kcchongnz blog
Does the “Golden Rule” Investing works kcchongnz?
“If something is easy to compute and understand, it is extremely unlikely that the market will misinterpret it. Therefore, such information will not, by itself, provide evidence of mispricing.”
Most readers here know there is this “Golden Rule” in investing; if the company announces increased profit this quarter compared to the corresponding quarter, or preceding quarter, the share price will go up and vice versa, or something like that. This is the only way to invest to be a super investor, so they said.
I am already deeply confused with the use of this “Golden Rule” after seeing its application to this stock called Gadang recently. Very confused indeed, as I thought this “Golden Rule” is a simple one.
On the surface, this investment strategy appears to be plausible. But is this obsession merited? Do earnings announcements have significant effects on value? What were the evidences? More importantly, can you make money off earnings announcements?
When you hear about 1, 2, or 3, or 10 friends who have gone up to Genting highland and made money playing the One-Armed-Bandit. Can you make the conclusion that “people who go up to Genting Highlands and play the One-Armed-Bandit will make money”? of course you can’t as you have not shown “statistically significant results” using a population of people going up there and more than, say 70%, of them have consistently making money doing it. More importantly, there is no plausible reason to say that.
So, how can you say, a certain rule of investing, say the “Golden Rule”, is a sure win strategy in investing in the stock market? Have you got the statistics that 800 out of 1000 times investor using this “Golden Rule” have been successful in investing using that strategy?
I will here use my own personal experience to show if I could make extra-ordinary gain by using this strategy. Please note that this is also a simplistic example using just my personal experience as a simple “null hypothesis”, and it is by no means a vigorous proof.
By the way, this strategy is still basing on the historical accounting profit as suggested by the proponents of this “Golden rule”, a past record too.
Return of Watch List of Magic Formula (MF) Stocks from 30th October 2016
A month and a half ago, on 2nd November 2016, I have sent out to my course participants a watch list of carefully selected 15 MF stocks at the closing prices on 2nd November 2016 as shown in Table 1 in the Appendix for their consideration for investment for long term, clearly showing the three metrics of return on capital, earnings yield augmented with an additional metric of cash yield. These metrics were based on the latest trailing twelve months’ income statements, the latest balance sheet and an average of cash flows over a few years, and the latest share prices at that time i.e. on 30th October 2016.
Anybody interested in what Magic Formula investing is can refer to this link below,
http://klse.i3investor.com/blogs/kcchongnz/55070.jsp
A month and a half has past and Table 2 in the Appendix shows the performance of the portfolio since then until as at 15th December 2016.
The portfolio return 3.01% during the last one and a half month, including all dividends paid or ex-dated during the period. This total return out-performing the return of the broad market of negative 1.02% by 4.04%. Nine out of 15, or 60% of the stocks have positive return. This value investing of the MF has done well again, supposed to be in the long -term, but also in this short-term of one and a half month too.
The best performer was RGB at +18.6% at its closing price of RM0.255. Next comes Hevea, with a total return of 11.9%. Thong Guan Industries did well too with a total return of 10.4%. Perstima also did well with +8.9%, all in the one and a half month’s period.
RGB reported an excellent set of quarterly result last month with revenue and net profit increased by 18.7% and 62.1% respectively. The share price performance of this stock seems to meet the “Golden Rule” very well indeed.
Hevea reported 5% drop of profit for the third quarter result ended 30 September 2016 on 22nd November 2016. Its share price did drop the next day by a few percent, but quickly recovered at the end of the day. Hevea’s share price had dropped to RM1.05 after reported earlier poorer 2nd quarter result in end of August 2016 as shown in this link here,
http://klse.i3investor.com/blogs/kcchongnz/104613.jsp
Hevea’s share price closed at RM1.52 on 15th December 2016. Followers of the “Golden Rule” would have lost the opportunity of making 45% in 3 months.
Thong Guan reported an excellent set of quarterly results too on 24th November 2016 with net profit increased by 37% compared to the corresponding period last year. Its share price, however, did not move much for two weeks until recently and closed at RM4.44 on 15th December 2016. It has since gained 10.4% from one and a half months ago. I have written something about thong Guan Industry in this link below,
http://klse.i3investor.com/blogs/kcchongnz/104956.jsp
The worst performer was ESCICT with a negative return of 4.6%, although it reported a better set of results compared to the corresponding period last year, with net profit increased by 29%. Next comes Willowglen and Kumpulan Fima with -3.9%, although they both also reported a better quarterly result compared to the corresponding period last year.
This shows a very mixed bag of results on stock return on reported earnings. The “Golden Rule” that stock price will go up if reported better result and vice versa is a myth, at least from my own experience.
In actual fact, as Bursa is made up of more than 70% of institutional investors, it is somewhat, but not completely, efficient in some way, that the prevailing stock prices have incorporated some kind of expectations of the results, before they are announced. Unless the quarterly report is better than the expectation, the share price may not go up, or even go down, if the reported good results, say +20% in net profit, are not better than the expectation of +40%; or share price may even go up if the poor results of decline profit of 30% are better than the expectation of decline of 50%.
In my opinion, if you are very good in estimating the future earnings of a company, and can do it right consistently, you will make a lot of money in investing. Absolutely no doubt about it.
How good are you in guessing this expectation? Unless one is an insider, or has insider information, which is illegal to use it to trade, there is no way an average retail investor has that advantage. I must admit that some of the investors do have that prowess in estimating the expectation, but there are far and few in between. For those few who are good in estimating future profit, most likely they already have the good knowledge in financial statement analysis and some valuation techniques, rather than those with vague “business sense”, or the fuzzy “pivotal moment concept (!@#$%&* is it?), or the what the hell “dynamic investing”, and nothing else. Otherwise, how can one estimate future expectation well?
Think about it, how can one have any business sense when putting out money to do business, doesn’t have the common sense that it must earn a higher return than the costs of capital? they don’t even know what ROE or ROIC are! How can one have good business sense when the business makes profit, only in accounting term, but keeps on putting out hands for more money from the owners, instead of allowing them to withdraw cash from the business?
In fact, the estimation of expectation is made more complicated with companies becoming more attuned to playing the earnings game, and have become increasingly adept at beating earnings or earnings expectations, or analysts work to mold the actual earnings, using both accounting choices (earnings management) and operating discretion (timing of capital and R&D expenses, for instance) to deliver results that try to beat or smoothen earnings or beat expectations. The problem with this game is that markets will eventually catch on with it and adjust expectations accordingly.
I am sharing with you my personal experience in investing with published records (always) in i3investor showing that the so-called “Golden Rule” doesn’t (accidently) work for me. I would like to hear from you too, of course with published records such as that in i3investor, that your “Golden rule” works for you.
Please bear in mind that we are talking about investing, not the vague “Dynamic investing”, the fuzzy !@#$&* “Pivotal moment concept”, etc.
“An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” Benjamin Graham
In my opinion, it is better to follow a well-established and proven investing strategies backed by academic research, well documented success, and plausible reasoning to build long-term wealth.
KC Chong (ckc13invest@gmail.com)
Appendix
Table1: Return of MF stocks from November 15 2016
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Discussions
12 people like this. Showing 50 of 156 comments
No offence to anybody, but if an investor during general meeting teach the management to spread out their payment so on to smoothed their quarterly profits this shows you that this person is very cunning. Last time i like to read that investor article, but after the recent Gadang bloodshed just make me think twice and don bother to click on the investor link anymore for his so called article and make money strategies.
Lastly, if some prominent investor promote aggressively a counter, and if u happen to hold it. Be prepare to sell
2016-12-19 17:14
Posted by mamatede > Dec 19, 2016 05:14 PM | Report Abuse
No offence to anybody, but if an investor during general meeting teach the management to spread out their payment so on to smoothed their quarterly profits this shows you that this person is very cunning. Last time i like to read that investor article, but after the recent Gadang bloodshed just make me think twice and don bother to click on the investor link anymore for his so called article and make money strategies.
This is called "pivoting moment concept", "dynamic investing" etc!
2016-12-19 17:52
Posted by mike90 > Dec 18, 2016 06:16 PM | Report Abuse
KC so daring hentam KYY again.
C what KYY firing back later.
You were right on the spot. There was salvo again in someone's latest article on Fund manager, and my name was mentioned again.
But mike, please read my above article a few more times and tell me did I "hentam" anybody in the article, or rather sharing a certain investing method that did not work for me, with all the data and records?
Is it an article of discussing a topic, or an article talk about personality?
Does an investing topic belongs to somebody?
2016-12-19 18:00
Kc,better just surrender to him.
He is the real big boss in Malaysia with strong influence.
He surely wont surrender.
2016-12-19 18:13
KC,you are dealing wth an old man wth an ego as big as the extinct dinosaur..hahaha.
Just ignore him n move on.
2016-12-19 18:45
KCChong sifu, veli thick skin hor? this "man"... I seldom tok ppl, but I really kenot tahan this "man".
2016-12-19 18:50
Mr Koon Yew Yin often quotes his "Golden Rule" = ...my share selection golden rule which is that the company must be able to make more money in this financial year than in the last financial year.....sounds so easy and simple that all we need to do is to programme it into a computor and let the computor to decide BUY or SELL. Is there any need for further research, forecasting...etc?
2016-12-19 19:42
Posted by rogers123 > Dec 19, 2016 01:25 AM | Report Abuse
kcchongnz: Try to use earning surprise...... Comparison of earning from year to year is too simple
To use "earnings surprise" you must have earnings projection in the future. A number of people ridiculed me for not being to do so, which is right, I can't predict the future. I doubt many people can do that too.
In overseas like US, there are many analysts following a particular stocks. It is their duty to make earnings estimates, as they have all the information of the future, and investors generally follow these earnings estimates from analysts. But not in Malaysia, especially for those smaller stocks, like all those stocks in my article.
But let me tell you one thing. 80% of them cannot predict the earnings any where near to the actual. In fact, quite a substantial number of them even got the direction of earnings wrong!
Don't get me wrong. Some of them can do a good job, but there are very very few, and far and between, especially for people who don't even know how to read financial statements, nor interested in reading annual reports, industry reports etc.
2016-12-19 19:45
What golden rule?Old man has crystal ball to tell future?
All he does is at best an estimate using currently available info.
How i wish stock selection is as simple as the old man think?
Some more want show off Fred Tham praise him, but all that Fred is doing is PLP him.
2016-12-19 19:52
If one is really good in stocks,i dun mind you making some noises.
But if all you know is so limited pls talk less,the more you talk the more the world know wat a tin kosong you are.
2016-12-19 19:55
20 formulas and 20 accounting ratios your secret to success, a margin of safety or an intrinsic value? or a palliative, just an illusion ?
just medicine sales men....KYY got a nephew with CFA title lose money fast fast soon after getting the titles.
Golden rules with business sense good enough to select good stocks with profit potential. Rudimentary TA and rudimentary TA enough .
The simpler the easier to understand the core problem.
Its business , then people then numbers.
Of course in assessing a business, you do need some basic numbers....but it is a qualitative issue......not a margin of safety issue, not a sleeping pill to get you to sleep.
Just because advanced CFA FA and TA is heavily promoted, does not mean you need to be a CFA to make it in the stock market.
2016-12-19 20:09
How dare people do not even what to talk about the attribute of a successful trader/ investor....and put the whole problem into maths formulas.
Its GIGO.....garbage in, garbage out....all the numbers of 20 formulas and 20 ratios all come from the same source.
2016-12-19 20:12
Another PLP trying to tell me how to trade stocks hahaha.
If you hv ever in your life achieved 500% return in a month like me,then talk more...else just shut up.
In bursa,i ate salt more than you eat rice.
2016-12-19 20:15
this stockmanmy is really an eye opener for me. I have never seen somebody as PLP as him. Like the Chinese said, one kind of rice feeds hundred types of people. Hoo hoo
2016-12-19 20:17
if all the numbers in I3 research and in the announcements and Annual Reports , not enough to form a conclusion....advanced FA knowledge is not going to help you.....it is just a palliative.
2016-12-19 20:18
good.
i still the the so called golden rule is crap....wat you need in bursa is different rules at different times...try apply the golden rule in a steep correection for instance.
2016-12-19 20:19
In his dictionary, the word shame doesn't exist
I am sure if he lives in the era of Japanese occupation, he will be one of those traitors that betrays his friends and relatives in exchange for goodies
2016-12-19 20:19
yes...Icon
I have strong opinion of what I write.
can or cannot?
people think I look for job with KYY...that is their problem, not mine.
2016-12-19 20:20
that is all the opinion?
no opinion of what I write?
what has happened to icon power in Comcorp?
2016-12-19 20:21
To rephrase the so called "Golden Rule"
"One must have different golden rules at different cycles of the market."
Hope you get it.
Gudnite.
2016-12-19 20:26
that is all?.....all you can say is shameless and Japanese?
My opinion is clear.....just because one does not have CFA title or CFA knowledge does not mean one cannot be a billionaire out of the stock market......
First, it starts from self awareness........
read this.......
http://klse.i3investor.com/servlets/forum/600111929.jsp
2016-12-19 20:34
A successful trader has a good intuition about timing, about pivotal moments ...it can be developed with experience.
Mangojuice > Dec 19, 2016 08:30 PM | Report Abuse
Mr Koon 'Golden Rule', made a sell call on 27th November! Called those who didn't cut loss as stupid! Even stab and mock Mr Ooi openly! Then quietly bought on 7th December! 10 days later boast and brag, how smart he is! Wow, I never come across such a display of shamelessness!
2016-12-19 20:37
“If something is easy to compute and understand, it is extremely unlikely that the market will misinterpret it. Therefore, such information will not, by itself, provide evidence of mispricing.”
market = how many people? I want discount or sales or good quality, taste and fashion and circumstantial needs and others, all these are mispricings, we love mispricings. I love it. I am not forcing you accept mispricings for you. I want to sell my bicycle you must buy for RM500 or I don't sell that is not my mispricings!
Tommorrow, I change my mind when I am broke and I want to sell for RM20 with the same bicycle, that is not my mispricing either.
Even when I advertised the price cut, that is not because I am senile, and that everything I do is a right perception of mispricings!
It is human skills that count. sax also don't need mathematics so much. Vomit Blood by me or you also can not convince you not to convince me and convince myself not to convince you. I hope you give up because I have given up on you for a long time ago so that I do not have to give up myself just for your sake of FAA or FAAC or ABC sake.
2016-12-19 20:50
“If something is easy to compute and understand, it is extremely unlikely that the market will misinterpret it. Therefore, such information will not, by itself, provide evidence of mispricing.”
If some thing needs a CFA certificate to understand, it is just a palliative salesmen sells to you.
2016-12-19 20:55
Aiyo kc ar kc... instead spending time on these clarification u better write a good stock study ma... everyone knows education is utmost priority.. wanna use "senses" how to survive wor
2016-12-19 21:03
there is no mispricing , never ever.
the price is the price on the screen.
you buy because you think it will go up for XXX reasons within the time span XXX you specified.
now...that would be a better approach to things. All the safety of margin and intrinsic values derived from your formulas are an illusion
2016-12-19 21:03
you have to survive on your business senses.
bracoli > Dec 19, 2016 09:03 PM | Report Abuse
Aiyo kc ar kc... instead spending time on these clarification u better write a good stock study ma... everyone knows education is utmost priority.. wanna use "senses" how to survive wor
2016-12-19 21:04
aiyo... stick to the EPS lah... get the EPS right and you can Huat... all these arguments make my head spin....
2016-12-19 21:06
icon
some times no need get EPS right also can huat huat like in Hibiscus.
Its called awareness.
2016-12-19 21:49
Posted by stockmanmy > Dec 19, 2016 09:49 PM | Report Abuse
icon
some times no need get EPS right also can huat huat like in Hibiscus.
Its called awareness.
GET EPS RIGHT & CHUN CHUN?
Calvin got one here:
DRB HICOM
Cash of 13 cts already in the bag. From Rm280 million Price Gain of POS share price. Anything other profits will be added bonus: from sale of 8x8 defense tank, Proton Ertiga MPV and huge profits from Corwin sale. Apart from ECommerce DRB has puspakom as a monopoly. Bank Maumalat a rising Islamic Bank & other assets with total NTA of Rm3.16
And DRB has transformed itself into an ECommerce Setup through its 53.5% Subsidiary POS Office.
Assuming the lowest earnings of 13 cts from POS alone
These are the prices for DRB
At 13cts
P/E 10 = Rm1.30
P/E 15 = Rm1.95
P/E 20 = Rm2.60
Anything below Rm1.30 is an outright buy.
Regards,
Calvin
2016-12-19 21:56
lol so many kind of people in a short span of comments. The best of the best PLP Japanese agent, Eagle with bulldog bite on DRB never give up, sosstupid still stupid and a wise old man laughing.
2016-12-19 22:05
To be a good investor, one must always see the company as a living organism. All criteria are bits and pieces to understand the company as a whole, some information are relevant but not important, some are way too important.
(For instance, to decide the gender of a person, does long hair means its a she? Normally it is, but not necessarily. This is what we call relevant but not important. )
Say to diagnose the health of a person, some look at the appearance (height, big eyes, etc ==> what everybody else is looking at==TA), some look at symptom of sickness (skin conditions etc), some look at measurement (blood pressure, cholesterol, blood sugar etc==FA). Of course some are more accurate and more important measurement then others. At times one factor is more important than the others.
Accounting is the language of the business. It is supposed to be articulated (everything must add-up).
By the way, you know what makes a stock moves up? HOPE!
What makes a stock drop? DISAPPOINTMENT!
2016-12-19 23:03
Hope? yes. hope spring eternal in all humans. That is why u can see forumers shouting $9, $10 for no obvious reasons.
More simple - a kid with a pencil and a ruler can make millions.
2016-12-20 09:52
As a general observation, only a few investors can do FA to the detail that KCChong has shared. For the majority, they may lack the resources, the computers and the mathematical skills to implement this approach. Nevertheless, most of them should be able, with some patience and diligence, extract and use the ideas shared by KCChong. Of course, investing looks simple but it ain't easy. First rule: Never to lose your capital.
2016-12-20 13:23
FAO...calvintaneng...re your DRB-Hicom recommendation, I prefer to buy Stock Code 7004 - MCE, also recommended by you. It is a turn-round stock, n KYY Formula doesnt apply. I prefer to be "the early worm". Cheers!
2016-12-20 17:01
Does Golden Rule investing work?
The point is....Do CFAs and Finance Professors have a better go at it than the gifted individual with Golden Rule?
We have a KYY and a St Paul who says otherwise.
2016-12-20 18:13
you want a share that when it starts moving up, people will chase it higher for you to make money.
the Golden Rule is a good and safe way to do just that....
too complicated margin of safety and too complicated convulated valuations no point.
2016-12-20 18:23
条条大路通罗马
no any method suit everyone.
find our own way to beat the market and happy investing.
2016-12-20 23:04
Even the best investor in the world unable to predict accurately which is the next hot stocks going to go up in the short term,i think Mr. Kc just wanna remind this point dont try to time the market, and how important is fundamental analysis , and not solely rely on perspective on how a business sound, though is part of the analysis ... Lack one of it and u are finding trouble... And is important to clarify that fa is a big tool box, for different company u need different approach (tool), Mr. Kc able to give u a variety of tools and guide u how to use it in which situation ... With step by step formula and explaining in detail, if u want to have a long lasting way in investing, knowing the rules is the 1st step
2016-12-21 01:35
Kai Kai
It's a fact generally billionaires became billionaires not like that.
2016-12-21 01:44
And is important to note that most of the super investor in the world using fa and asset allocation not to time the market but to grow it through time, so i assume fa and asset allocation is a sound method... Since it being used for a long time without fail... My point of view mr. Kc investing style is passive type, they will grow through times, but not immediately but is virtually guaranteed, Mr. Kyy is more aggressive cause it apply leverage and the timing is everything....
2016-12-21 01:51
From my experience, FA is the most important for stock investment, other than that is complimentary, good discussion KC, I just started admire your writing style and your investment style. I have to admit that I also learn something from KYY guy. Keep it up.
2016-12-21 05:23
FA like rice.
you need enough to survive
but eat too much rice, you fat, lazy and dumb.
2016-12-22 16:22
TA like vitamins
a little bit is essential food
too much in body, it becomes poison.
2016-12-22 16:25
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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....
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@masterful...VIS 0120, macam tak laku...jumlah saham cuma 110.70million sahaja...volume transaksi macam tak bergerak...dividen not sustainable(maksudnya tak ada duit untuk bayar dividen)...terakhir bayar dividen 16 may,2011...lepas itu, tak ada dividen lagi...risiko tanggung sendiri.....haha.....
2016-12-19 15:18