Highlights

Choivo Capital

Author: Choivo Capital   |   Latest post: Sat, 6 Jul 2019, 5:16 PM

 

(CHOIVO CAPITAL) The art of being a quarter predictor.

Author:   |    Publish date:


For all of my critiques of quarter predictors, I actually relatively neutral towards them, except when it comes to areas where ethics might be a much deeper shade of grey than not.

Having said that, I too predict quarters to some extent, but only when the information falls on my lap.

Make no mistake, quarter prediction is a lot of work. The kind of work you do is probably different from a value investor, but you will still need to put in long hours in order to obtain the confidence level required.

So how does one goes about it?

 

 

The Start

It starts with the news. One of the biggest source of predictive data is large swings in,

  1. Currency
  2. Commodity Prices
  3. Legislation
  4. Accounting entries / Contract Recogntition
  5. Work-outs (Event driven catalyst)
  6. Results of linked or similar companies

Now, there are many more factors, such as demographics change, consumer behaviour, technological disruption etc etc. But these things take time, and is not that predictable in the short term.

When predicting quarters, the one thing you must understand, is that it is like predicting the weather. The longer out you’re trying to predict, the lower your precision level. At best, you can predict 2 quarters, maybe 3 if you’re really sure and sharp.

 

 

The Middle (Part One)

Now that you’ve found this predictive information, you need to decide which company’s earnings will be affected the most. In Malaysia, we only look for positive earnings because we cannot short.

Now, the best ones are where nobody is aware of yet. The absolute best ones, are where it has been beset by losses for some time, or severely compressed earnings, and therefore have people start valuing on a P/B basis instead of a P/E basis.

In addition, it is key for it to be a simple and easy to understand business.

If you try to predict the quarterly earnings of a conglomerate, you are in for a very rude surprise. Conglomerates have multiple income streams, and the points of failure in terms of your research increases exponentially.

Now, having found a sample of the companies, you now want to study very quickly how large the effects will be. You need to aim for at least 4X earnings increase YOY and preferably QOQ, because that is your margin of safety.

Depending on the company, it may not be so simple as to take just the commodity price to predict. The easiest one to show is MSC, everyone though tin price would shoot up for a year or something, and shoot the profit, and as it turns out, there’s a lot more than just tin prices in the market.

 

Now, let’s assume you chose steel. There are a few things you need to consider.

  1. Price of steel (this was your starting point)
     
  2. Legislation (this was also your starting point)
     
  3. Cost of production

    It needs to be split into its components and conservative figures must be used.

     
  4. Interest expense

    Rate increase can really affect things, especially if its denominated in foreign currency. In addition, for construction or property development companies, some of the interest is usually being capitalized in the construction in progress, you want to make sure the construction is still ongoing, and therefore interest can still be capitalized.  Otherwise, you might be a sudden and very material hit to earnings.

    In addition, when it comes to these companies, you might be in for a surprise if the quarter you’re predicting is the final one. Because the auditors come in before the final quarter, and if they have been under capitalizing or over recognizing their progress billings, there will be adjustments made, and this will properly screw you over.

     
  5. Foreign Exchange

    It’s not just the sales and cost, but also any borrowings or cash deposits. Some can be very significant effects. In addition, some companies have very large percentages of trade payables and receivables, which will in turn be affected and thus affect your prediction.

     
  6. One off impairments or contribution from associates.

This is again a whole new animal. Especially if the associates are not of the same business.

 

Now, assuming you’ve done all of this conservatively and with care, and you obtained a range of figure that is 3-4 times higher than the last quarter or previous year quarter, you now need this ask this question.

Is it priced in? What you know does not matter. Do other people also know it? Information that is useful is where only a few is aware of, and most aren’t.

If it isn’t, congratulations, you now have your quarter prediction speculation buy ready, and can now buy up your position.

Now, to set a target price. Well this one is very complicated. Because you are speculating, you cannot set a price you think is fair. Instead you need to determine the price you think other people will consider fair, and the reduce it by 15% of so to be conservative.

 

 

The Middle (Part Two)

Now, there is a short cut if you have not noticed. You do not actually need to do your research in such as detailed manner (you still need to be quite detailed as we will show later).

You’ve guessed it. Write an article!

Due to the unique structure of the malaysian equity markets, its actually quite straightforward to have your day in the spotlight.

I've written an article about it here.

https://klse.i3investor.com/blogs/PilosopoCapital/172101.jsp

The first thing you must remember, is that the purpose of the article is to whip up sentiment, and to inspire greed, hope and the fear of missing out. And the best articles, are articles of some slight but crucial misdirection (ie, you do not actually disclose everything), which are weaved out of threads of truth.

This is key. The important and persuasive facts must back your thesis. Otherwise it would not be convincing. You need,

 

  1. A clickbait title.

The first step is to have someone actually click your article. People are greedy, so you must have specific words to catch attention. Remember, everyone wants the green arrow, and QOQ and YOY increase.

Something like “XXXXX EXPLOSIVE EARNINGS UP AHEAD, PER OF 2!”

 

  1. You need pictures, color, different font sizes and other things.

Remember, you are selling something and your main audience or customers have short attention span. You cannot like me, just write in one colour, one font and one size.

 

  1. Establish credibility

    People need to think that you know what you’re talking about. Good English is a decent start. But more importantly, you must go into detail about the business, the details could be inane and have zero importance, but you need to sound smart saying it. If you did your research, this part should be straight forward.

 

  1. Select Factor to weave narrative.

    Now, out of the factors above, you need to select the best ones that are the strongest in pushing the narrative. The ones that are not so strong, ignore them.

    The best way is to split each factor out and explain one by one, with pictures and different coloured fonts! And then at the end of the article, combine it all into your thesis.

    If you do it right, each factor should buil anticipation and emotional rush in the person, and when the full thesis comes, ORGASM!

 

  1. Select news to back it up

    Next, to select news that back up your arguments. If you did your research, and the threads of truth are in place. It would not be difficult. Most news articles and journalist only have first level thinking. IE, Steel price up, therefore profit sure up. They do not, think in terms of the natural feedbacks that occur.

    In addition, the nature of the internet means you will always be able to find an article that supports your point of view.

 

  1. Setting TP

    Now, the last and most important part. Remember, use BIG FONTS and RED for this one. Setting the TP.

    Now, the key here is to remember. This is a speculation. But only you must know this. The others must not. They must look at it as an investment!

    So instead of being honest and saying “I think sentiment will push it up to 7 PE because people are greedy and most people will probably see 7 as a reasonable number to pay, and therefore aim to get out around that figure”.

    You must say: “FAIR VALUE should be around 7 times PE, for this company with potential explosive earning moving forward. And bright future due to XXXXXX”

To sound even more reasonable, you will want to compare it with other companies listed in otherr countries or its peers, or even to nestle etc.

Don’t worry about the fact that the economic quality/ moat or the company as well as interest rates in various countries etc play a major part in valuation. 
Most people will not ask. And if they ask, dont respont.

If you did this right, and the sentiment all feel correct. You may even get the lottery of Koon Yew Yin buying. Feel free to send him an email detailing this speculation. If it’s lucky to be uptrending soon after, OTB will also buy and recommend as it meets all his criteria, whether TA or Next 2 or 3 quarter earnings.

This will really make you a lot of money.

 

  1. Q&A

    Now after this, you should also if possible, stick around and answer questions. Most won’t be asking the hard questions. Most will be retirees who have not had experience in valuation and investments that you have. They are easy to settle.

You will also get questions or support from the shrewd traders, who can sense fish and greed swimming. They would have bought the moment they saw your article, and see that it felt right. The questions will be easy as these people know they will also make money off your work.

Now, when you get questions from people that can actually see through you bullshit. Again, very easy way to handle it. DO NOT RESPOND.

You will lose. Your argument will not hold water against them. Just shut up. If you decided to respond, habis, everyone can see you lose, and you cannot delete his comment summore.

Do not worry, the traders will defend you, because they know how key it is for the sentiment to hold up.

 

  1. Multipart articles

    Also, make it multipart. As people have short attention span. If you write 2000 to 3000 word article like me, sure habis.

    And you also want to build up your arguement and narrative, dont forget. This is a very good tool!

 

 

The Final Part

Now here comes the home stretch.

Whenever you do a quarter prediction, you are trading/speculating, and therefore, you must know how to do your EV, or Expected Value.

Now, assuming you didn’t write an article, your calculation is as follows.

 

Example 1

If profit XXX (higher QOQ and YOY), return is 40%. Probability 30%.
If profit YYY (higher YOY, but not QOQ), return is 20%. Probability 50%.
If profit ZZZ (Lower), loss is 10%. Probability 20%.

Expected value is (0.4*0.3)+(0.2*0.5)+(-0.1*0.2)= 0.2 or 20% gain averaged out over a large sample size.

 

If you wrote an article, and things go well.

Well, you would have locked in the profit pretty easily. If OTB and KYY buys, well, you hit the jackpot my man, you would have made way more.

 

Now, here comes the harder question. How much of it is priced in. Chances are, the answer is all of it. The EV is likely to be negative, example:

If profit XXX (higher QOQ and YOY), return is 10%. Probability 30%.
If profit YYY (higher YOY, but not QOQ), loss is 10%. Probability 50%.
If profit ZZZ (Lower), loss is 30%. Probability 20%.

Expected value is (0.1*0.3)+(-0.1*0.5)+(-0.3*0.2)= -0.08 or 8% loss averaged out over a large sample size.

 

In which case, you should probably get smart and get out beforehand.

Of course, you cannot tell people that. You need to tell them you think still got some way to run etc. That is could be a good investment. For good measure, compare to nestle again, and say, look how all these smart sifu is in the stock.

 

 

Conclusion

I hope this was useful for you. Have fun! And may you make incredible profits and scare the rest of Malaysia out of this market for me, so that I have less competitors!

Looking at how incredibly detailed some of the research is, and how they pace the stories, as well as how similar the styles are, i wont be surprised if there is a smart fund manager out there, hiring someone to write these articles after they buy in.

Just incredible.

 

If one day, due to your efforts, most people in malaysia say stock market is for gamblers only and sure lose money one.

Well, I’ll organize a big dinner for everyone!

====================================================================

Facebook: Choivo Capital
Website: www.choivocapital.com
Email: choivocapital@gmail.com

Share this

  Be the first to like this.
 
teareader818 Good read. Look forward to actual examples.
02/09/2018 8:24 PM
Choivo Capital The new layhong one is a fantastic example. Thought he's not so much a quarter predictor.

My guess is that either a fund manager asked an associate to do, or it's wealth wizard.

This is not the first time that guy has written a goreng ish report.
02/09/2018 8:25 PM
No right Nor wrong Only to Win Jon, u owe an explain for concluding your above remarks.
Else, its just a bold saying.

Hehe, need you to talk down LayHong for me ma
02/09/2018 8:34 PM
Alex™ prediction camouflaged as an art? This is speculation at best.
02/09/2018 8:37 PM
klee Jon,you wrote numerous articles which i am lazy to read.The reason...you are not tested n proven.Period.
02/09/2018 9:06 PM
NoctisShadow This post should be dedicated to ChickenKing as it seems very much directed to him and his recent articles that made a splash on I3. All made sense after your comment about Lay Hong fitting the bill. Don't think it is fair to critique others just because a few of his articles garnered a lot more attention and potentially challenging your popularity here.

How many years have you been investing? How many sectors do you truly understand? Do you understand other methods such as TA enough to repeatedly condemn it? You may write a lot of articles on I3 and even collect fees from several forumers. But the fact you spend so much time on I3 and claim to be an auditor makes me wonder, how much time do you actually have left to hone your skills as an investor? Or maybe blogging is the main skill.

Coming up with multiple articles to condemn other popular bloggers such as KYY to garner more followers on your part might actually back fire.

I have no articles, no rich and successful investing experience, but I am lucky to have a sharp observation, I hope. All the best to your future endeavors, please be fair.
02/09/2018 9:20 PM
Choivo Capital Nope, chicken King post actually is pretty non quarter predictive.

If he wanted to do one, he would have referenced feed cost etc which have fallen and egg price which has gone up. Wait did he, not sure.

Having said that, his research is fantastic.

I am not the only one who is realize the power of i3 in Malaysian markets.

The article was incredibly professionally written, very very well organised, perfect formatting, with all the key information a trader and investor would want.

There is no way this was done by a first timer, as the account would suggest, or someone who got stuck and wanted to incite sentiment. That one would have been sloppy.

This was not his first piece that was done this way. My bet is that he is either a fund manager, or someone hired by a fund manager to write it out properly.

Don't be a fool. Having said that, I have layhong shares that I bought near the bottom and I may buy more, so I'm not going to mess up a good thing.
======

NoctisShadow This post should be dedicated to ChickenKing as it seems very much directed to him and his recent articles that made a splash on I3. All made sense after your comment about Lay Hong fitting the bill. Don't think it is fair to critique others just because a few of his articles garnered a lot more attention and potentially challenging your popularity here.

How many years have you been investing? How many sectors do you truly understand? Do you understand other methods such as TA enough to repeatedly condemn it? You may write a lot of articles on I3 and even collect fees from several forumers. But the fact you spend so much time on I3 and claim to be an auditor makes me wonder, how much time do you actually have left to hone your skills as an investor? Or maybe blogging is the main skill.

Coming up with multiple articles to condemn other popular bloggers such as KYY to garner more followers on your part might actually back fire.

I have no articles, no rich and successful investing experience, but I am lucky to have a sharp observation, I hope. All the best to your future endeavors, please be fair.
02/09/2018 21:20
02/09/2018 10:24 PM
Choivo Capital I am fully aware of layhongs weak points, but as I am not sure and it is just a punt for me. I'm more than happy to have someone fry it up for me. Haha.
02/09/2018 10:26 PM
Choivo Capital Now, you might ask, why would a fund manager write that up if he believes it is cheap?

Well, it's simple. He is not sure. Or, he has gone all in and cannot buy more. Or, like all managers he has a one or two year perspective and need the share price to go up NOW.

If I was a fund manager paid a salary by cimb say, well, I can almost see myself doing that.
02/09/2018 10:31 PM
3iii >>>Alex™ prediction camouflaged as an art? This is speculation at best.
02/09/2018 20:37<<<



Firstly, I am waiting for apabagus to make an appearance again after my posts. His appearance is more predictable than the earnings of companies.

With so many variables considered in predicting the next quarterly earnings of this company, can I say, this company's business is too difficult to value.

Give it a pass. Choose an easier company that you can understand and value easily.

I have to agree with Alex that in investing there is a small element of speculation, but when the company's business is too complicated to fathom, the speculative component becomes larger and what you deem as investing is actually speculating.

Just throw a coin, and you will not be too far correct or wrong either.
03/09/2018 7:49 PM
ccc1 investing is actually speculating.
===============


investing speculating trading....all same, except expected holding period.
03/09/2018 7:53 PM
ccc1 holding period less than 12 months, better don't call investing.
03/09/2018 7:54 PM
ccc1 speculations gone wrong, don't know can call investments or not?
03/09/2018 7:55 PM
soojinhou Now since I've taken care of lionind, got a bit of time to be intellectual. Now everybody knows the highest upside is found for companies at inflection point where you take a bet on something that hasn't happen yet but if the anticipated result fits your forecast model, you'll make a fortune. That's not a secret, that's common knowledge. There are simply people who bother to work hard to find these opportunities. But since it hasn't happen yet, it is still cheap, and market hasn't realize yet. A bull run like that is like having AEM at 1100% gain in 2 years. What's your best performer? Want to compare?

And it's not even that I want to brag about it, many are also losers. It's just my strategy of qualitative forecasting facilitated me in finding this gem, before market found out about it. I bet to you, many of the top contributors in i3, in spite of this shitty year, are making way above buffett levels. Why the hell need to follow buffett if we are beating him by a large margin? For ikan bilis like us, agility is our weapon. Find a few big runners a year, overweight appropriately, and close the year above Buffett's.

So you can think of quarter to quarter predictors as people like that. People who actually go deep into research and try to find such opportunities. It's not an evil scheme trying to swindle the investing public. If we are wrong, we suffer financial losses too, coz after all, who wants to write about companies that doesn't have a catalyst? Why quarter to quarter? Because determining the impact of that catalyst is the path to a the sky raining gold! Who wouldn't monitor their stock closely to judge the impact of the catalyst?

Above Buffett levels can be humanly achieved, just need to work at it. Look around you man, many of these people made a fortune from stocks, just chill man. There's more ways to skin a cat than ours. And take a look at Petron, very defensive, one for your portfolio.
04/09/2018 7:58 AM
Sslee Dear all,
If you look at the research house covering the stocks, their stock analysts are required to make recommendation on the latest price targets every quarter when stocks they covered announce their financial result. They then give their rating: buy, hold or sell. In US if a stock miss their quarterly EPS target can be punished by the share price dropping severely.
The only different is that the research house analyst should not hold any share they covered. Whereas all those write in i3 had their vested interest.

Thank you
04/09/2018 9:08 AM
stockraider U need understand this loh....in USA those analyst are professional people, they are paid salary mah....in msia I3...we makan sendiri...those promote are here beside...profit element or out of friendly social element...thus u should not expect same like usa mah...!!

Posted by Sslee > Sep 4, 2018 09:08 AM | Report Abuse

Dear all,
If you look at the research house covering the stocks, their stock analysts are required to make recommendation on the latest price targets every quarter when stocks they covered announce their financial result. They then give their rating: buy, hold or sell. In US if a stock miss their quarterly EPS target can be punished by the share price dropping severely.
The only different is that the research house analyst should not hold any share they covered. Whereas all those write in i3 had their vested interest.

Thank you
04/09/2018 10:43 AM
Choivo Capital Dear Sslee,

Everyone writing you research have their own motives.

Writers who own the stock, want it to go up.
Writers who short the stock, want it to go down.
Analyst who don't own the stock, want either a reputation of being a very thorough or insightful analyst, or satisfy management who will be paying them to do coverage, or satisfy other motives.

We need to be very clear about incentives, in order to know where others are coming from.


=====

Dear Soujinhou,

I never said quarter predictors are evil etc. Anyway, lets not get into that, neither of us will learn anything from that discussion.

I want to know your thought process on buying AEM then, and why you bought it. In addition, when it went up, did it go up in line with your insight, or a completely different factor?

In addition, what is difference between the decision making behind AEM which went up 1100% and others which did not do well?

How did you ensure that the gains from the ones you do well on, far exceed those you don't?

If without AEM, how would your results be? If it is negative or very mediocre, how do you know its not due to luck, and that you will be able to catch more AEM's.

I'm very curious.
04/09/2018 1:56 PM
qqq3 no one should depend on IB analysts for opinions....only for information, can la.

on the other hand, nowadays, information every where.
04/09/2018 2:03 PM


 

237  238  528  1246 

ActiveGainersLosers
Top 10 Active Counters
 NameLastChange 
 SAPNRG 0.275+0.005 
 DAYA 0.01-0.005 
 VSOLAR 0.155+0.005 
 NAIM 1.08-0.08 
 ICON 0.065-0.02 
 HSI-H6P 0.17-0.01 
 HSI-C7F 0.43+0.005 
 BJLAND 0.215-0.01 
 PRESBHD 0.49+0.025 
 MERIDIAN 0.125-0.01 
Partners & Brokers