My Investment Philosophy?

Maybe I am wrong but for the qualitative measures like management ...and the business model.
I prefer to assume that a blue chip has the management quality and business model to sustain (the very reason it became a blue chip was its management ability to create a business model that is competitive in their respective sector). I do know their business model but not in the details. I believe capable management adapt to changes and business model is just an execution of the strategy of the management. Do not fall in love with management as sooner or later an idiot will run the company and you will find it out too late.

I acknowledge that I do not have the ability to understand or read management or their business model in detail. That can only be done by insiders or person working in the industry in management position. For the rest, they are reading and analysing off annual reports and PR and news and that can be a little superficial as those things are meant to be marketing tools. I don't think you can spot cans of worms reading those.

So, I am approaching it via a quantitative screening of bluechips instead of small caps (Which would required really intense scruntiny of the management and business model). Graham did mention in his works of later years that he thought an intense scrutiny of balance sheets and companies might not even be necessary for stock investment. We just need that few quantitative variables that matter. Tweedy Browne did a work on their own investment and philosophy which is nearer to Graham than Buffett.. and have proven for their own benefit that Low valuation ratio have proven to be invaluable to their selection of securities. They believe in diversification and have no more than 5% in any holdings and are investing in a whole slew of securities based on that and they didn't come out all too shabby.

But of course, the trend is my friend too. Or...at least I hope he wants to be friend with me.

My Valuation Criteria

A lot of global blue chips (not financials) are turning up in my screen that fits my criteria of, even after normalising earnings & FCF with an appropriate capitalisation rate :-
1) EV/FCF of 10%.
2) P/B under 1
3) P/S ratio under 0.7
4) Discounted FCF with MOS of 20% at least.
6) Dividend Yield of > 5%
7) Strong B/S

Case in point, Arcelor-Mittal... Something is wrong somewhere.. maybe I missed it...

Views on Balance Sheet and Valuation

My views on analyzing the B/S, P&L and Cash Flow Statement:

1. On the B/S. A B/S that is well-structured or well-proportioned supporting the underlying business and its further growth, is certainly superior to a B/S with a big overall size and/or big key B/S items. It is also very important to verify that the asset items in a B/S are of sufficiently good-quality, and their values properly or conservatively recorded. Given a choice, I will much prefer to have the body of a healthy athlete, than an 'inflated' body or one carrying 'diseased' parts!

2. On the P&L. It is crucial to first critically assess whether the profits are real, fair and sustainable. To just fall for big and nice profit numbers is obviously quite dangerous. It certainly pays to remind ourselves that profits on the P&L are merely numbers derived by accountants using accounting rules; and it is quite foolhardy to assume that the accountants and management are honest and knowledgeable in accounting, and the auditors are always diligent and never make mistakes. In this regard, having a good-enough understanding of the underlying business activities and the industries concerned, will certainly help in the interpretation and analysis of the P&L and financial accounts.

3. On the Cash Flow Statement. It is only good, if the profits in the P&L and the current assets in the B/S are both good. The primary additional value-add from analyzing cash flow is to be able to value the underlying business based on its capacity to generate free cash, which is superior to just relying on accounting profits.


For valuation of a business or a stock, I like to make it simple. My own views and approach:

1. I will only rely on my own valuation to decide on my own purchase price, after factoring in an appropriate margin of safety.

2. My primary basis for valuation of a business is a reliable estimate of its current aftertax FCF, before adjusting for WC changes or capex. Depending on the stabiity of the underlying business and quality of the financial accounts, I can accept the numbers in the latest P&L, or take a simple average of the relevant numbers over the most recent accounting periods to adjust for volatility.

3. Having determined a reliable estimate of a business' current aftex FCF, I would apply an appropriate multiple - based on my own judgement - to derive my own estimate of the fair or intrinsic value of the entire business. The appropriate multiple will take into account the quality aspects of the business, including its profitability and sustainability, volatility and growth potential, management quality/competence, intangible assets (like brands and goodwill), business/industry risks, long-term capex requirements, working capital/capex requirements, etc. The derived estimate of the fair or intrinsic value of the entire business will be used to determine the fair value of the unit share, after adjusting for any existing derivatives like warrants or stock options.

4. Depending on whether there are additional 'reserve-type' assets - e.g. investment properties, 'hidden' value (vs. realisable current market valuation) in key assets, large cash reserve, etc. - in the company, I will usually attach additional value in my estimate of the fair or intrinsic value of the entire business.

These are comments extracted from Wallstraits Forum. I find it to be of value in my understanding of how others value their stocks.

Step into the new Mercedes E Class

Wow... The marketing is damn solid.

Click on the Concert Tab under the link.
http://www3.mercedes-benz.com/mbcom_v4/xx/e-class/en.html

A voice recording done inside the car while it is being driven.

As for the car, it does not look nice.. but does have a lot of new innovative features. Interesting... maybe have to go and take a look at the real one when it arrives.

My favourite in Mercedes lineup would be the SLK... *drool*... but it is already 5 yr old and maybe it is time for a revamp like the C and E class.

CANSLIM Stock Pick

CANSLIM Trading Style Broken Down | Stock Trading To Go

CAN SLIM is Investor Business Daily’s (IBD) acronym for the seven common characteristics all great performing stocks have before they make their biggest gains. My trading foundation is rooted in CAN SLIM although I use it differently than most beginners now that I have evolved into other styles and methods.

CANSLIM Letter Breakdown

Let’s start by understanding what each letter represents in the CAN SLIM acronym as described by investors.com:

C= Current earnings per share should be up 25% or more and in many cases accelerating in recent quarters. Quarterly sales should also be up 25% or more or accelerating over prior quarters.

A= Annual earnings should be up 25% or more in each of the last three years. Annual return on equity should be 17% or more.

N= A company should have a new product or service that’s fueling earnings growth. The stock should be emerging from a proper chart pattern and about to make a new high in price.

S= Supply and demand. Shares outstanding can be large or small, but trading volume should be big as the stock price increases.

L= Leader or laggard? Buy the leading stock in a leading industry. A stock’s Relative Price Strength Rating should be 80 or higher.

I= Institutional sponsorship should be increasing. Invest in stocks showing increasing ownership by mutual funds in recent quarters. IBD’s Accumulation/Distribution Rating gauges mutual fund activity in a stock.

M= The market indexes, the Dow, S&P 500 and Nasdaq, should be in a confirmed up trend since three out of four stocks follow the market’s overall trend
CANSLIM Strategy Breakdown

What do I look for in a stock that relates to the basic CAN SLIM principles described above?

C: I always screen for stocks that have earnings increasing quarterly. I don’t set the bar at 25% but many of my buys are stocks that have earnings increasing by at least this figure. As long as earnings are increasing, the stock can remain on a watch list to be tested on additional technical and fundamental screens.

A: Annual earnings are more important when searching for loner term growth stocks that can be in your portfolio for months or years at a time. I study annual earnings more often than quarterly earnings and I always take a look at return on equity. I don’t use a minimum threshold for ROE but I prefer stocks with at least a double digit figure in this category.

N: New products and services are important but I prefer to look for stocks that are new in general. I like stocks that have debuted on the market within the 5 years as an IPO. I search for stocks within 15% of new highs or stocks holding support above the 200-day moving average that made a new high within the past 52-weeks.

S: Trading volume is very important in my trading system. I prefer to buy stocks moving higher on explosive volume. Volume must be at least 50% greater than the 50-day average. I also look for sell signals when volume starts to increase as a stock violates support levels and moving averages.

L: I tend to trade leaders as far as industries and sectors are concerned but I do occasionally make a purchase in a stock that may not be in a leading industry. A relative strength rating above 80 is excellent but I prefer to see a relative strength line trending higher regardless of the actual rating in IBD. Stocks travel in packs so trade the groups moving higher in an up-trend and you should be fine. Stick with the top two or three stocks within each group and your trading results improve.

I: This is very important in my research as I am biased towards investing in stocks that show increasing sponsorship from quarter to quarter. I ride the trend and the big boys, also known as institutional investors, are the people that move the markets. When institutional money is flowing into a solid stock, I start to dig deeper.

M: This is probably the most important portion of the CAN SLIM acronym as it will tell you what direction the overall market is trending. Avoid fighting the trend by trading in the opposite direction of the market. I watch several important factors to gauge the overall strength of the markets: Price and volume on the NASDAQ, DOW and S&P 500, the NH-NL ratio and the number of stocks trading above and below their major moving averages. Finally, I keep a personal index of 20-30 stocks that I feel are the best in the market at the current time and monitor their weekly action.

Portfolio Update March 2009

YTD Returns : -13.87%

Sold off some equities funds to switch into the equivalent ETFs. The trend towards ETFs only bodes ill for most mutual funds.

How to detect trend change

March 2007

Written on 06-03-2007 9:27 am by Craig
How to Identify a Change in Trend - Easy as 1-2-3

In the book Trader Vic - Methods of a Wall Street Master, Victor Sperandeo mentions three rules for correctly identifying a change in trend. Here they are as follows:
Step One: The Trend Line Break

The first thing that you want to look for is a trend line break on a correctly drawn trend line. The trend has not changed yet. This criteria gives you a heads up on a possible change in trend.



trendline
Step Two: Retest and Failure

After the trend line has been broken, the stock will rally but fail to move above the prior high. The trend has not changed yet. We still need one more criteria to confirm the change in trend.



trendline
Step Three: The Confirmation

Finally, the stock moves below the prior swing point low and the change in trend is confirmed.



trendline

This example is for a stock that is moving into a down trend. The rules are just reversed for a stock that is moving into an uptrend.

Also, here is a quote from the book:

If two out of the three conditions are met, the chances are good that a change in trend will occur. If all three conditions are met, the trend change has occurred and is most likely to continue in its new direction.

These rules won't work 100% of the time, but I think you will be impressed by how often it does work. Pull up any chart and test out the rules. See if you could have anticipated a change in trend. Also, try it out on weekly charts and intra day charts.

Now I just need to figure out how to identify a change in trend with my wife's mood swings. THAT would be impressive!

How to use Volume & Price Action to your advantage

Stock Chart Volume | How Traders Use Volume on a Stock Chart

Stock Chart Volume
How to interpret volume on a chart

Stock chart volume is probably the most misunderstood of all technical indicators used by swing traders.

There is only a couple of times when it is actually even useful and if you get right down to it, you really could trade any stock without even looking at it. But, I’m getting ahead of myself. First, let’s define what it is:

Stock chart volume is the number of shares traded during a given time period.

Usually plotted as a histogram under a chart, volume represents the interest level in a stock. If a stock is trading on low volume, then there is not much interest in the stock. But, on the other hand, if a stock is trading on high volume, then there is a lot of interest in the stock.

Volume simply tells us the emotional excitement (or lack thereof) in a stock.
Liquidity

Stock chart volume also shows us the amount of liquidity in a stock. Liquidity just simply refers to how easily it is to get in and out of a stock.

If a stock is trading on low volume, then there aren't many traders involved in the stock and it would be more difficult to find a trader to buy from or sell to. In this case, we would say that it is illiquid.

If a stock is trading on high volume, then there are many traders involved in the stock and it would be easier to find a trader to buy from or sell to. In this case, we would say that it is liquid.

Let’s look at a couple of common volume patterns on a stock chart:


Stock Chart Volume

A surge in volume can often signify the end of a trend.

Here, on the left side of the chart, this stock begins to fall. Volume increases dramatically (first green arrow) as more and more traders get nervous about the rapid decline of this stock. Eventually everyone piles in and the selling pressure ends. A reversal takes place.

Then, in the middle of the chart, volume begins to taper off (red circle) as traders begin to lose interest in this stock. There are no more buyers to push the stock higher. A reversal takes place.

Then, on the right side of the chart, volume begins to increase again (second green arrow) and another reversal takes place.

This chart is a good example of how the trend of a stock can reverse on high volume or low volume.

Mistakenly, some traders think that stocks that stocks that are “up on high volume” means that there were more buyers than sellers, or stocks that are “down on high volume” means that there are more sellers than buyers. Wrong! Regardless if it is a high volume day or a low volume day there is still a buyer for every seller.

You can’t buy something unless someone is selling it to you and you can’t sell something unless someone is buying it from you!
Volume and Price

So if all volume represents is interest in a stock, when is it useful? The only time volume is useful is when you combine it with price. For example:

Expansion of range and high volume - If a stock is drifting along sideways in a narrow range and all of sudden it breaks to the upside with an increase in range and volume, then we can conclude that there is increased interest in the stock and it will probably continue higher.

Narrow range and high volume - If a stock has very high volume for today but the range is narrow then this is called churning. In this case, significant accumulation or distribution is taking place.

Ever heard the saying, "volume precedes price"?

Many times you will see volume pick up right before a significant move in a stock. You can see that interest is building. On a stock chart, look for volume to be higher than the previous day. This is a sign that there may be a significant move to come.

Take a look at this example...

Volume Precedes Price

This stock rallied for three days in a row on relatively low volume. Then, on the fourth day, volume increased dramatically. This increase in volume began the move to the downside.

Interpreting volume on a stock chart can be confusing! Just remember that the price action is the most important factor on a chart.

All else is secondary.

Hedging and Catching Falling Knifes

Investing in bad times

RE: Investing in bad times

williamlim Wrote:
Care to give advice on how you used hedgeing in your portfolio. Would the hedge amount be equivalaent to the total value of your long only portfolio or is it only up till the amount you think the loss in your long-only portfolio would be?


You have to shift your focus and view first. You hedge by going short when the market is primarily up, but showing signs of breaking. When the market is primarily down like today, your main positions should be short, while long positions become your hedge. What the majority of people advocate here is basically hedging without a primary (they think as long as price is cheap, it is ok to go long), not knowing that any long positions they have now should be viewed as a hedge.

You ask how I hedge my portfolio. The fact is, I don't. In times of volatility, hedging is redundant, and in fact makes things worse. Because I have very short trading timeframe, hedging becomes even more redundant. I oscillate between long and short positions frequently (usually with a combination), and I use stop loss to control risk.

The best and only true leading indicator is sentiment, because sentiment is the one thing that arrests the correction and ultimately switches it back to up. Read this again carefully:
p9939068 Wrote:
The second is just plain common sense, but it's really difficult to drill in. For stock markets (NOT economy) to turn up, the FIRST step is for private equity to have confidence in AT LEAST the NEXT earnings report. Now ask yourself, do you think companies will start posting increased earnings in the next quarter?

After reading this, you will have to find your own answers as to what will start encouraging private equity to regain confidence, and not look for some indicating signals (like BDI etc, although they can be useful). Instead, look out for events that are critical to regaining confidence.

Lastly, if you "die die metal teeth" only interested in long positions with a long term view, then remember not to catch a falling knife. Lets simplify things and think of the economy as a perfect "U". You want to enter the market at the right side of the U, not the left. In the left, you don't know how low it can continue to go. In the right (with the right signals), you can be assured it's going up, even if you miss the bottom (which you will anyway if you enter on the left).

Furthermore, and quite importantly, there is a chance we have be looking at an "L" economy. This means you will have much more time at the right side to decide when to enter the market, without missing the bottom much.

Buffett's Valuation Method

Mid-Continent Tab Card Co. « Compounding Machines

During her presentation, Schroeder provided a fascinating case study of a private investment Buffett made in 1959 in a company called Mid-Continent Tab Card Company. At the risk of sounding technical, tab cards were something used in computers back in the day. At any rate, with over 50% profit margins, selling tab cards was IBM’s most profitable business in the 1950s. As a result of a settlement with the Justice Department, IBM was forced to divest of its tab card business. A couple of Buffett’s friends, Wayne Eaves and John Cleary, had started a tab card company themselves in the mid-to-late 1950s. It was an extremely profitable business. Tab cards were made on what was called a carel press. They were turning their capital over 7x per year while earning 40% net profit margins. In 1959 they were looking to grow this profitable business which required buying more carel presses.

So, in 1959 Eaves and Cleary approached Buffett to see if he had any interest in investing in the company. This is where Schroeder’s presentation gets interesting as she describes the process Buffett went through in deciding if he wanted to invest in the business and the return criteria he desired for putting up the money. I suspect the first thing that most analysts would do when presented with such an investment opportunity is to ask for management’s financial projections and then create a discounted cash flow model. According to Schroeder, Buffett did none of this. In fact, given complete access to all of Buffett’s files, she never once saw anything remotely resembling a financial model. Instead, he analyzed on a quarter-by-quarter and plant-by-plant basis, the historical profit and loss statements for both Mid-Continent and all relevant competitors. From there he acted like a horse handicapper figuring out which one or two factors would make the horse succeed or fail. In the case of Mid-Continent it was sales growth and cost advantages. When presented to Buffett in 1959, the company had $1 million in sales, was growing at 70%+ per year and earning 36% profit margins. According to Schroeder, the ultimate decision to invest came down to the question, can I get a 15% return on $2 million of sales. The answer in his mind was yes, so Buffett invested $60,000 of his non-partnership money representing 20% of his net worth. This investment gave him 16% of the company’s stock plus some subordinated notes.

As one would expect the Mid-Continent investment turned out quite well for Buffett. Over time he put another $1 million in the company, which would later be renamed Data Documents. The company was sold in 1979 to Dictograph. Buffett held the investment for 18 years earning a 33% compounded annual return…sign me up!

What was interesting to me from this case study was that he did not seem to bother himself with projecting revenue and profits out five years, did not grind over whether to use a 10% or 12% discount rate, nor worry about which terminal multiple to use. There certainly was no investment banker’s “book.” Instead, he approached the investment wanting a 15% “equity coupon.” From there, he had to decide for himself whether it was a cinch to get such a return while relying solely on analyzing historical profit and loss statements.

Discussion of this investment did not make it into The Snowball because it was deemed too technical for the general public. Let’s hope that Schroeder publishes a follow-up book with more stories similar to that of the Mid-Continent Tab Card Company.

A 50/50 Portfolio is ideal for most.

My approach to portfolio construction was decided on the premise that mine is a lump sum investment and future investment would only be thru' dividends/coupons. So, I need to make sure that no matter what I do, the capital will be intact in a way or another.

A way to minimize the loss would be a 50% bonds, 50% stocks portfolio. The bonds portion could be make up of real bonds and property that is fully paid. If not, property under loan should fall under the equity portion.

Assuming that your 50% stock allocation falls 50% and never recovers, a 5% income stream from the bonds will more or less offset the loss in 10yrs.

This should be the worst case scenario since a good quality stock portfolio will not stay below the figures forever.

Essentially, you have not made money .. and the 10yrs is like putting your cash in a mattress without earning interest. But it's better than punting 100% in stocks and waiting for stocks to recover to 100% to break even.

Example, If you weight it at 50/50 for a hypothetical $6mil portfolio getting around $300k annual dividends/coupouns, I would be able to recover the paper loss of $3 mil within 10yrs (assuming I did not reinvest the dividends/coupouns which could lead to more compounding). From there on, the $300k dividends/coupons becomes the return on investment and any gains on stocks are also considered as gains.. SoI believe I shouldn't do badly over 5 yrs to 10yrs.

What I have learnt in this bull/bear cycle is when you have a lump sum for investment, do not dump everything in at one go. DCA is still a very good method as that will allow you time to adapt to the pyschology of the stock market and know whether you are suitable to be aggressive or conservative or should be out at all.

I have got a friend who got convinced to put in $40k into a global equity fund, now that it's down $20k, he is having sleepless nights worrying. In this case, he would be better owning govt bonds if he wants to earn more and possibly put in only 20-30% of her money in equity. This way, it should worked exactly like my 50/50 portfolio without losing any sleep.