Back to Basics - Stock Investment

The purpose of putting these simple steps is to facilitate my next task – an overview and easy reference for my son to begin his stock investment journey next year. Obviously there are many books, videos, articles, etc on various topics of stock investment from valuations, methodology, behavioural finance to analysis skills, etc. But these simple steps I intend to show him will form a basic overview on the investment process.

1. Searching for investable companies
2. A 1^st and foremost question – only if I can understand the businesses they are in and the business still has potential in the future.
3. Perform quick analysis on key statistic to determine if they are investable
4. If yes, try to perform simple valuation to determine what is the intrinsic value
5. Compare to current price if there is sufficient margin of safety
6. Try to identify if there is potential catalyst to trigger price moving towards intrinsic value
7. Set the amount for this investment
8. Take a quick look at the technical chart. Hold on to buy action if there is unusual price and volume activity observed. Check for possible reasons.
9. Action on the purchase depending on market sentiment – bearish, buy in stages. Bullish – may have to buy at one shot.
10. Read announcement/news on this company or regulations etc that may have effect on the company– sell should be triggered when sell conditions are present

Check list ( No 1 is a must, not tolerable while others are more discretionary as they can be compensated by qualitative factors that may not be quantifiable eg monopoly, special license, patent, etc)

1. Management integrity intact (try to check if there is any integrity issue in the past)
2. Sufficient margin of safety (>25%)
3. Reasonable ROIC (>12%), ROE(>10%) and low PE (<10)
4. Profitable, Not overly geared (<30% gearing level) with healthy free cash flow over the last 1 year
5. Not sun set industry or Industry not in down cycle, preferably in growing industry
6. Preferably with dividend record
   Qualitative factors need to be considered together to determine if the company concerned is indeed an excellent candidate.  

	Check List	Yes/ No
1	Management integrity intact
2	Sufficient MOS
3	Reasonable ROIC, ROE and low PE
4	Profitable, Free Cash Flow & low debt
5	Not sun set industry or in down cycle industry
6	Dividend track record

 

A wolf in sheep's clothing?

I received a message from a cousin this morning and he eagerly shared with me an opportunity to invest in a great company, that will be the Alipay of Malaysia. I had known him well as we grew up together and he has been a very honest person, so I patiently listened to all his voice recording on my whatsapp...wow, the company is going for IPO on AIM, London Stock Exchange (as usual, I am still not excited with all the juicy story). 


I then text him asking for the company website so that I could take a closer look. From the domain name, I can sense something fishy - the website has a totally different name from the company and the webpage looks like a kids' game page. True enough, nothing much can be found on the website - none of these are listed- product/service, management team or corporate news. You need to be a member to login. I worried he got into some funny scam, so I decided to search for more info online.


Yes, there were some video on Youtube on their launch of new corporate name, the CEO spoke about vision and mission and how all members can "see their present from the future". It is getting clearer to me, its MLM related. It claims it is a financial education & learning platform . Then the introduction of crypto-currency and e-payment platform to categorise the company as a fintech company ( I suppose this is the story used for AIM listing) . However, when I get into more details of how members earn their "commission/bonus" or point/etc, it is not so clear. The company has also a share scheme in place with price available to members for buy/sell purpose. What I learnt was that there are lots of restriction and high admin charges when a member wishes to transact/ convert points to cash. I further checked at Bank Negara's website on "blacklisted" companies that may be involved in unauthorised deposit taking/etc, bingo!! the name is there. Is this a wolf in sheep's clothing?  


I have reverted to him on my concern and advise him to get back all the capital first whenever he could. Well, as expected, his response is "an outsider who do not understand the business always wont believe how much money can be made" from this opportunity and show me how many merchants have signed up to accept the crypto currency, how much was credited in his e-account, the IPO. I see he has no intention to bullshit me but I doubt he fully understood how the company can pay them so much when it is such a young company with no real revenue yet.


A scam will only collapse when there is no more fresh "money" flowing in. We knew so many Ponzi schemes/ money game companies every where in the world that can last many years, even in advanced country like US has the largest Ponzi scheme (Madoff case) lasted so many years, with big financial institutions and well educated professionals have fallen victim too. 


I am saddened by the news  that people I know lost their hard earned money to this kind of scam. No doubt greed is the main driver but being ignorant could be the reason for those not so well educated group.


On a separate note, I always remind myself, do not be over confident on my own stock analysis/ pick and take a second level thought when there is contradictory view by others. Try to step back and be a little objective, do I really know something that the market is not aware yet, hence not factored into the price yet? Sometimes we can be blinded by our over-confidence...yes, one needs humility on the investment journey. 

Follow savvy investors - sure win strategy??

I believe some of us like to look out for names of some popular savvy investors on Annual Reports for "hints" if that particular stock is endorsed by successful investors, yes, I do the same too. The fact that they are so successful provide some comfort to us that their stock selection should be better as we believe they have better insights.


There are few investors that I follow did really well basing on the share price performance of those companies they owned. But I did not simply invest in these companies before careful analysis for the following reasons:-


1. They may have entered at a very attractive price, hence, already sitting at handsome unrealised gain when I saw their name on Annual Reports, I will try to do some analysis whether there is anymore margin of safety. Yes, it still warrants careful study before jumping in. 
2.  Is it that they see something that we don't? If I still can't see, I would rather miss than feel sorry later.
3.  They have much much larger capital, hence, that particular stock may just be a tiny fraction of their capital for whatever reasons (diversification or strategic capital allocation for growth stock / dividend stock / aggressive risk taking). I need to study if that stock also fit into my own strategy, otherwise, I may end up with a dividend stock when I need to look for more growth or vice versa. Worst, if that is their high risk bet for high return and they could afford to lose all in this particular stock but I can't afford that.
4. They may have bought it years ago with extremely low entry price, for all you know, they could be in the midst of exiting when we enter.
5. Everyone makes  mistake at times, so are they. Again, when they make mistake, it probably only a ripple to them but for me, it may be a tsunami. Furthermore, they can wait much longer for it to recover but I don't like to get stuck for more than 2 years!!
6. Theirs dividend income is large enough to provide fresh capital for additional investment. I do not have this luxury now, but that's my ultimate goal.


Having said all that, it is still a good source for stock picking as there may still be upside even after their names appear on Annual Reports. Better still if we are in much earlier and ride on the momentum after strong followings from their fans.
The key is - do our homework and think objectively!!