier for well-managed companies to continue performing than for bad companies to turn around.
    • Good management adds value beyond a company’s hard assets. Bad management can destroy even the most solid financials. Good managers act like owners, focus on growing the business and create long-term shareholder value.
    • It’s harder for incompetent management to make big mistake, which would affect the bottom line, in a simple business.
    • The more complex a business is, the more uncertain our projections will be.
    • A stock price will remain cheap if the company continues to make same amount of profit year after year.
    • Do not to be discouraged if companies take loan (reasonable amount). It is normal that companies borrow money to do more business.
    • Read the company’s commentary on their prospect carefully.
    • The normal profit for a fairly good company is between 5-10% per year.
    • Focus on the future productivity of the asset you are considering.
    • Compare the asset value or market cap of company A with that of its competitors so as to have an idea how much the company is worth.
    • Never buy any company share if you do not know what the company is making, who its customers are and who will use its products.
    • Not one single strategy can work all the time because all business operations face different challenges at different time.
    • Do not worry about the daily price fluctuation of your shares. Games are won by players who focus on the playing field — not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.
    • If you instead focus on the prospective price change of a contemplated purchase, you are speculating.
    • Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important.
    • To be really successful, one must invest like an entrepreneur and be willing to venture. One must always look at the profit growth prospect of the company.
    • Most investors and professionals concentrate too much on fundamental and technical analysis and they do not think like a businessman, but the best way is to invest like a businessman.
    • Investment is most intelligent when it is most business-like.
    • There is no point in buying a stock based on intrinsic value if the price never reflected that value. Nobody knows how long “the long run” really is. It could be days or years.
    • Use the long term price charts to buy shares that have been depressed for a long time.
    • If everybody wants a stock, the factors, performance or news must have been reflected in its price and it will be very dangerous to buy at the price.
    • The stock market is a zero sum gain play.
    • When the price shoots up with very big volume, it means that there are a lot more buyers than sellers.
    • Correction is usually less than 10% for really good shares.
    • The joy of investing is in finding another better share to buy.
    • Buy undervalued shares and take some calculated risk to earn exceptional profit.
    • You can still buy the winning horse after the race in the stock market.
    • In the stock market, you have to be decisive to buy or sell.
    • After an undervalued stock is identified, we have to wait patiently to buy it.
    • Do not be afraid to buy when you have found a good one.
    • Do not buy down trending stocks because the price can go further down and you will lose money.
    • No share can keep climbing up and up indefinitely for whatever reasons and no share will continue to go down for whatever reason.
    • We should not be afraid to cut loss as soon as we know that the company cannot make more profit this year than last year because when the company announces reduced profit the price will fall.
    • Keep some really good shares for long term to be able to make more money.
    • The best way to reduce risk is to own a larger number of counters. Do not put too many eggs in one basket.
    • The road to success has many obstacles and the biggest one is fear.
    • Most investors overreact to good or bad news.
    • To be a successful investor, you must overcome your emotion and be able to think logically.
    • What you really need to succeed are EQ, MQ and BQ.
    • You don’t need to be an expert in order to achieve satisfactory investment returns.
    • Smart contrarian investors do not rush to buy property shares blindly.
    • Less intelligent readers often doubt and intelligent readers are more trusting.
    • Margin finance to leverage profit. However, novice investors are not encouraged to use margin loan to buy more shares.
    • Never buy up to maximum margin limit. Always allow room for safety.
    • Any economic storm will pass if the economic fundamentals are strong.
    • Never fall in love with the shares you have bought.
    • Luck is what happens when preparation meets opportunity.
    • Short term traders cannot be rich.
    • Success leads to confidence, leads to over confidence, leads to failure seems to be a natural cycle. The only protection is humility.
  • Useful plantation industry information:
    • Forest clearing duration: 1 – 2 years
    • Sowing to pre-fruits bearing duration: 4 years
    • Peak production period: year 7 – 18
    • Lifespan of oil palm: ≥ 25 years
    • Major palm oil producers: Indonesia & Malaysia (accounts for 90% of total palm oil production)
    • Major palm oil buyers: China & India
    • Edible oil demand growth: 6 million tonne/annum
    • Plantation value: RM 70K/ha (in 2013)
    • Biodiesel mandate: to use B10 fuel
    • Additional info – FFB Yield: 20 – 30 tonne/ha
    • Additional info – Yield: 3 – 7 tonne/ha
    • Additional info – Yield: soybean – 0.4 tonne/ha, sunflower – 0.6 tonne/ha, canola – 1.2 tonne/ha
    • Additional info – Global palm oil consumption: 55 million tonne/annum (32% of global oils and fats outputs)
    • Additional info – Oil palm accounts for 5.5% of the global land use for cultivation
    • Additional info – CPO price chart: http://www.indexmundi.com/commodities/?commodity=palm-oil
  • Useful power plant information:
    • 1 MW can light up about 1,000 homes
    • Average construction cost: USD 1.3 – 1.5 million/MW
    • Coal consumption: 4,500 tonne/MW/Year
    • Additional info – Coal price chart:

https://www.quandl.com/collections/markets/coal

 

 

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