When Value Investor meets Speculator

The followings are the imaginative conversation between Value Investor(VI) and Speculator(SC) in relation to the recent share price spike in CNI:-


SC: There is a spike in the price of CNI lately, I think something is blowing in the company and I smell opportunity to make some profit


VI: Hang on.. lets perform a financial analysis on the company.  Wow, it is loss making over the last 2 years and the financial performance has deteriorated over the last 10 years since its listing. I did not read any news on company is about to turn around. From an asset perspective, it appears "undervalued" as the net asset stood at 10 sen and the share price is only 8.5 sen, but then the prospect is uncertain and the intrinsic value I get using discounted cash flow is not convincing and I can't use PE method as I don't expect any turnaround any time soon. If I were to use asset base, it would be better for me to invest in property stocks which is selling at bigger discount to net asset value.


SC : Isn't Investment about the future? You can't just base on what it is now. Yes, the company is on the down trend since 10 years ago, but the sudden spike in share price indicates insiders know something we don't know. Furthermore, how much lower can it go from 8.5 sen now and the upside is tremendous if there is some positive news flow later...hey , aren't you looking for Multi Bagger, this is a real Multi Bagger(MB) in the making. Look at its competitors HaiO and Zhulian, their shares are flying and CNI could just be the next target.


VI: Well, I noted the competitors financial performances are getting better, hence share price has gone up but in CNI case, that is nowhere in sight. It does not provide sufficient margin of safety if any, as the company is still not showing any sign of turn around. That's also a reflection of an important qualitative factor - management capability, 10 years is still not enough for the management to prove otherwise? I do not see any catalyst that will trigger a turnaround.


SC: No risk No gain, you have to take more risk for more return, more so if you are searching for a MB. Good fundamental company will take 10 - 20 years to become MB and company like CNI, it could just be days or weeks.

(Both are staring at each other with disbelief.....)


Do you have similar dialogue playing in your mind most of the time??


This was what I used to do during my early years of stock investment:-
1. Are there some juicy "news" about the company now
2. Has the volume increased tremendously - indicate more interest and the insider definitely know more than me ( not always the case if you look at Superlon's case, one of the directors started to unload his shares when the price just started to go up a year ago or vice versa in CNI's case the last few years)
3. Better still if there is a rumours that the share will go to certain price...I will unload a little early before it reaches the target price, I will be safe
4. Have a good look at the financials, nothing alarming...place the order!


When the price went up, I was so happy and felt like an intelligent investor. When the price went down, it gave me lots of anxiety, should I cut loss before getting burnt badly...I started to look at the financial position closer to see if it will become PN17 company.


The journey to practice value investing is full of challenges and temptation, but the most challenging part to me is confirmatory bias. It will influence me to search for news that support my pre-existing view. How do I avoid this weakness?


This is what I usually do now...
1. Do I want to get into this business? I will only proceed to 2 if I like this business. Hence, I will go to the company website to have some basic info on product/services offered
2. I will start to input past financial data into my excel template
3. Analyse the quantitative aspects, ratios, trend, etc to determine what caused the increase or decrease in different category of items, any tangible assets undervalued, intangibles not reflected
4. Put a standard assumption in the projections and try to get an indicative Intrinsic Value
5. Read a few years annual report to check if there is any program/ development that will affect the future of the company, includes the prospect written in Chairman's Statement to see if how far they delivered what is "promised"
6. Check announcement to Bursa/ Google if there is any news release
7. Put some variation to the assumptions made based on additional news obtained to have a feel on the possible impact on Intrinsic Value
8. Perform/Assess qualitative factors - management integrity & capability, competitive advantage, potential catalyst and its likelihood 


When the price went up, I was happy too and still felt like an intelligent investor. When the price went down, I am not so worried as long as the fundamental does not change.


Hence, I find that the 2nd approach has a bigger chance to keep a potential MB as it usually take some time for a company to turn MB ( with the exception of companies that may win big contract and turn MB in weeks).


For an ordinary investor like me with not much of business acumen ( otherwise, I would have gone into business on my own if I do), I have to leverage on people with strong business acumen, hence, I like to invest in companies where the management has demonstrated strong sense of business acumen...and that has to be proven in the financials, not promises or by announcing to the world their vision and dream every now then. That's the reason why I usually do not invest in start up even though they are potential MB....total capital loss to me is unbearable risk while stock price fluctuation is a norm in stock investment.


Performing analysis on CNI...next MB?? Really??