“bigger fool” theory
bias, eliminate all bias before starting on a valuation. Analyst tend to issue buy than sell.
Don’t take strong position of a company before you value it as you’re going to find a way to make it undervalued
One should always presume that the market is correct than the analyst.
Discounted cashflow valuation ?
Price to book ratio?
PE to growth ratio ? the power the PEG, the greater the perceived value.
Growth at a reasonable price, buy stock when the PE ratio is lower than the rate at which earnings per share can grow in the future.
Equity risk premium, taking difference between the earning yield of the Singapore stock market and the one year fixed deposit rate.
Higher PE of market, lower earning yield, lower ERP.
ERP > 3.5% = Enter
ERP close to 0% = Exit
Earnings is what drives the stock price.
Buy stock when one-year fix deposit < average dividend yield
Sell > avg dividend yield
Companies that distribute a high proportion of their earnings as dividends recorded higher earnings in the subsequent 10 years. Go for high dividend stock. >4%
On a falling market : 70% of picking a winner
During market bottom : 88%
The more % the company use their earnings to give as dividend, the lower the sustainable growth. Sustainable growth = % of profit retain x return on equity.
Risk = standard deviation. Sharpe ratio
Capital Asset pricing model
The smaller the company, the higher the average returns, lower PTB, higher average returns.
NAV
Price to book ratio(market price of the company equalities/book value of equity) = best performer
PTB does not count in intangible assets, PTB does not count for service sector who don’t
Have fixed assets, or PTB become negative if company suffer series of loss.
ROE (return on Equity) = Net income/total shares, lower ROE, lower growth
Company with brand name/patents tend to enjoy fatter margins than their competitor.
Surprise good announcement ?
stock price start moving even before result (anticipation)
sharp jump after announcement (1st day)
30/88 fall despite better than expected result (due to extraordinary item which the market did not think would be recurrent)
On average, stock continues to go up for the next 4 days following the result announcement, but magnitude of the climb is smaller. There will be profit taking before another surge, rise would be gentler, taking place 30 trading days after the initial earnings surprise.
Small/mid cap more sustainable.1/2 year after good report, small-mid cap on average outperformed the general market by 10%.
Chance of making money is greater if the stock is one that’s not widely followed by analyst(small medium stock)
Big caps are more widely covered by analyst, any surprise are worked into the share price much faster, And chance of you profiting from these surprises are slimmer.
Discount for opacity
Market generally rewards more transparent companies with higher valuations because the risk of nasty surprises is deemed lower.
Companies with good results tend to release their result earlier. As they got nothing to hide.
Corporate Transparency index
The Conglomerate Discount
Market discounts the value of conglomerates relatives to single-market or pure-play firms
13/17 conglomerate are trading at their discount book value.
Multi-industry companies aka conglomerate are very volatile, inefficients(resources spread too thinly among various business.)
Focus company net earnings grown at a much faster rate.
Investor should not take group net earnings figure at face value, a company may have investments in a few associated companies and its share of profits in these companies may add up to a substantial amount in group net earnings but if the associated companies decide not to pay any dividends, the company may not lay it’s hands on any of the profits at all, this danger is particularly real for associated companies incorporated in countries with relatively poor corporate governance, like china. The alert signal should be further heightened if a company, which doesn’t have a cash-generating core business, borrows heftily to invest in a hodge-podge of associated companies, in such companies, investors
Should pay closer to companies cash flows and liquidity rather than profitability.
Unless you have access to information which others don’t, you can’t beat the market on a consistent basis
Stocks which less exposure to investor (business times, straits times article), has more potential as small caps are not efficiently priced.
Since blue chips are frequently efficiently priced, the odds of consistently beating the index is slim.
Diversified basket. Mid/small cap more returns.
Behavioral studies have shown that investors tend to sell the winning stocks way too early. Meanwhile, they also have the propensity to hold on to the losers for way too long.
Stop-loss limit. 90%, 85%, 80%
Strategies
Buy-And-Hold
“do nothing strategy” $100 portfolio, $60 stock, $40 cash. Value never fall below initial investment in cash, ie $40. Once lost $60, then that’s it. Upside potential is unlimited
Constant-Mix
$60 stock, $40 cash. If stock declines by 10%, now $54/$40 = $94, as portfolio must maintain a 60% of stock, so 60% of $94, investor use part of the $40 cash to buy stock to rebalance 60% of $94. In general, rebalancing to a constant mix requires the purchase of stocks as they fall in value, and sale as they rise in value, buy low, sell high.
Constant-Proportion
CPPI (constant-proportion portfolio insurance)
Take for example a CPPI strategy with a floor of $75 and a multiplier of two. With initial wealth of $100, the cushion is $25, So the initial investment in stocks is two times $25, $50.This will give you a 50/50 stock/cash mix.
Now imagine that the stock market falls from 100 to 90, your stocks will fall 10 per cent from $50 to $45. Your total assets will then be $95($45 stocks and $50 cash). Your cushion is now $95-$75, or $20. This means your stock exposure should be $40($20x2). So you have to sell $5 of stock. If stock fall further, more should be sold. Once your portfolio value declined to $75, or your floor value, you should have zero exposure to stocks.
In a trending market, either up or down, constant mix do worse, CPPI will outperform buy and hold. As market do not move in straight line, constant mix is best suited, like Singapore which tend to reverse to its mean over time.
Singapore market is efficient in adjusting stock price to account for stock splits, bonus or rights.
Companies which issued bonus shares generally have performed better than the market in the months leading up to the announcement of the bonus and after bonus shares is issued, Rights issue is another story.
Buy only companies which announced bonus shares is not a bad investment strategy. Excitement over the bonus issue died down 2 months after ex-date, serious out-performance only occur 150 trading days.
When a company “buy” over another company
Wealth is transferred from acquiring company shareholder to the target shareholder.
Small companies market values rose when they announced acquisition(even better if they acquire public listed company), the reverse was true for big companies.
Better to acquired a subsidiary or private limited company than public company(equity was used to finance it). Loss is more if company issue new shares for acquisition.
Calendar
STI Sesdaq
JAN low gain low gain
FEB low loss high gain
MAR high loss high loss
APR high gain high gain
MAY low loss high gain
JUN flat medium gain
JUL low loss low loss
AUG medium loss low gain
SEP low loss high loss
OCT high gain high gain
NOV medium gain flat
DEC high gain low gain
US presidential cycle
Pre election years 80% positive
Election years 69% positive
Market is constantly changing, nothing is fixed.
Loser won’t lose forever
Winner won’t win forever
Behavioral finance studies have found that human tendency to avoid investments which have gone wrong is one of the main weakness of investors, learn to recognize the conditions that led to an investment turning bad.
Wrong price, shouldn’t buy a stock at any price, even it’s the next big thing.
Wrong timing
Rough patch
A number of best days in the STI occurred after sharp decline in the previous 1,2 or 3 days
126 days moving average (most useful)
It pays to diversify your portfolio
Analysis Report
An analyst tends to follow others when they see that others estimate are around the same number. Following not related to accuracy.
Old analyst bold, young are less bold.
Profit guidance by companies ( analyst follow)
Positively bias, overestimate the profits.
Underestimate consumer cyclical, healthcare and transport.
Overestimate tech, industrial and energy
FEAR erodes your ability to think in a long term perspective. When you’re fearful, you don’t feel very confident, you are not going to make the wisest and most savvy long-term perspective decision.
A Parallel of cynicism is fear. The fear of losing money can paralyze many into inaction.
Returns
Raw Land
Hotel
Office
Retail
Industrial
Apartments
__Sales leasebacks__________ Risk
1. Equip with necessary knowledge, research and due diligent, make the probability of success as high as possible (>75%)
2. raise stake on high probability event.
3. never dismiss long shots, just reduce your bets or the proportion of your wealth at stake, even it falls, you will not be totally permanently impaired, wealth wise.
4. Do what you can to increase luck
Declining volume is an indication of the easing of selling pressure.
When company announce bad news,
1. lots of investor rush for exit
2. short sellers
3. a few days later, weak holders succumb and let go at rock bottom level
4. BUY! (note: not all stock will bounce back)
Sunshine and good moods = good market
Cloudy, rainy and bad mood = bad market, react more critically.
Fraud companies
Watch out for companies with a prominent chief executive-cum-chairman, who happened to be also the founder and majority shareholder.
If shares are “closely held” by a few major shareholders.
If the company has raised the market’s expectations to such an unrealistically high level that is impossible to achieve.
Revenues/incentives structures based on commissions, eg. pyramid scheme
If CEO hand pick board of directors or independent directors.
Quick succession of chief financial officers or auditors.
If numerous significant related party transactions which are not properly explained.
Financial statement are not transparent.
When bargain really a bargain?
Eg.
Stage 1 : raise from 80c to $1.50 .. not many people dare to buy because it risen by a lot.
Stage 2 : Stock shot up to $3 then correct to $2.70, many people will enter thinking it used to worth $3! (volumn increase)
When stock prices come down from a high level, investors think they are getting a bargain. But most of the time prices continues to get cheaper. Thus u must know the “fair” price.
Human beings have a tendency to look only for information that happens to back up their current view. Not only do we look for information that agrees with our belief, we also pretty much see all information as consistent with our prior beliefs. (bias)
Mr. Montoer’s 7 sins of fund management
Our insistence on relying on forecasts when it has been proved time and again that we simply cannot forecast.
The illusion that more information is better information.
Thinking that you can outsmart everyone.
Being short-term focused.
Believing everything you read.
Believing that group decision-making is better.
Why waste time listening to company management? Always say gd things abt ownself, overly optimistic.
Sunday, May 23, 2010
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