Subject: Circle Of Competence

I had read this statement n also shared with a member before n that is " we will not b good in everything we do, we will also not b bad in everything we do, there is always something that we can do" . As a conservative investors, I set many stringent criterias in selecting my investment prospect. the purpose of setting these criteria is to give a buffer for the prospect so that their business continuation will not be affected when recession set in (as mentioned I only buy when everyone is dumping their share). As my investment focus on both companies from sgx n hsi, out of all listed companies in this two xchange I have filter out 100 stocks/companies as my investment prospects or research pool. Thus, when warren Buffett said his research pool comprised 2000-3000 companies I almost fell off my chair becos remembering details n numbers from 100 companies is already at my maximum brain capacity, warren' s ability is beyond human limit.

I will not invest in the following companies, high debt, low operating profit margin, low cash on hand, product/services offered that I can' t understand, financial reports that I can' t understand, business operation that I can' t understand, business operation that go against my personal principle (cruelty to animal n etc), companies that do not update their financial report regularly n many others. There are also many companies which I do not know how to value them due to lack of the related operation experience, for example insurance company. I can understand how an insurance policy work but I can' t understand how an insurance company operate, without knowing how it operate there is no way that I can adjust its cashflow n balance sheet to work out its valuation. 

Some may not know y I said that. Let me quote an example. If your principal income is from your employment the rental income from your property will be deducted from your net cashflow but it will be added back into your balance sheet as cash. For property developer that owned service apartment, hotel that earn rental income as their main business activity, the rental income will be included in their cashflow. Thus if we can' t understand how a business work we will not b able to work out its valuation n that' s the reason y I kept emphasizing the important of reading financial report thoroughly. 

Hence companies that I invest are within my circle of competence or parameter of knowledge n that help me to maintain a high success rate in my investment. In addition by creating a research pool of prospects I do not focus my attention on a single stock price movement. Example I sold galaxy entertainment after its valuation materialised, the proceeds received will be reinvested into another prospect that is below valuation. If subsequently galaxy prices fall back below its valuation I can buy back using funds from other investments as well. Thus my focus is always at the valuation n fundamentals n not at the share price movement. This is the reason I will not be bother by macro factors becos there will always be stocks that r trading above n below valuation, we just need to put in our effort to develop our own research pool n nature will take it course. Heaven will help those who  help themselve. 

Thank you :)

 

 

 

 

 

 

 

Subject: Low Risk High Return

In prc trading n speculation of stocks are something which is very common becos they felt that 1)A share mkt is dominated by retail investors unlike the u.s mkt which is by pension n institution fund. 2) they have no confident in the financial report furnished by listed companies (number of fraud accounting were discovered). 3) 老 鼠 仓 (rat account), listed companies or fund managers manipulate the stock mkt by releasing false info to the public n take a position before such info were released. Even fund managers who supposed to invest based on the value of a company, also doing trading just like the retailers. Hence, nobody is interested in value investment.

In reality, besides the business risk of a company the real risk come from not knowing what we are doing n thus it come back to the same old story of reading the financial report. I' m not sure whether anyone felt exegerating that in order to invest safely we must read the last 10 years report n I have the following to share with everyone. 

Assuming we have co.A operating earning for yr1 is 1mil, yr2 is 200k loss n yr3 is 2.5mil where else for co.B yr1 is 1mil, yr2 1.1 mil n yr3 1.2 mil. As I have mentioned before the purpose of reading the past 10 years report is to look for consistency n stability. Although both companies in the above example generate the same amount of net earnings for 3 years but co.B will be preferred becos of its stable cashflow. A stable n consistent cashflow implied that it' s valuation is highly certain n such characteristic is important becos thats give us the confident to wait while we are holding the stock. Unlike a company of volatile earning, there is low certainty toward its valuation. Hence this is the reason y I have been reiterating DBS valuation since day one. Irregardless of rate hike or not, fear due to negative news n etc the valuation will hold n will only change with its quarterly report.

Thus by knowing what we are doing in investment it is just like 2 players are playing cards (I' m not sure of the name of the card' s game, there are 5 cards given n the first card is not reveal to others but the rest of the 4 are shown n pairs will be bigger than single card), the one who knows the valuation is like he has a pair of X-ray eyes able to see the base card of the others n thus have a higher probability of winning. Those who are not able to do so will face a high risk low return scenario. The recent survey show that most prc stock investors are losing money n that' s the reason y the communist are so keen to open up their stock mkt to the foreigners hoping that large institution investors to come in to stabilize the mkt. my own view is it will not help, even the most mature mkt like the u.s also experiences volatility becos there will always be more ppl doing trading than investment due to the temptation of making money fast. 

Hence even if everyone is educated on the benefit of value investment, taught on the technicality of applying it but without the mindset to wait for its valuation to materialize, it will not work too. Temptations from greed n worries from fear will continue to affect ones investment decision. Thank you :)