kcchongnz blog
Basing on audited account to pick stocks is unreliable? kcchongnz
I read with great interest an article in i3investor titled,
“Just Basing on Audited Accounts to Pick Stocks is Unreliable – Suzn” in the link below,
http://klse.i3investor.com/blogs/suzinaidu/121946.jsp
Really? What research does he base on, or just a sweeping statement?
“What Has Worked in Investing” published by a famous US investment company Tweedy Browne has gone through vigorous research and provided you with the methods which have worked in the past and are still working very well today. Those methods were generally based on accounting metrics such as price-to-earnings ratio, price-to-book, price-to-cash flows, dividend yields and all those metrics used by value investors, the school of thought of Benjamin Graham.
Yes, those earnings, book value, cash flows, dividend etc. are all from audited accounts. Of course, they are not plucked from the sky, and they are not gotten through the crystal balls of the snake-oil salesmen.
In a paper titled “The Super Investors of Graham and Doddsville”, Warren Buffet showed the track records of each of nine disciples of Benjamin Graham showing that they all generated annual compounded returns of between 18% and 29% over track records lasting between 14 to 30 years.
Let’s have a look at their profit history in Table 1 below.
Table 1: Return of value investors
|
Investor |
No. of Yrs |
Annualised Return |
S&P / Dow Return |
|
Buffett Partnership |
13 |
29.5% |
7.4 % (Dow) |
|
Walter Schloss |
28 |
21.3% |
8.4% |
|
Tweedy Browne |
16 |
20% |
7% |
|
Bill Ruane |
14 |
18.2% |
10% |
|
Charlie Munger |
14 |
19.8% |
5.0% (Dow) |
|
Pacific Partners |
18 |
32.9% |
7.8% |
|
Perlmeter Investments |
18 |
23% |
7.0 % (Dow) |
These super investors achieved fantastic returns basing purely on the audited accounts. So how can you say, “Just Basing on Audited Accounts to Pick Stocks is Unreliable”? Which research you are basing on?
Take for example, Walter Schloss who practised deep value asset based investing using the balance sheet, $10000 invested 28 years ago in his time yielded $2.23m at a compounded annual rate, CAR, of 21.3%. This is 23 times more than if one were to invest in the broad S&P500, returning a CAR of 8.4%.
Joel Greenblatt of the Magic formula fame, used two accounting ratios; Return on invested capital and earnings yield, and carried out quantitative investing. He outperformed S&P 17 out of the 22 years and achieved a compounded annual growth of 23.8% as compared to the 9.6% of S&P. $10000 invested 22 years ago in 1988 has grown to 1.09m by the end of 2009, even after the US sublime crisis in 2008-2009. This is by no means a small feat compared to the same amount invested in the broad market which only grew to $75100 during the same period.
In his latest book, “The value Investors, Lessons from the World’s Top Fund Managers” published in 2012, Ronald W. Chan interviewed twelve top fund managers from US, Europe, and Asia using various forms of value investing expounded by the Super Investors of Graham and Doddsville, such as PE ratio, P/B, P/CF, DY etc. The evidences showed it has worked all over the world.
Many other super investors used audited account and made judgment in their investing and obtained extra-ordinary return over a long period of time. Those methods are logical and intuitive, and I don’t see why they are unreliable and should not work.
So how can you say, “Just Basing on Audited Accounts to Pick Stocks is Unreliable”? Which research you are basing on?
The said article went on to say that,
“I noticed that many novice investors openly tell other investor to sell off counters that had company reported losses from last year. As an investor, before giving out any 2 cents opinion or advise to others, we must first examine our own track record to see why we are not making money in the first place.”
The above statement sounds more like some kind of “Golden Rule” of investing. I don’t know who was the one who has been propagating and advising other people.
The author further said,
“Secondly, to be a successful investor, we must at least have some practical sense on how a business works. We must first look at the future development of the company and their profit growth prospects.”
Jaks and Sendai were used “As a references of counters that has churned profit without mirroring its previous QR results;”
Not sure how the author already knew Jaks and Sendai have “churned profit”.
However, the author mentioned the huge investment outlay Jaks and its China partner have to come up, but did not quantify the “tremendous profit growth” it will achieve, and how much is the present value of this project, what is the internal rate of return of this project attributed to Jaks, disregarding its huge losses in its property development and local construction works.
More importantly, nothing is mentioned about the risk of this power plant project. The risks could be currency risk, inflation risk, partnership risk, bureaucracy risk, execution risks, political risk, social and environment risk, foreign country risk etc. You name it.
Haven’t we seen that in Mudajaya’s foray into power plant development in India? By the way, how many Malaysia construction companies had made profits in overseas construction job?
For Sendai, the author described the track records of Sendai in constructing big projects overseas. But did they make money?
The author relies on the MD of Sendai on the amount of projects the company has secured. I did hear many good stories from the CEO or MD of some construction companies before but the actual outcome turned sour, such as one company starts with K. There is another construction company starts with V, which has secured billions of jobs and also with a Chines partner. Its MD went around telling all the investment banks how undervalued was its stock, but still the share price cannot go up. The pertinent question should be, are they going to make money from the huge number of projects they have? I personally have no idea.
I have read articles before mentioning that construction is not an easy business with so many problems. The industry is a dog-eat-dog world. If a company get projects from competitive tenders, likely they are not going to make money. That was what I have read from the industry expert. I, being a civil engineer for many years working in the construction industry, do agree with this.
So, is Sendai guaranteed making big money from its huge order book or not? What was its track record?
The author also mentioned this at the end of his article,
“There are some Sifu who will never recommend his followers to buy JAKS and Eversendai because he relies too much on audited accounts and does not look at the company’s business and growth prospect. That is why they misses the opportunity to buy stocks which have been shooting up like rockets.”
Sounds very familiar. I personally do not invest in stocks which have not shown good track records, but I in no position to advise others to invest, or not to invest. In construction, capability and track records are paramount important as we already knew the difficulties in constructions. Well, if others want to invest in them, that is their prerogative.
One thing for sure, for an illiquid stock, it doesn’t need many million to jack up its price from continuous buying. It will continue to go up in price if there are enough fools to follow. It will be self-fulfilling. The problem is, you won’t know when the music stops. The clock in the room has no hands.
By the way, there are hundreds of stocks in Bursa. You aren’t a “low class” investor if you don’t buy Jaks, or Sendai. There are plenty of opportunities in Bursa, stocks with high potential to go up, and come with little risk.
Finally, I do not think one must show he has a lot of money, or must be substantial shareholder of companies, to be able to express his opinion here.
Oh yeah, I personal have been obtaining satisfactory return over the long term with my study of audited account, and have avoided a lot of pitfalls in investing, as shown in my various articles, records in i3investor.
if one wishes to pursue my way of investing, you may contact me at
ckc13invest@gmail.com
It is my passion to propagate value investing.
KC
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Discussions
13 people like this. Showing 43 of 43 comments
There's even a purported trading champion who says he dislikes holding a company through the release of financial report. He even sells subscriptions. For ppl like him who disregard financial analysis, I hope some day they meet the ultimate pump and dump master John Soh. Then only they will learn their lesson.
2017-05-03 06:19
good write up KC...this KYY is really trying to mislead the readers by following his own delusion.. BUt i cant blame him as he already have Alzheimer dz and wont live long also. Just forgive him for his dz pls.
2017-05-03 06:32
Same as KC, I have reservation about Sendai
Bought at 60 Sen, but after study carefully it's track record, noticed it was very bad at generating profit in the past. Gave me an impression that it's capability of securing huge amount of contracts is actually the other side of the same coin - you bid so competitively until you can't make money out of the projects.
So I sold off at 60 Sen (broke even)
Fair enough , it has gone up to 90 Sen+, but for me, I am guided by KYY's own golden rule that if I not convince that it can make more money in future (bearing in mind market cap not small), I don't buy
Maybe KYY has insider info ? Maybe he spoke to the MD ? I don't know.
I have no regret. Sometime if certain money is not for you to make , it is not for you to make
Sticking to KYY Golden Rule caused me to miss out on sendai but on the other hand, it will also help me to make lots of money in other cases and also avoid huge losses (lemons)
You can't have your cake and eat it too. Welcome to the real world !!!
2017-05-03 06:44
Icon, don't catch you. You said kyy golden rule. Tell me why then kyy never sell xingquan. His golden rule is a rule of what he himself alsodid not follow.
2017-05-03 07:02
I follow a principle, not a personality
That person can screw up, but the principle can be valid and lasting
2017-05-03 07:11
kc
the most profitable trades / investments come from taking a risk, and proven right later....turnarounds are one of them.....
since whatever is in audited accounts is all public knowledge and historical records, ...and share price is about the future.....and the internet revolution speeds up the spread of information...the world of Benjamin what ever and the Wall Lone Buffalo is so 20 century....when people never learn how to take risk, they are better off buying Index Funds.
2017-05-03 09:48
know your bet.....know what you are betting on...have an opinion on what is a favorable outcome.
the stock market exists to encourage people to assume risk and be rewarded for taking risks and later proven right....that is how the economy functions at its best.
must read whole Annual Report , and the news not just audited accounts, have an informed opinion ...and place your bets.
stockmanthekoonman > May 3, 2017 10:12 AM | Report Abuse
So what differentiates you from a gambler?
2017-05-03 10:16
proven wrong, lose money....that is proper and correct.
stockmanthekoonman > May 3, 2017 10:13 AM | Report Abuse
What if proven wrong?
2017-05-03 10:17
In the case of Nylex, no matter how deep is the discounts to NTA and audited accounts, ....
if chemicals recovery is the bet ( the unique selling proposition) and don't know how good it is...then no bet can be made............
Sendai offers recovery story and deep discounts to NTA, Nylex offers what?
2017-05-03 10:33
Assuming calculated risks is one thing.
Assuming risks fueled by perceptions and emotions, is a completely different thing. To the contrary it can be very much harmful.
to quote the old man, minus the emotions and irrationality the market will be fairly priced. Knowing when the market is unfairly valuing a stock is the way to go. Not by trying to predict the future.
Unless you have insider info.
2017-05-03 10:39
A track record.
Sendai offers recovery story and deep discounts to NTA, Nylex offers what?
2017-05-03 10:40
On the chemicals play as i'm not an expert in it.
But there is a trend there which you cannot deny.
2017-05-03 10:43
Kyy certainly had his days. But he's getting reckless.
Double or nothing.
2017-05-03 10:52
Bull market, bear market
In a prolonged bear market, the value investors with their accounting ratios, and formulas and bankruptcy tests are born. The tool...the audited accounts.
In a bull market as currently, it is growth and catalysts
Those not flexible are left in the dust, biting the dust....Investors / traders should be flexible while holding steady. Must adapt without being nervous.
Turnarounds ( Sendai) and new businesses ( Jaks) are good choices in current market environment.
2017-05-03 12:26
Holly Grail of investment in long run, value investment always wins just look at Nestle, Dlady, Pbank, Maybank, Genting always show increasing return even....during deep recession...it always bounces back with great strength loh....!!
So value investor....must always pick stock with big margin of safety and with good sustainable prospect & not manipulated & promoted speculative goreng stock like Jaks & eversendai loh.....!!
Don get con loh.....!!
2017-05-03 12:34
The Wall Lone Buffalo is not what he seems
He has been a sailang man all his life, with a good business sense.......borrowing money from friends and relatives to sailang all into a bankrupt textile company. That is how he got his first break in life. ...and he is no accountant.
A lot of people now tries to make a living out of the Wall Lone Buffalo name...but what can be taught become popular memes, it is what cannot be taught become priceless.
ps.....not to worry., I will guide you all along and it is all FOC.
2017-05-03 12:40
too bad
smooth writing makes no money
taking the right risk makes the money.
y Wealth_seeker > May 3, 2017 02:02 PM | Report Abuse
well written, kc, as usual.
2017-05-03 14:11
don't talk nonsense...good shares don't come cheap...and certainly no huge discounts to NTA
good stuffs not cheap
cheap stuffs not good.
y stockraider > May 3, 2017 12:34 PM | Report Abuse
Holly Grail of investment in long run, value investment always wins just look at Nestle, Dlady, Pbank, Maybank, Genting always show increasing return even....during deep recession...it always bounces back with great strength loh....!!
So value investor....must always pick stock with big margin of safety and with good sustainable prospect & not manipulated & promoted speculative goreng stock like Jaks & eversendai loh.....!!
Don get con loh.....!!
2017-05-03 14:50
steady , calm and willing to back up his opinion with his own money...no wonder KYY is the maverick.
this raider, nervous, value investor, always scared, needs his margin of safety fails in the game.........
you have to ask why?
2017-05-03 15:06
Posted by stockmanmy > May 3, 2017 09:48 AM | Report Abuse
kc
the most profitable trades / investments come from taking a risk, and proven right later....turnarounds are one of them.....
You are really an eccentric fellow. You talk so much about “sailing”, taking risk etc. but without knowing what “risk” is.
That for example, you talked about investing in Jaks nowadays so much as if it is the investment of the century. Have you quantified what the return will be? have you measured what the risks are?
What is its return versus its risks? Or what is the return per unit risk?
Are you happy if you “sailing” for an investment with the potential return of say 12%, but the risk of losing all is 80%, or a return per unit risk of 0.15?
When you “sailing” an investment now, with the risk of losing all, you only hope that it will be proven right and become “the most profitable trade” without knowing what your return is likely to be, rather than doing a probabilistic study?
Some more make a statement as below?
Posted by stockmanmy > May 3, 2017 12:40 PM | Report Abuse
A lot of people now tries to make a living out of the Wall Lone Buffalo name...but what can be taught become popular memes, it is what cannot be taught become priceless.
ps.....not to worry., I will guide you all along and it is all FOC.
I really don't know what to say about you.
2017-05-04 00:08
kc
people sailang $ 200 million in it....That is what sifu means.
People got guts...they drive Rolls Royce, they earned it.
2017-05-04 00:20
when the nobody got guts he/she loses all their money cos if a nobody buy a lot,the insider people will push it down. bursa is not an open market,mustn't sai lang.unless u r a politician or some big shot only can sai lang.wanna invest big must invest elsewhere not bursa
2017-05-04 00:25
sorchai manny only look at one outcome of all possible outcomes. Ask us to focus on that outcome. Go all out for the outcome, not knowing luck will run out one day. Newbie like me can also see the stupidity of this manny thought. Manny pls go back fly kite. You very lonely? No grandchildren to absorb your teaching?
2017-05-04 00:29
People got $ 200 million in the game , sailang....I think that is the real meaning of sifu
He drives Rolls Royce, he earned it.
cheoky > May 4, 2017 12:29 AM | Report Abuse
sorchai manny only look at one outcome of all possible outcomes. Ask us to focus on that outcome. Go all out for the ou
2017-05-04 00:37
a real piece of gem..................
Bull market, bear market
In a prolonged bear market, the value investors with their accounting ratios, and formulas and bankruptcy tests are born. The tool...the audited accounts.
In a bull market as currently, it is growth and catalysts
Those not flexible are left in the dust, biting the dust....Investors / traders should be flexible while holding steady. Must adapt without being nervous.
2017-05-04 00:39
Posted by stockmanmy > May 4, 2017 12:37 AM | Report Abuse
People got $ 200 million in the game , sailang....I think that is the real meaning of sifu
He drives Rolls Royce, he earned it.
I really shake my head with this kind of mentality. Some more,
Posted by stockmanmy > May 3, 2017 12:40 PM | Report Abuse
ps.....not to worry., I will guide you all along and it is all FOC.
By the way, there is a good article for you to learn something here,
http://klse.i3investor.com/blogs/kcchongnz/121724.jsp
2017-05-04 00:40
too many insider tradings that derail any individual any chances of being filthy rich. just like last time before china open up their economy
2017-05-04 00:42
manny is either very lonely in real life or ego need feeding to the extend the surplus energy crooked his mind. my opinion. maybe manny you can join Tzu Chi. Here- http://www.tzuchi.org.my/web17/
Expend out your surplus energy there, not i3.
2017-05-04 00:46
cheoky
a real piece of gem..................
Bull market, bear market
In a prolonged bear market, the value investors with their accounting ratios, and formulas and bankruptcy tests are born. The tool...the audited accounts.
In a bull market as currently, it is growth and catalysts
Those not flexible are left in the dust, biting the dust....Investors / traders should be flexible while holding steady. Must adapt without being nervous.
2017-05-04 00:50
cheoky
a real piece of gem.................. you can't comment because you have no idea how the market works, or how to make money.....lol, no kidding.
Bull market, bear market
In a prolonged bear market, the value investors with their accounting ratios, and formulas and bankruptcy tests are born. The tool...the audited accounts.
In a bull market as currently, it is growth and catalysts
Those not flexible are left in the dust, biting the dust....Investors / traders should be flexible while holding steady. Must adapt without being nervous.
2017-05-04 01:51
Account look good
Bear market also need to drop
Diversification also cannot survive in bear market
Low can get lower did work
2017-05-04 13:07
Warren Buffett can make investing sound easy: Buy stocks when they’re cheap and pretty much hold them forever. And Buffett constantly reminds us of this simple wisdom. Of course there’s a bit more to it than that. Still investors seem to make the same mistakes over and over.CORRECTLOH...EVERGREEN HAS GREAT MARGIN OF SAFETY MAH....!! SO ACCUMULATE LOH....!!
Why is that?
I decided to put that question to Buffett himself during a recent interview at his headquarters building in Omaha, Nebraska.
But first I asked him if he thought people really learned from what he says and actually go out and successfully invest themselves.
“Well, I think some are helped,” Buffett says. “The main thing we wanna give them — Charlie and I feel this way — is the right attitude toward investing. You’ve got a big tailwind if you’ve invested in America over time. A huge tailwind.” U BUY WHEN UNDERVALUE WITH BIG MARGIN OF SAFETY..EXAMPLE EVERGREEN GOT GREAT MARGIN OF SAFETY LOH...!!
Unfortunately, most investors struggle to stay focused on the long-term and react to the short-term, unwittingly making money-losing decisions.YES WE ALREADY KNOW EVERGREEN GOING TO MAKE GOOD PROFIT 30-6-2017 ONWARDS SO MUST START BUYING NOW LOH...!!
“People have certain habits, some proclivities that are self-destructive in investing,” he continues. “So I would say that I hope our main message is to stay away from trying to trade stocks or do things that are kind of self-destructive, and just let America do the work for ’em.” YES DON EVER SELL EVERGREEN JUST HOLD UNTIL SAY 31-8-2017 THAT MEANS RM 1.20 IS IN UR BAG...IT IS THAT SIMPLE LOH..!
And this lead to the question I mentioned initially, which is: What are the big mistakes people make? Why do people get it wrong?
“Well, the big mistake is thinking they know when to buy and sell stocks,” Buffett says with a chuckle. “That there are times to buy ’em and times to sell ’em. There’s times to buy ’em. And eventually maybe, when you decide to start dis-saving when you’re 70 or 80 years of age or something of the sort, at that time you may sell ’em. MISTAKE IS THAT U TRADE THE SHORT TERM LOH...!!
“But basically any attempts to pick the times to buy or sell, I think, are a mistake for 99% of the population. And I think that even attempts to pick individual securities is a mistake for people.”
The attempt to beat the market by tilting asset class weighting and trading in and out of stocks is known as active investing. Buffett recommends passive investing through a “very, very low cost S&P 500 index fund.” IF U R PANLAI....BUT U LOSE MONIES IN STOCK...IT IS BCOS U R NOT TUNE....U HAVE NO APTITUDE IN SHORT TERM INVESTMENT....GO FOR LONGER TERM...LESS ACTIVE...CHOSE STOCK WITH MARGIN OF SAFETY LIKE EVERGREEN AND HOLD LOH...!!
“They don’t need to do anything but that,” he says. “Then they’ll get a decent result over time. To some extent, the smarter you try to be, the worse you do in investments. Now, there’s a few professional investors that will do better than the S&P over time. But the average individual isn’t going to be able to find them. And they don’t need them. That’s the beauty of it.” BESIDE SMARTS...U MUST BE WIRED RIGHT IN ORDER TO BE SUCCESSFUL...UR INVESTMENT ATTITUDE VERY IMPORTANT LOH...!!
No mistaking that.
2017-05-04 13:09
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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....
abang_misai
Ini KC betul-betul Kwai Lan.
2017-05-03 04:37