Intelligent Investor's Notes
Buying Good Companies when the price is cheap - A summary from 小資女艾蜜莉 video
Intelligent Investor
Publish date: Tue, 27 Jan 2015, 10:38 PM
I came across 小資族,靠理財也能創造大財富 video on i3investor. The video interview a girl (小資女艾蜜莉) who draw a salary less than TWD30k (MYR 3k) but achieve a net worth of TWD 4 million (MYR 400k) in 6 years by investing in stock market.
She reveal how she pick good stock and time the market in the interview. And, below is some of the points shared on the interview.
How to choose a Good Companies
How to determine if a stock price is expensive or cheap?
From the interview sections, she mentioned that she will monitor around 80 stocks and start to buy when the price is cheap, and start to sell when price is expensive. In one time, she will hold 3-5 stocks to achieve diversifications.
References:-
She reveal how she pick good stock and time the market in the interview. And, below is some of the points shared on the interview.
How to choose a Good Companies
- Buy companies with strong histories of profitability
- Avoid commodities business that need high capex with negative growth of the gross profit margin. (In another words, look for franchises which are able to dig deep economic moats around their castles)
- Avoid company with small cap; look for big cap with long listing history.
- Check where is the earning come from? Operating profit or investing profit? We should focus on company that able to generate profit from its core business.
- Check if company invest in loos making initiative?
- To exclude company with low quality earning. Check Revenue Growth vs Trade Receivable.
- To check if a firm able to generate Operating Cash Flow to support it's own cash usage.
- Avoid high debt company?
- Prevent company that alway ask cash from owner.
- Avoid company with insider selling.
How to determine if a stock price is expensive or cheap?
- Based on historical dividend yield
- Based on historical share price
- P/E
- P/B
- ROE
- Red - Expensive
- Yellow - Moderate
- Green - Cheap
From the interview sections, she mentioned that she will monitor around 80 stocks and start to buy when the price is cheap, and start to sell when price is expensive. In one time, she will hold 3-5 stocks to achieve diversifications.
- DY is a good indicator - we can buy a good comapnies when DY is high and sold it when DY is low. This metric can be used at a company with a dividend payout policy.
- I don't get the idea why should use this? A share price alone not able to reflect the value. What can we know if the share price hit a 52W high or 52W low?
- I prefer to use the magic formula to replace the P/E.
- We need to bear in mind that not all asset is same quality. And, some company is asset light and market will value it based on its earnign power instead of the book value. Compare with P/B, I think graham net net might be a better candidate for us to hunt for cheap stock with good asset quality.
- There is some issues and pitfall on ROE, do perform DuPont analysis on the ROE, or alternately I prefer to use ROIC
References:-
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Discussions
7 people like this. Showing 30 of 30 comments
I wonder that buy in below 7% DY and sell out above 9% DY if there is any historical record for good return? example research was done that companies with low PE, low P/B generally outperform.
2014-06-20 18:33
ok my bad, tweedy browne has published that, generally higher yield outperform lower yield companies but those that have higher yield with low payout ration outperform all
2014-06-20 18:39
Yes, in fact small and mid cap have potential of higher gain simply because of the size factor.
However, Emily's investing strategy has lower risk as small cap may not be able to withstand a major economic downturn. So Emily's strategy suits most people in my opinion.
Buying big cap with long history of return is especially better to do when there is a major crisis when stock prices are beaten down.
Risk and return in investment is inseparable.
2014-06-20 19:52
Maybe MBSB 1171... always break record.. revenue.. pbt.. asset growth.. ??
2014-06-20 20:58
Mark Mobius advocate buying Good Shares in Bad Times & Buying bad shares in good times. For me I like buying 10 cts to the dollar if I can find them.
One guy was given a Company Car for only Rm600. I told him I will add a zero behind and make it RM6,000 to buy it from him. My workers protested, "Why pay him RM6.000 when his Company sold him for only RM600?" I replied, "It doesn't matter if the Company sold him at RM600 or RM1.00. I am willing to pay RM6,000 Why Not? If I can sell it for RM12,000!
With this same Value Hunting I have Bought RM1 Million Dollar Property For Only RM250K. And RM500K property for less than RM200K. Of Course You Can Only Get Them When Sentiment is Really Bad When Few Dare To Buy any.
I find this same principle in KLSE. Take Mulpha for Example. In Year 1994 I bought & sold Mulpha at RM4.20 to RM4.50.
20 Years Later I Am Very Surprised to see Mulpha at 43.5 cts. It is selling at 10$ of 20 Years Ago Value. And The Prospect of Mulpha is now Changing Fundamentally For The Better.
Now I understand Warren Buffet completely, "I know I will be rich"'
2014-06-20 22:42
Should read as Mulpha is selling at 10% of 20 years value.
And I bought Perak Corp at 60 cts when less than 1% of the people pay any attention then. Now that Perak Corp Is SO HOT & SO POPULAR Its Price Has Also Risen Up In Tandem.
2014-06-20 22:58
Hi NOBY,
I alway believe risk and reward is a package that come together.
The chance for big cap to survive in an economic downturn is higher than a small cap.
We can choose it based on our own risk appetite. And, we have to be sure what is your goal? And, what is the CAGR that we are target for?
http://intelligentinvestor8.blogspot.com/2014/06/five-habits-of-highly-successful.html
2014-06-20 23:05
Recently I was told by my colleague to buy Nestle if ever we can afford.
Any comments?
Very expensive but currently it's at 63.50 which is the lowest during the first half of 2014.
2014-06-21 09:19
Hi tssl74,
Nestle is definitely a good companies
- It is a company with strong histories of profitability
- The company generate enough operating cash flow to cover its operations, and in another meaning it provide the management a lot of free cash flow.
- Owing to this, NESTLE is also company with strong histories of dividend payout.
- And, NESTLE is definitely a franchise business with moat (check the profit margin and you will know).
Buy, does the current price is cheap? This is definitely depends on individual. I will suggest you to do an exercise do check out NESTLE current Margic Formula Earning Yield and compare it with its historical yield.
(Refer to http://intelligentinvestor8.blogspot.com/2014/05/magic-formula-joel-greenblatt.html)
And, if you decide to buy NESTLE at 63.50. Do ask yourself what will you do if the price hit 60, 55, or 50?
I hope above answer can help you. And, do share with us your homework and we can learn together.
2014-06-21 09:56
Hi NOBY,
One more thing, look at the part of the video when they discuss about the cut loss.
I tend to support Emily for not cutting loss in view of his stock pick criteria. And, if I were her I will buy more (if I have the capital) when price come down instead of cut loss.
If I choose a relatively young and small companies, then I might need to cut loss if price drop drastically.
Let's take NESTLE as example. If i buy at 63.50 now, I definitely have to buy more when price come to 50 or 40.
Please let me know what's your view.
2014-06-21 09:59
re Evaluate! Is it worth ? when price drops ...also when price increses! Is it still Cheap or Has ir become Expensive. based on -political situation, stock market Trend,Platform of Performance.
if Stage sinks lower, actors aaaaaaaaALL come Down.Cannot dance! can only shake with fear.Change in earnings.. where is cash river flowing from?Policy OF Managenment or MIss management.
It is a composite picture: Have to RE-EVALUATE. people who do homework SURE escape Punishment, or can can hide and try to Escape too Much punishment by selling off or adding some quicklines( of Cash.) .Averaging is two sided sword.Can cut both ways....SO RE_Evaluate n Smile n b happy.
2014-06-21 11:27
Hi funitec,
I would suggest your share us your study \ homework. And then we can understand more.
I believe we can judge a company based on its pass records. Owing to this, I calculated the intrinsic value base on its financial result and buy it when there is a great margin of safety.
And, I have no idea how to spot the trend. And I think it is very difficult to perform a right estimation or forecast.
I believe in Warren Buffett and Howard Marks's statements.
"In the business world, the rearview mirror is always clearer than the windshield." - Warren Buffett
"In both economic forecasting and investment management, it's worth noting that there's usually someone who gets it exactly right... but it's rarely the same person twice." - Howard Marks
2014-06-21 13:49
I invest on potential ( substantiated with contracts announced) , rather than merely referring to historical data. History is past n dead. Future is alive and real!
2014-06-21 14:17
Yes I agree that if during a downturn, my strategy would be to pick up high div yield, defensive beaten down blue chips first since these would be the most resilient and the first to recover. Part of the reason for blue chips being unlikely to crash like small caps would be the institutional support (foreign or local) that would support share price. Normally small caps will only move with retail participation which typically will be poor during a bear market.
The problem is no one really knows when we are going into bear market until we are in one. Haha... so my strategy is to always maintain an acceptable amount of cash and to diversify well.
2014-06-21 15:22
Hi Cweed,
Yes. History is past. But it is not dead.
"In the business world, the rearview mirror is always clearer than the windshield." - Warren Buffet
I believe you can make more money if you able to hit the right stocks with great potential. And, you might have a higher CAGR target than me. But, there is a risk come along with it. It need a great discipline to cut loss if the trend is against you.
2014-06-21 17:18
please name down some mid caps companies, that is having above mention criterias???? i mean exact one defficult to find,,but some nearer ones?? future more FA news coming for this stocks
2014-07-02 07:46
which of the stocks you think always is having some FA breaking news??? so far i can think of SAPURA KENCHANA, and CMSB???? how about other mid or small caps ones, any oppinion from your side??? with the most FA news???
2014-07-02 07:48
Great info for reading . I agreed with kcchongnz. However no one is wrong as i believed everyone have their own risk preferences . :) Some aim to buy Lamborghini and some just aim for BMW and some might just aim to have stable and happy life . It is how you defined your own life satisfaction . Cheers.
2014-07-02 16:51
Latest Good News from Star Business Online
FOREIGN FUND TURNED NET BUYERS OF MALAYSIA EQUITIES ON TUESDAY.
Just sit back and relax. KLSE will be Powering Upward!
Stay Firmly Invested.
2015-01-28 12:29
Only after 3 full bear cycles or a minimum of 15 years, will we really know how good a investor she really is.
2015-01-28 14:33
Buying Good Companies when the price is cheap.....
Below companies might be a good candidates..
- Good Companies - ROE >= 15, Net Profit Margin >= 15
- Cheap? P/E <=8, P/NAPS <= 1.5, DY >= 3%
http://www.klse.my/stock/screener.jsp?Type=S&T4QROE-1=15&T4QNPM-1=15&T4QPEPS-2=8&T4QPNAPS-2=1.5&LFYDY-1=3
2015-01-28 15:48
this style can only take out and implement it when there is a crisis like 2008 or 1987 or 1997..
2015-01-28 18:07
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This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....
NOBY
Dont agree with this one
3. Avoid company with small cap; look for big cap with long listing history.
I would say small cap or big cap shouldn't matter but must look at historical consistency of earnings and management ways.
2014-06-20 17:54