stockoperator

When we look at either ROE, ROA or ROR that gives us the pictures of good employment of Asset/Liability or Invested Capital or cash on hand.

1) How about the Growing of Business/Top Line, Growing of Bottom Line and its profit Margin to capture market share and growing its Business?

SO we look at cash flow statement. IF the CASH is piling up, then we can say management has yet to reinvest the return. IF there is a purchase of Land, factory, expansion, equipment and machinery, then there is High chance of reinvestment of profit/cash on hand for further Growth.

Growing GOOD Business is STILL a concern. ONLY when Business is becoming more valuable in term of growing size, profit and earning visibility then it will be reflected in share price.

2) if answer to question 1 is YES. THEN How about the Price we pay for such Business or management? That will determine our futures return.

2014-05-26 13:04

stockoperator

A company with lower ROE, ROA or ROR can still manage to grow their Business. However their margin of Error is very small, that means they cannot afford to make any mistake and their Business future undertakings must be very Safe.

In that case, Business with High ROE, ROA or ROR can afford to wait for Better business opportunity to come by. Probably they can afford few average Business OR probably can afford few minor mistakes.

2014-05-26 13:14

NOBY

Good job but I think some of the ROE numbers are inflated due to corporate exercise (ie bonus issue etc( or one off extraordinary gains.

2014-05-26 13:18

intelligent_investor

stockoperator, nice comment.

2014-05-26 13:19

intelligent_investor

hi noby, yes. this is just a list to start. need some effort to study their ROE.

2014-05-26 13:25

NOBY

Normally, you can use the free FA screeners available to screen for this (not sure if you use some other screener). I normally use this screener, www.klsescreener.com/v2/ scan for companies with PE between 5 to 15 and ROE between 15% - 30%. This can help filter out the outliers. The above screen can be used to do some pre-screening for magic formula stocks as well but need to dig deeper.

2014-05-26 13:29

stockoperator

As you said it is a Good list to start by as those companies earning is way above asset/capital employed. They are mostly asset light and probably needs little capital expenditure. That itself is good Business.

Take note of those in natural growing market and company with strong management to capture market shares.

A growing trend of profit margin with strong revenue or growing trend of ROE/profit margin is better indicator than a SINGLE NUMBER OF ROE ITSELF.

TEHN again, what price do we pay?

2014-05-26 15:17

mbge7clt

funny to see luster there...

2014-05-26 15:27

intelligent_investor

hi stockoperator,

Your comment is good.

Basically, this is what i plan to do:-
1.) check how the ROE was achieved? I am looking for companies with high ROE that achived by high net profit margin, high asset turn over and low financial leverage. (http://intelligentinvestor8.blogspot.com/2014/05/dupont-analysis-dissecting-roe.html)

2.) then, is it worth to find out more on the companies and see if the comapny is a franchise with moat? (http://intelligentinvestor8.blogspot.com/search/label/Moat and http://intelligentinvestor8.blogspot.com/search/label/Franchise)

3.) Then, perform DCF valuation, and buy only if MOS > 30%. I believe it is relatively easier to forecase the FCF for a franchise business than normal business. (http://intelligentinvestor8.blogspot.com/search/label/DCF)

2014-05-26 15:32

stockoperator

I like your 123 line of thoughts and I always like DCF model. SINCE you raise MOS, then i have also prioritized my 123 as follows:

a) OUR WINNING Mentality

Can you know that you will be Rich in stock investment? Are you sure? Can you imagine that? If not, please DONT TRY.

You cant invest you did not trust the company and the economy.

Your trust and Methodology will be seriously tested when:
1) Market Crash that is why it is cheap
2) Bad News on your company that is why it is cheap
3) Yearly or Quarterly drop of earning that is why it is cheap
4) Your Holding is under performed by Broad Market due to years of consolidation that is why it is cheap


b) Portfolio Management and Diversification and cash management

Our job is Not sitting here everyday waiting for Market Crash or any event of the above to happens OR wait until MOS reach whatever level.

Our job is to think of how to safeguard our investment return, invest with peace of mind, how to achieve efficient frontier, think of Eternity of Long term Compound, Study Business Model and KEEP INVESTING in our portfolio, Risk Control; Cash Management, margin control....

BASICALLY IF I HAVE CASH DURING MARKET crash or WHAT HAPPENS TO MY PORTFOLIO? OR when 90% of Broad market down, should i still strive for the balance of 10% that will still out perform?


c) Methodology

How do I do it? YES, you should buy at Huge MOS and your 123 above.

BUT IS Buying at Margin of Safety is the Only Answer? How about the selling and holding part? When should i cut my losses? So, it leads you to the whole investment process.

WE BASICALLY NEED TO HAVE A WHOLE MASTER PLAN DRAFTED OUT BEFORE COMING TO IMPLEMENT IT.

2014-05-26 16:40

kcchongnz

A good place to start to look for good companies to invest. Just beware of some of the pitfalls on investing purely based on ROE here:

http://klse.i3investor.com/blogs/kcchongnz/52949.jsp

2014-05-26 19:53

stockoperator

Do we really think that Applying ROE or teaching people even techniques like DCF model is like teaching people How to fish.

How about before teaching people how to fish, we tell them before going out to the sea for fishing, they have to bring life jacket and even must know how to swim first, right? We tell them there could be storms or even the boats might sink.

IT is a survival issue and knowing the whole process that matters as well.

2014-05-26 20:16

Intelligent Investor

Mr. Chong, thanks for your articles. It will take time if need to identify the pitfalls for all companies. Will you do it for all companies or you only will drill down to detail after filter out to a smaller number of companies?

2014-05-26 23:30

Intelligent Investor

hi stockoperator, i am interesting to know more about b) Portfolio Management and Diversification and cash management.

what is your guideline for cash position on your portfolio? And, what will you do if the stock on the watchlist not reach your desired MOS?

for part c)Methodology

BUT IS Buying at Margin of Safety is the Only Answer?
There is many ways to determine when to buy a stock. But, if we want to minimize the downside, MOS is a very good way. I remember Ben Graham mentioned that "Confronted with a challenge to distil the secret of sound investment into three words, we venture the motto, Margin of Safety."
Do you have better way than buying at MOS?

How about the selling and holding part? When should i cut my losses? So, it leads you to the whole investment process.
Shall we cut loss if the price going south but the fundamental intact? Shoulnd't we buy more if there is a great discount? Remember what Seth Klarman say? "Value investing is the discipline of buying shares at a significant discount from their current underlying values and holding them until more of their value is realised. The element of a bargain is the key to the process."

For me, i will sell some when price move up and sell more and more when the price near to its intrinsic value (as the MOS is zero or almost zero).

2014-05-26 23:37

Intelligent Investor

I am kinda risk averse and I like Charlie Munger view on cash management - "There are worse situations than drowning in cash and sitting, sitting, sitting. I remember when I wasn't awash in cash - and I don't want to go back."

2014-05-26 23:40

stockoperator

1) Stock Concentration is more like Great Rotation which is selling the losers and rides on the winners. Basically it is riding on profits and cut the losers short; You may start with 10 but end up with 5 winners; Any criteria for Winner or losers? Well dont mistaken laggards as losers.

2) Stock Diversification meaning the mix of High Quality mid cap company and small cap with the mix of High profit Growth and High Dividend yield will generate better results than well research Big Cap; We hope those will become blue of the blues One day;

3) Study the price chart of last ten years and noted the Biggest falls in percentage from high; it can be 23.6% or 38.2% and devise your strategy from here. And never Buy into any stocks which has fallen more than 38.2% before. Hold it forever and add on to it from time to time during correction;

4)Only Buy into Companies which has consolidated for sometimes and the Longer the Better it is as once the price break out. It is more likely to be more than 50%. So you are safe and most likely you can Hold it forever as you have studied the price before that it has never dropped below 38.2% in past ten years. You may find your MOS during this time as when price consolidates, company profits expands.

5) We are here to be Rich Not to take profit as if when we take the profit there must be something wrong in the whole process.

6)Liquid asset can be bank deposit, cash, current account, mutual funds or Bonds or anything liquid. Do you think Businessman is stupid with so much money in the current account with near zero interest? Opportunity is everywhere Not necessary from stock market crash, fair?

You are investing as well if you are Holding cash. Holding cash is part and parcel of the structure.

7) Opportunity is also everywhere Not necessary from Stock Market investment alone, fair?. Stock market is definitely Not the Only Holy Grail. So we need to widen our horizons. Look at property price and gold price of past 5 years for example. Or why not starts your own Business? In that way I am better investor because i am a Businessman and i am a better Businessman because i am an investor.

8) Learn to Borrow and Margin financing in good and bad times. It helps but keep it to the minimum.

9) Why should we be uncomfortable if our companies share price keeps on going up? We will ONLY become Uncomfortable if we Only want to take profit at Highest price as though we did not sell Now the price is to retrace immediately. Market will always punish those who wants to sell at Highest price, fair?

10) Why should you worry about price falls if you did not get to Buy at your defination of MOS as you are confident that price will bounce back next year if it drops this year? Market will also punish those who always want to Buy at lowest price. Fair as well?

2014-05-27 01:26

stockoperator

I hope some concepts help in your process.

2014-05-27 01:27

WLiang777

May I know What is FCC stands for ?

2014-05-27 07:18

johnny cash

Post removed.Why?

2014-05-27 07:47

Intelligent Investor

Hi stockoperator, thanks for the lengthy reply.

2014-05-27 09:32

Intelligent Investor

Hi WLiang777, do you mean FCF instead? It is stand for Free Cash Flow.

Free Cash Flow = Operating Cash Flow - CAPEX and It is left over cash after spending necessary money to keep it growing at its current rate.

Normally, an investor will discount all the future FCF to estimate a firm intrinsic value. Read http://intelligentinvestor8.blogspot.com/2014/05/discounted-cash-flow-analysis-reverse.html for more details.

2014-05-27 09:34

Intelligent Investor

Hi johnny cash,

I will pick some post and repost it to i3. you can visit http://intelligentinvestor8.blogspot.com and I will update this blog when i perform my study.

Noby did provide us a free scanner - http://www.klsescreener.com/v2/ and it can serve as the start point to filter out some stock.

Or alternately, you can use the list in this blog to perform further study.

2014-05-27 09:37

johnny cash

Intelligent Investor--- thank you very much for the reply, very kind and nice of you

2014-05-27 10:02

stockoperator

My Dear Intelligent, making money is a bit different from stock analysis.
Making tons of Money is again different. To be Rich is different again.

You can make things possible and you have skills and in great mental state.

2014-05-27 10:09

Intelligent Investor

hi stockoperator, i just aim for 15% CAGR. I hope I can achieve it. Let me review what is my result after 10 years or 20 years.

and, thanks for your quality reply.

2014-05-27 10:48

Intelligent Investor

hi stockoperator. referring to your post below

Blog: [转帖] 出席 Mr. Koon 股票讲座分享有感 - 夜孩子

May 24, 2014 04:02 PM | Report Abuse

How do i find cash to invest while I am nearly 80% invested?

1.10-20% cash holding
2.Sales of Loser into and Ride on the Winner. Around 10- 20%.
3.Portfolio Switching 10%
4.Use of Margin Accounts 10%.

So Besides learning and graduates from stock Valuation, we have to learn up portfolio management. Why? Again we want our portfolio to survive then we can talk about Long term Compounding.

Do you mean that you will always keep 10%-20% cash holding? But what if you have use the 10%-20% in opportunity A, then you find a good opportunity B?

And, aren't (2) and (3) the same?

2014-05-27 10:51

Intelligent Investor

"1) Stock Concentration is more like Great Rotation which is selling the losers and rides on the winners. Basically it is riding on profits and cut the losers short; You may start with 10 but end up with 5 winners; Any criteria for Winner or losers? Well dont mistaken laggards as losers. "

I agree that laggards is not a lossers, and for me laggards should be a better investment candidate as it provide a higher MOS. So, what is your definition for losser?

But, is it contradict with your sentences "riding on profits and cut the losers short;"? I prefer to sell some when the price start to move and sell further when price move near to the intrinsic value (as MOS become lower and lower). And, buy some more on the laggards (if fundamental intact).

What's your view?

2014-05-27 10:55

NOBY

This is a nice discussion. I have always been thinking about % cash in my portfolio and if I will have enough cash to invest when opportunity presents itself. If market crash and stocks become unbelievably cheap, there are a few ways I have considered to get additional cash in order of preference :-

1. Credit card cash advance. Nowadays its so cheap, interest rate is slightly higher than 1. but safe a lot of hassle. Recently, I was able to get one at 3% fix rate (or 5.9% reducing term) and use this as starting capital if cash is short. The interest rate here is fixed typically and you can pay back in installments for up to 4 years as long as your cashflow allows it. Amount here is small maybe about 50k at the most.
2. Refinance home loan. As long as interest rates are low this is viable option to free up a large sum of money.
3. Withdraw from EPF to invest directly into stocks. This one is tricky cause you get charged 3% upfront plus you forgo 4-5% risk free EPF dividend. The required return must be great to take this option. However, you cant lose more than you own since it is your own money,
4. Share margin financing. This is the riskiest in terms of all the options since we are borrowing up to 1.5x to 2x the collateral pledged. There is risk of margin call and effect of double edged sword in terms of leverage. I would consider this as last resort and only put a small percentage.

2014-05-27 11:09

stockoperator

Portfolio means other asset class other than stocks.

To manage the whole portfolio is like managing your whole health system. You know you need certain balancing and you cant over exercise/over invest as well. You are governed by Higher Law and principles.

You know your priority is Not A B or C but A-Z.

2014-05-27 11:11

stockoperator

Yape cut the loser and ride on the winner. Eventually ONLY those winner will take you to your Purpose in life.

When fundamental deteriorates 3 years in a row? Is it a Loser? OR if price ever drops more than 40%, do you want to know why? I dont want to know as i cant devise a good strategy for that. Well, most of the time it is still a profit taking and reinvest into winner.

2014-05-27 11:28

stockoperator

Every Business involves certain small percentage of debt financing. It can 10-20% of your total portfolio in good times and bad times.

BUT I WILL STILL RETAIN MY CASH HOLDING.

2014-05-27 11:34

Intelligent Investor

Hi Noby, thanks for your sharing.

2014-05-27 11:39

NOBY

II, no problem. Its hard to find FA investors in this forum and I m happy to share my views. FYI, I am creating my own watchlist of magic formula stocks in Bursa. It takes a lot of time and analysis since a lot of the ratios involved needs to be calculated manually. However, I have always wanted to track how Greenblatt's method would work in KLSE for the long term.

2014-05-27 11:44

stockoperator

So if i am 80% invested, that means I am fully invested. I hope i will never use my cash holding Ever and Ever.

2014-05-27 11:45

Intelligent Investor

Hi noby, glad to hear that. If you don't mind, can share it with me?

2014-05-27 13:06

NOBY

Sure. Once I finish it.

2014-05-27 13:21

stockoperator

1. I glance through your posting on Jae Jun stock picking Ratio and surely i agree with that. Monitoring those Ratio year to year changes for past ten years is more important than the SINGLE NUMBER of Ratio itself.

2. Also note that there is No absolute valuation in Jae Jun model and I also agree with that. As such don't work out so hard on that fair value and MOS as we are playing around with too many assumption and you will miss out on certain corporate development as DCF model is trying to value additional cash flow generated from new Development.

3. Having said that DCF model is best used to evaluate additional value to be added into the cash flow stream of income from additional corporate development NOT the Best valuation method for the company itself.

4. You may monitor those Ratio changes relative to the price of past ten years. If price is lagging behind because of MR MARKET for a few years and fundamental remains intact, then that is your Margin of Safety.

Well certainly, if price overshoot and there is no further corporate development and has outperform the Ratio percentage significantly over a period of time, it can be over valued.

2014-05-27 15:40

Sew Kuan

Good news

2014-05-27 17:18

Intelligent Investor

hi all! I have further update the list. you are welcome to review and comment. http://intelligentinvestor8.blogspot.com/2014/05/company-listed-in-bursa-with-roe-20-and.html

2014-05-28 14:41