KESM, the burn-in Specialist

KESM is principally involved in specialized electronic manufacturing activities. More specifically, the company is engaged in providing burn-in services. The company has business dealings with virtually all the American semiconductor manufacturers.

For the 9 months ended April 30, 2016, KESM’s EPS shot up to 52.7 sen. This is an improvement of 244.44% over the corresponding period of the previous year when its EPS = 15.30 sen.

In the past 2 years, the 4th quarter was better than any other quarter of the year. Based on this fact, the 4th quarter for the fiscal year 31.7.16 should not be lower than 17.6 sen per share. Thus earnings for the full year are likely to be not less that 70.3 sen per share. 

According to its filings with Bursa, KESM has following metrics and key ratios as at 30.4.16: 

Paid-up capital: RM40.015 m. Par value: RM1

Market Cap: RM240.45 (Last traded price: RM5.59)

NTA: RM6.52 per share

Current Assets: RM197.72 m

Current Liabilities: RM63.57

Current Ratio: 3.11

Quick Ratio: 2.956

Cash & short-term investment: RM112.50

Total loans: RM44.66

With a strong balance sheet and good growth in earnings, KESM should deserve a PE of not less than 10. Should the full year’s earnings be not less than 70.3 sen per share, the fair value of KESM should be no less than RM7.30 per share. (This is my opinion. You may have yours.)

Historically, small-cap stocks with strong balance sheets, have performed better than most big-cap stocks. In Malaysia, a stock with a market cap of RM500 million is considered a small-cap stock. 

Since the end of 2015, demand for smart phones, i-pads, tablets and computers have slowed down. However, the internet of things (IoT) are envisaged to pick up going into the 2nd half of 2016. The automotive sector is the likely leader in this respect as car manufacturers compete against one other to produce smarter cars.

To produce smarter cars, more and more newly innovated chips are indispensable. And thus the demand for burn-in and testing services will increase by leaps and bounds. This is where KESM will benefit the most as the company’s growth engine is in the testing of semiconductor chips.

KESM is well prepared.  In 2014, it completed its final phase in its development program mainly for these services. Its plans for 2016 and beyond are in place according to its CEO, Samuel Lim in the 2015 annual report. 

I am bullish on this stock. I had recommended the stock as a buy when it was at RM5 recently.

Investment is never without risk. Please do your own research before buying. 

Remember, you always buy at your own risk. 

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Plan with wisdom Be wise

Value for money you must insist

• Insist in buying stocks that have a strong balance sheet, good dividend yields and a good business modal. The current ratio must not be less than 1. It must be net cash positive as well.)

Buying in a downtrend you must resist

• Don’t buy in a downtrend. Prices move in trends. A trend in motion is assumed to continue. So remember, buy only in an uptrend, not in a downtrend. Wait for a downtrend to end before you buy.

The trend is your friend

• You must not go against the trend of the market. Never swim against the current.

Follow it to the very end

• A trend can continue for a few days, a few weeks or even a few years. As long as the trend is up, you must stay with it. Many people make the mistake of selling early in an uptrend. They did not capitalise on the trend. As a result they missed the major part of the profit. This is many people’s mistake. Don’t make it yours. 

Holding on to a falling stock is unwise

• A stock that is in a downtrend is likely to fall lower. Especially for traders, they must quickly cut loss. Never turn a trade into an investment.

Cut your losses quickly is advised

• An early loss is the best loss. So sell quickly in a downtrend.

Never kill a golden goose when you have one

• When you have a good stock, hold on to it. Don’t sell for a small profit. Keep it for the long term.

Never sell prematurely, let it run for once

• Never sell early in an uptrend. Hold on until the trend ends.

Undervalued unpopular stocks are never a fancy

• Many undervalued stocks are not in demand as they are ill-liquid. Many people do not know them because analysts do not highlight them. 

Glamour stocks are the choice normally

• Majority of market participants are small time traders. They usually follow the herd without knowing what they are buying. Their mentality is: When many people are chasing a stock, it must be a good stock. So, I might as well follow.

Join the crowd, enjoy the ride if you wish

• If you want to have fun and excitement, go ahead, enjoy yourself and participate in the buying and selling.

Be careful though, lest you fall out and vanish

• When you join the crowd, be careful, as you are likely to lose all your money

The market is most tempting at the top

• At the last stage of a bull market, news is good; prices move up every trading day. People rush in to buy. You see many of your friends making fast money. In such a scenario, the market is very tempting as easy money seems easily made.

Lock in your profits before volume has a good drop

• When the market is in euphoric mood, volume transacted is very high. This is the time to sell and take your profit. When the market reverses, volume will drop very fast. So don’t wait for volume to retreat before you sell.

Sell your stocks when you love them most

• When your shares are highly priced and greatly overvalued, you will love them most. Because of the high price, that would be the best time to sell.

Take your money and let the deal be close

• Sell to take profits, and call it a day

Buy when volume traded is at its lowest 

• When volume traded is lowest, prices are normally very low as well. So, you should buy when volume is very low. 

The market will then be at its dullest

• When volume is lowest, the market is dull and boring. People will shy away from it.

Investors should buy low and sell high

• Investors are people with lots of idle money to buy. So they can afford to buy and wait for good times to sell

Traders should buy high and sell higher

• Traders are people who want to see fast money. When the market is at the bottom, you will not know for how long it will be there. So it is better for them not to buy until the market picks up. 

Someday, you will know what I mean

• One of these days, you will understand why investors should buy low and sell high, while traders should buy higher and sell higher.

By then, you are a stock market dean

• Once you know the interpretation, you have become an expert of the stock market.

The above poem was written many years ago under the heading Stock Market Wisdom. I hope with this interpretation, people will understand it better.

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Elliot Wave / Ron Wheeler

For people who are interested in TA (Technical Analysis) this video is interesting and useful. Don't fail to see it. You are advised to see and listen to it more than once.

https://www.youtube.com/watch?v=konvREHelj4

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FLBHD (5197)

FLBHD is a small-cap stock with a paid-up capital of RM51.6 ml as at 31.12.2015. Its par value per share is 50 sen. Its principal activities are the manufacturing and sale of plywood, veneer and laminated veneer lumber and investment holding. 

The company was listed on 28.4.2011 in the main board. The earnings of the company are as follows: 

Year 2011 : EPS 14.15 sen; 2012 : 11.24 sen; 2013 : 14.66 sen; 2014 : 15.53 sen; 2015 : 30.74 sen. 

Comparing the EPS of 2015 to that of 2011, earnings have more than doubled. This is excellent growth.

As at 30.12.2015, its current assets total RM121.563 ml of which RM57.819 ml is cash. Total liabilities amount to only RM12.715 ml of which current liabilities amount to RM9,699. The Current Ratio stands at 12.53!!!

The company has no borrowings. Its cash alone is enough to cover total liabilities by 4.547 times!!! Is there another company listed in Bursa with such a strong cash position? Please let me know if you know of one.

In respect of dividends paid, there are as follows: 2011: 6 sen; 2012: 6 sen; 2013: 8 sen; 2014: 8 sen & 2015: 15 sen. Thus dividend growth is excellent as well. With so much cash in the banks, the company should have no problem maintaining its dividend payments. Although the company does not have a dividend policy, we can see that it usually pays out about 50% of its earnings as dividends. This is good for those who love dividends.

I understand that the company does not have concession in any timberland. I called the inter-relation officer to find out how the company sources its raw materials, especially timber logs and glue. Unfortunately he refused to tell me about this, saying that was the secret of the company.

The new minimum wages commence on July 1, 2016. This will have an impact on the production cost of plywood. To mitigate this, the company will modernise and automate the manufacturing facilities of the group. This should not be a problem as the company has lots of cash to implement this intention.

The company exports 92% of its products, the bulk of which (76%) goes to US and the rest to other countries, mainly Taiwan & Korea. The value of the US$ has a great impact on the bottom line of the group. The more it appreciates against the Ringgit, the more the group will benefit. The reverse is the other way round. So, keep an eye on the exchange rates.

One of the things I like about this company is that it is environmentally friendly. Its mill is the first Malaysian plywood mill that is certified as a CARB Certified Manufacturer in 2008 by Professional Service Industries, Inc.  The company was also awarded with the JAS certification by the Ministry of Agriculture, Forestry and Fisheries of Japan in 2009 as a proven qualified plywood manufacturer. These certifications certify that the groups’ products are of high quality, and goes a long way to enhance customers’ confidence. 

In additions to the above awards, the company was accredited as a certified Lacey Compliant Wood Products Manufacturer by Benchmark International, LLC (BMH) under the BMH Lacey Compliance  Verification (LCV) Program. This means that its timber logs are confirmed to be sourced legally. 

I like to use the metric, ROACE (Return On Average Capital Employed) to appraise the competency of the management. The higher this is, the better. Using the figures in its balance sheet as at 31.12.2015 and 31.12.2014,  FLBHD’s ROACE is 25.67% which is deemed to be on the high side. 

Going by the track record of this company, I have full confidence that it will continue to grow well. I give a 5-star rating to the management.  

The chart below shows that the stock hit a bottom on 17.8.15 at RM1.22, and then moved up to RM3.09 on 11.1.2016. It is now undergoing a correction phase. The last done price is RM2.23. Should it drift lower, the support levels are: RM2.08 and 2.02 while its immediate resistance is RM2.37. 

Action to take: Buy at support and also when it decisively crossed RM2.37.

This is my opinion. Whatever action you take, you do so at your own risk absolutely.

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MMSV Current Year Prospects

MMSV current year prospect extracted from Bursa Announcement:

Despite the soft demand experienced from the smart devices sector in the past few months, the Directors foresee ample rooms for expansion in the Group’s market shares for other LED related industry especially the 

automotive sector. Besides, talks about smart devices’ manufacturers coming out with new products for their end consumers are expected to materialise. 

MMSV FYE 31.12.15; Shares Issued 163 ml at 10 sen each.

Essential statistics and metrics as at 31.9.2015:

3Q result EPS 1.33 Vs 2.88 senPYCQ) poor showing

Non-current assets: RM9.698

Current assets: RM34.219 ml

Total equity: RM35.050

Total non-current liabilities: RM8.391 ml

Current ratio: 4.078

Cash & near cash: RM18.460

Total liabilities: RM8.867 ml

Bank borrowings: zero

High cash position, high current ratio, and no borrowings show that this stock is fundamentally sound and solid.

Since its 3rd quarterly report on 24.11.15, there were company buy-backs & insiders buying in the stocks as well. (For details, check Bursa Announcement)

The company will announce 4Q result within the next few days. I believe

the result will be a better than that of the 3rd Qtr.

Strong US$ is good for the stock.

Chart shows a weak uptrend with little volume traded. Resistance is likely to be at 58.5 sen and 61.5 sen. If 61.5 sen is decisively breached, the stock is likely to trend higher. 

Our world is moving towards automation and LED lightings which are the core businesses of the company. Please do your own research, and buy at your own risk. 

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2016 New Year Greetings

https://www.youtube.com/watch?v=BHrv4v-N9y8

Wishing all my readers a Happy and Prosperous New Year of the fire monkey 2016

Scenario of Stock Market Euphoria

Scenario of Stock Market Euphoria

Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria / Sir John Templeton

The last stage of a bull market is euphoric. It is important to know the scenario of such a market so as not to be deluded by the madness of the crowd.

In an euphoric market, optimism is at its extreme. Price-rise is an expectation. Newbies come in drove to open accounts with broker firms. More and more housewives get involved. Shoe-shine boys, ice-creme sellers and poor farmers will also be talking about the market. By then the market is a hive of activity.

The public flocks to the boardroom every trading day. Financial news is good. Price advances are spectacular and frequently made head lines in local newspapers. The dogs and cats (low-price stocks of no investment value) are whirled up, but big blues refuse to rise further. Volume continues to rise and speculation is on the rampage. In every corner of the town people are talking and boasting of their gains in the stock market. 

Stocks will be trading and very high PE and low-dividend yield. Every tip you get is a good tip; everyone is an expert as prices continue to move up day after day. 

Boardrooms in broker firms are crowded as soon as the market opens. All seats available will be fully occupied; people will be standing here and there.

IPOs (initial public offerings) become more often, and most are oversubscribed by close to a hundred times. 

The craziest thing is that warrants can be higher than the mother shares. People simply throw cautious to the wind, become illogical and mad! Then you hear someone says, “this time is different). 

The truth is that, like all bull markets, this too will pass. It will not be unlike any other bull markets. If you are lucky to see such a scenario, be wise enough to sell everything, and sell short if you are allowed. Remember what the great investor Warren Buffet said, “Be fearful when others are greedy.” 

Euphoria has no time limit. It can lasts for months, weeks or even days. You must get out in time. For when the market finally reverses, the way down will be fast, furious and cruel. The majority will be hurt; they will be devastated. Don’t be one of them.

Are we anywhere near a market on euphoria? 

Fundamentally sound stocks giving 4 to 5% dividend yield are still available presently, and volume transacted daily is normal, 1 billion plus. I think we are far from there. When volume transacted daily is over a few billion units, its time to worry.

Notwithstanding the truth and opinion expressed above, stock markets are always uncertain. 

You listen to me at your own risk.

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Xinghe A Potential Dark Horse

Supreme Global Group Ltd (SGGL) is a Hong Kong registered company. It has a 91.15% subsidiary known as Henan Xinghe which manufactures and trades edible oil, mainly peanut and other blended oil. SGGL got listed in Bursa via a reverse takeover (RTO) exercise in April, 2014. 

Key West, a GN3 status company in Bursa issued 1.9 billion shares at 11.05 sen per share to take over SGGL valued at RM210m. In a private placement, it also issued 300 million shares at 20 sen per share. Shortly after the RTO, the name Key West was changed to Xinghe. 

On 29 April 2014, Xinghe debuted at 25 sen, moved up to 26 sen and closed at 22 sen. The highest it went up was 29 sen some time later before easing all the way down in a roller-coaster ride to below 7 sen.

Now at 6.5 sen, is this a good stock to buy? Is this another risky and useless China-based stock? Let us have a look at its balance sheet and earnings.

As at 30.9.15 

Paid-up capital : RM234.850m

Par Value : 10 sen per share

No. of shares issued : 2.3485b

NTA : 23 sen per share

EPS for the quarter ended 30.9.15 : 0.77 sen

Non-current assets : 37.732m

Current assets : 549.186m

Current Liabilities : 19.675m

Current Ratio : 27.91 (This is fantastic)

Cash : RM373.27m (Excellent)

Borrowings : RM29.072m

Final dividend paid on 21.9.15 : 0.2 sen

On 25.3.15, 1.17425b bonus warrants of 1 for 2 were issued. These warrants are convertible to ordinary shares at 10 sen per warrant. The expiry date is 22 March 2019.

From the above info, it can be seen that the company has a very strong balance sheet with plenty of cash and little borrowings. If it is not China-based, this stock is easily worth 50 sen a share. 

Other points to note are:

SSGL is 10% owned by the China Government. The Chinese government is very serious in dealing with corruption. So, hopefully, there won’t be any hanky panky in the company.

Henan Xinghe is one the top six edible oil producers in China. It is mainly involved in producing edible vegetable oil as well as peanut protein cake in the China market. 

It is a profitable company with ambitious plan for the future. It intends to produce peanut protein to compete with soybean protein by 2017. According to its MD, peanut protein is a better product than soybean protein. 

It uses lots of palm oil as its feedstocks, and that is the main reason why SSGL wants a listing in Bursa, according to its CEO. Its presence in Malaysia is good for the palm oil industry.

The company has a dividend policy of paying 15% of its earnings as dividends.

At the last traded price of 6.5 sen, I am of the opinion that the stock is a good buy. The stock has been crawling at the bottom for many months. To me, this is an accumulation by savvy investors.

Will this ugly duckling turn into a golden swan someday? The potential is there, but only time will tell. Best action to take is to buy some now at 6.5 sen, and watch the stock closely. Chase only when the 7 sen level is decisively breached. 

Trading or investing is never without risk. You buy at your own risk absolutely.

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My Stock Picks for 2016

I choose the following stocks for investment in 2016:

Kim Hin RM2.28

Gadang RM2.12

CBIP RM2.05

FLBHD RM2.88

SUPERLON RM2.13

UCHITEC RM1.74

I believe these 6 stocks will be much higher by end Dec 2016. They are all dividend-paying stocks with strong fundamentals.

May 2016 be a much better year than 2015, and may all my readers be blessed with good health, good luck and much prosperity for the new year. 

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The Importance of the Cash Flow Statement

The Importance of the Cash Flow Statement

Cash is not everything, but it makes everything different. 

Companies fold not because they are unprofitable, but because they are not able to settle their financial obligations that are due for settlement. 

Most people look at the cash position in the balance sheet, compare it to that of a year ago, and then decide whether the company has improved or not. They wouldn’t be bothered to look at the Cash Flow Statement (CFS). 

Actually the CFS must be studied in detail to gain an insight of what has happened to the cash of the company. Some people like to read it from the bottom to the top, some prefer to read it from the top to the bottom.  It doesn’t matter how you read it as long as you get the facts right.

Cash flow is about cash inflows and cash outflows. It is not about profits. A company may make profits, but its cash may have dwindled. On the contrary, a company’s cash may have improved while the company is showing a loss.

Cash can flow in via the operation of the business, investing activities  financing from banks, right issues, bonds, etc

Cash outflows are operating expenses, interest payment, taxes, company shares buyback, capital expenditure, the purchase of property, etc. 

The CFS will show you all these information. You need to study it carefully before deciding whether a change in the free cash flow is good or bad. 

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Learn more about earnings

In business, the priority is earnings. You need earnings to settle your operating expenses, pay taxes and expand your business. 

No company can survive without earnings. Earnings go by different names. Profit, income, the bottom line and earnings are all the same.

EPS (earnings per share) is the most often used metric to evaluate a company. Many people just look at EPS and then decide whether the company is good or no good. This is a mistake. 

When you look at EPS, you must also look at revenue and the actual amount earned so as to have an idea about its profit margin. A high profit margin is better than a low one.

Often overlooked is the quality of earnings. Earnings can come in many forms. These are: 

01) Profits from normal trading and services provided by the company

02) Sale of a property or some properties that are outside its business model

03) Sale of treasury shares 

04) Sale of some financial instruments, such as equities or bonds

05 A change in depreciation rates

06) Appreciation of foreign money against the local currency

All the above activities can affect earnings. So, the next time you look at EPS, do not forget to read the income statement in the quarterly or annual report to know how the earnings come about. Bear in mind that some earnings are just one-off affairs and are not repeatable in the foreseeable future.

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Know FA to invest well

There are 3 important statements to carefully look into when you analyse a company. They are: the balance sheet (BS), income statement (IS) and the cash flow statement (CF)

The BS shows on a certain date what the company has and what it owes others.

The IS shows the sources the profits come in.

The CF statement shows how cash flow in and out of the company.

When I study the balance, the first thing I look at are the current assets and the current liabilities. From this I work out the current ratio. If the current ratio is below 1, I take this as a red flag, and I shall not bother to dig deeper into the stock. This is my personal style; it is not a standard criteria for you to follow.

Cash is a very important item.The more the better. If a company has plenty of cash, it can do many things. It can expand its business, use it to acquire new businesses, purchase its own shares or distribute some of it to its shareholders.

Debt is the opposite. A high debt, especially one with high interest rate, relative to its paid-up capital is a red flag. Bear in mind that debt has to be serviced. This means interest has to be paid. A company that has a not of cash and much borrowings is not in a strong financial position. 

Personally, I prefer small-cap stocks and mid-cap stocks instead of big-cap stocks. Big-cap stocks are suitable for institutions and fund managers. As a small player, you can’t compete with them. Once institution or fund managers have taken notice of a stock, the stock will no longer be cheap. 

There are many other things to consider when you look at the BS. For example, when you look at the accounts receivable or inventory, you need to concern yourself whether these can be easily turned into cash. 

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ROE Can Be Misleading

A high ROE may not be as good as a low ROE

ROE ( Return On Equity) is a common metric used to gauge the competency of the management. ROE is calculated by dividing the net profit by the shareholders’ equity and expressed as a percentage. Most people think that a higher ROE is better than a lower ROE.  Let see whether this is true.

Shareholders’ equity is the total assets minus the total liabilities.

Consider this scenario: Company ABC has a paid-up capital of 1000, net earnings of 100 and zero debt. Thus its ROE is 10%

(100x100/1000)

Company XYZ also has a paid-up capital of 1000 and earnings of 100, but it has debt of 200. So its ROE is 12.5% (100x100/800)

Assuming that both companies are in the same business. Which is the better company? 

Company ABC has a lower ROE than Company XYZ, but obviously it is the better company.

ROE is a useful metric only when you know how to use it intelligently. 

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The Current Ratio What It Means

The Current Ratio What It Means

One of the metrics I like to look at when I assess the financial health of a company is the current ratio. This ratio is calculated by dividing the current assets by the current liabilities.

The current assets consist of cash, receivables, inventories and financial instruments that can be easily turned into cash.

The current liabilities consist of payables, debts, taxes and dividends that are payable within a year.

The purpose of this ratio is to know how capable the company is in paying its obligations when they fall due.

A ratio of below 1 is not a good sign. This does not mean the company will go bankrupt, but it does mean that it may have difficulty settling payments that are due to be paid. 

A current ratio of between 2 to 3 is preferable. If the ratio is above 3, it may mean that the company is not competent in using its assets to generate returns.

When you compare current ratio it must be done among companies of the same business to be of any use. Simply put, a higher ratio than 1 is better than a ratio of below 1.

To invest intelligently, you never look at 1 metric alone. There are many other things and metrics to look at. The most common ones are: the calibre of the management, business modal, price-earnings ratio, return on equity, market capitalisation, enterprise value, dividend yield, price to sales ratio, price to book value, acid ratio, return on capital employed, net tangible asset, margins, free cash flow, etc.

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Don't Lose Money

What does Warren Buffett mean when he says: Don’t lose money?

For me it means as follows:

01. Don’t speculate or gamble

Gamblers or speculators lose money in the long term although there are occasional gains because of luck. The odds in gambling are always in favour of the House or Banker. That’s why all gamblers, except the professional ones, make money in gambling. Ask yourself. Are you a professional gambler?

02. Don’t listen to insiders

If you think that insiders are keen to make outsiders rich, you are being naive. Insider trading is an offence. Why should an insider take risk of being prosecuted by giving you, an outsider, inside information to make money? Many people are impoverished by what is called an inside tip. Be extra careful especially when the tip is said to come from the horse’s month.

03. Don’t buy what you don’t understand

Many people like to tag along with their friends. They buy I buy. This is not a good idea. Your must know what you are buying. 

04. Don’t play with borrowed money

Play within your comfort zone. Playing with borrowed money will make you edgy. Fear causes irrationality. When you are irrational you are likely to make mistakes that are costly.

05. Avoid rubbish shares.

Shares with high borrowings and little or no earnings and no dividend yields are too risky to get involved. All companies that fold are those with high debits they cannot service. 

06. Insist on value when you buy

Everything has a fair price. To be safe, limit your purchases only to stocks with strong balance sheet, good cash flow, and good growth potential at undervalued prices. Buy dollar notes for 50 sen as advised by Benjamin Graham, the great legendary investor. 

07. Timing is everything

Warren Buffett calls this: The perfect pitch. You will do well to wait for a golden opportunity before you act. Most people do not have the patience to wait. They act in haste and lose money.

08. You can’t win without knowledge and wisdom

“How can the unarmed go into a mortal combat and hope to escape unscathed /James Dine.” The stock market is a battlefield wherein are professionals working full time playing against you.  Are you good enough playing against them? No way, right? Never overestimate your own ability.

The opinion stated above are my own. You may disagree. But if you wish to learn more, you may join me in my Telegram Super Group where you may voice your opinion, share your knowledge and experience, and concur with other members for mutual benefits. What you need to do is to install Telegram into your mobile phone and pm me. My phone number is: 016 9321849. 

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Buy low or Buy High

TA says, buy, when the price is up

FA says, buy, when the price is down

Which advice should you take

Depends on whether gold or silver is what you wish to make

Both can be profitable

If cleverly implemented

Gains could be wondrous

Otherwise, result could be disastrous 

The stock market is full of traps

There are bull traps, bear traps and value traps

Learn what they are

Be knowledgeable to avoid being trapped

You can buy low and sell high

Or buy high and sell higher

which strategy you use is up to you

Just make sure the strategies are not foolishly abused

Tides, Waves and Ripples

Stock prices have three movements. They are known as the tides, waves and ripples. The primary trend is the tide, the secondary trend is the wave and the daily movements are the ripples. 

When you are watching the movements of the sea, it is difficult for you to know whether it is high tide or tide. But if you plant a stick at the shore where the water reaches it, and watch the wares coming in and going out you can easily determine whether it is high tide or low tide. When the waves that come in show higher marks on the stick, you know it is high tide. In a low tide, the marks will be reversed.

In stock prices, you look at the highs and lows. A higher high and a higher low means that the market is on an uptrend. A lower high and a lower low indicates a downtrend.

Bear in mind that trends move in trends. This means a trend in motion is likely to continue in the same direction. Thus, you do not buy in a downtrend or sell in an uptrend until the trend is reversed or has shown signals that it is about to reverse. If you do not know TA (Technical Analysis), charts will be of no use to you. 

An investor will not worry about the ripples which are the hardest to forecast. But to a day trader, these movements are the ones that matter most.

A day trader does not carry position overnight. Make or break, he will clear his position at the end of the day. 

Can a day trader make money? A professional one probably can. But for an ordinary one, his chance is close to zero. He may win some and lose some, but on balance over a year, he is likely to lose. High transaction cost which includes stamp duty is high. It eats away your profits, if any. 

The problem with most traders is that they tend to over estimate their skill. They think they are professionals when in actual case, they are not. When they win, they say they are good, but when they lose, they say luck is against them. 

From my experience, I find that when you invest, it is easy to make money, but when you trade, it is difficult unless you are really good.

I have always consider myself an investor. However, there people who consider me as an trader. 

Well, If I am a trader, then, I must be a great one, simple because I have been making lots of money in the last fifty over years. 

Investing Without Tears

Investing is never 100% risk free. No matter how diligent and careful you are, a certain amount of risk is there. But with some knowledge and a good strategy, risk can be mitigated. Here are some guidelines:

1. Be an investor not a trader

Every stock has a company behind it. If you do an in-dept study of the company and you are convinced that the company is fundamentally sound and that your principal is safe in addition to an adequate return before you buy, you are investing. 

2. Don’t buy liabilities

A company with high gearings and no earnings or very little earnings is a problem company. It is a liability. Don’t buy it; don’t buy somebody’s problem. 

3. Follow the trend

Prices move in trends. A trend in motion is likely to move in the same direction. Follow it. When you see higher highs and higher lows in a chart, that’s an uptrend. A down trend is when you have lower lows and lower highs. 

4. Avoid the herd mentality

Just because all your friends are buying a certain stock, and therefore it is safe to follow, is a wrong way of thinking. In the stock market, there is no safety in numbers. You need to think independently as an investor. 

5. Be aware of what is cheap and what is low price

Many people assume that a low-priced stock is cheap. In reality, a higher-priced stock is often cheaper. You must look at the intrinsic value before you decide which is cheaper relative to its price.

6. A stock market is not a casino

The stock market has no mercy for those who treat it as a casino. All amateur gamblers lose money. Trading and speculations are akin to gambling. 

7. Be aware of your own ability

The problem with most people is that they tend to over estimate their own ability. 

Imagine what chance you have if you pit yourself against the professionals who are there ‘playing’ the market full-time.

8. Insist on value when you buy

A stock has three prices. It has a market price, a book value and an intrinsic value.

The market price is easy to understand. It is the last traded price at the end of a trading day. 

The book value is simply the net tangible asset (NTA) as shown in its balance sheet. 

The intrinsic value is the most difficult to calculate. I do not know of any formula for this. At most, it is only an estimation. You have to factor in many metrics such as barrier of entry, calibre of management, earnings potentials (present and future) growth prospects, patents, etc.

So, what should we do? For me, I make it simply. I look at the track record relative to its earnings, earnings growth and dividend yields. The higher these are, the higher the value. 

Buying a stock at high earnings per share (PE) is risky. Unless the forward PE is  expected be much lower, avoid stocks trading with high PE. (A PE of over 16 is too high for me.) 

To value a stock, here are some metrics or key ratios to consider: EPS( earnings per share); D/Y (dividend yield); NTA (net tangible assets); PEG (price to earnings growth); NPM (net profit margin); ROE (return on equity); D/E (debt to equity ratio) C/R (current ratio); PCF (price to cash flow). One other thing to carefully consider is the core business of the company. Here, you need to think about barrier of entry, patents and competition.

9. When is the best time to sell a stock

Close to 100% of all stocks will at one time or another be selling at extremely high valuation that they should be sold. At other times, they will be selling at overly undervalued prices that they should be bought. We want to sell a stock when it is very much overvalued.

Understanding the value of a stock is crucial in this respect, and with the help of technical analysis, you have the advantage of the competitive edge.  

10. Control your emotion

Taking action for action sake is a weakness that many people fail to control. Some people need to move in and out of the market often enough to overcome boredom. 

They forget that transaction costs eat into their earnings. 

Buy and sell with good reasons and not simply with intuition and the need for action.

Following the guidelines mention above will go a long way to help you to invest intelligently. 

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