(This post was originally published at klse.i3investor.com)
There are many stock selection criteria such as P/E ratio, dividend yield, NTA, price to book value, good cash flow etc. which all investors follow to make normal profit. I consider the most important criterion is “profit growth prospect”. Can the company continue to make increasing profit this year, next year and year after next year. If you can find a company with good profit growth prospect, you will be able to make exceptional profit.
With no disrespect to professional fund managers, they consider current earning most important and as a result they miss out those companies with poor current earning but with tremendous profit growth prospect. You can buy them cheaply because the funds are not interested.
Companies with good profit growth prospect and poor current earning are always available irrespective of the KLCI, market trend or market noise. You have to know the business you are buying, and that means being passionate about knowing everything about that company.
You must look for businesses that you can easily understand because you have to be able to make an educated guess about the future earnings of the business. The more complex a business is, the more uncertain your projections will be. Simple businesses also have an advantage, as it’s harder for incompetent management to make big mistake to affect the bottom line.
Management can make a huge difference in a company. Good management adds value beyond a company’s hard assets. Bad management can destroy even the most solid financials. It is always very difficult to judge whether the managers are honest, intelligent and hard working because you do not know them personally for a long time.
One sure way is to find companies with the controlling shareholders managing the business. They will surely protect their own interest in the company.
Value investors want managers who act like owners. They focus on growing the business, thus creating long-term shareholder value. Managers who act like employees often focus on short-term earnings in order to secure a bonus or other performance perk, sometimes to the long-term detriment of the company. If you’re thinking like an owner, you pay yourself a reasonable wage and depend on gains in your stock holdings for a bonus.
Do not be afraid to buy when you have found a good one
Commonly accepted investment principles encourage you to diversify by owning many stocks of various kind of businesses. I think it is not possible to keep track with so many shares of different type of businesses. When you have discovered one really good share, you should not be afraid to buy more. You should not own more than 5 counters.
Keep looking for a better share to buy using margin finance
They say the joy of finding a girl friend is in the pursuit. The joy of investing is in finding another better share to buy. After you have found a better share to buy, you should use margin finance to buy provided you are sure that the newly discovered share has a profit growth prospect of more than the borrowing interest. The current interest rate for margin finance is 4.6 % without rollover fee.
How to use margin finance to increase your profit
As you know, all shares moves up and down. To maximize your profit you should sell some of the shares which have gone up too rapidly as no share can go up indefinitely for whatever reason. In this way you will always have some money to buy the shares when they are under correction.
Do not worry about the market index
As you know, the KLCI is around record level and many investors are afraid of the next market crash. As a result, you have the opportunity to buy really undervalued stocks with good profit growth prospect. I do not believe that the market will crash in the next few months.
If you approach buying stocks like buying a business, you will want to hold onto them as long as the fundamentals are strong.
When to sell
As a long term valuegrowth investor, you do not buy and sell frequently. However, you must sell any of your holdings when you see that the reasons to buy it are no longer valid; or you would not buy it at the current price. You must remember to sell and do not fall in love with your holdings. If you do not sell, you will have no profit and you will not have money to buy when there is another buying opportunity.