kcchongnz blog
Valuation Matters kcchongnz
I have been emphasizing that as an ordinary investor who wishes to build long-term wealth in a more predictable manner should treat investing in a stock as investing in part of a business. Hence, before buying a stock, one must look at the business,
- What business it is in? How does it make money?
- Is the business durable?
- Does it provide stability in earnings and cash flows?
- Does it earn return higher than its costs of capital?
- Does it have financial health to withstand any crisis?
- Is there a growth prospect for its business?
- Does it have good and credible management?
- Etc.
I have deliberated the above in the link below,
https://klse.i3investor.com/blogs/kcchongnz/161473.jsp
However, you could purchase the best stock in the world, but if you buy it at a lofty premium, it may not be a good investment.
Vice versa, the stock could be the worst company in the world, but if bought it cheap enough, it could work out to be an excellent and profitable investment.
Hence valuation matters. It determines your return on the investment.
Valuation is an Art
Most important of all is to remember that valuation is an art.
Anything that involves assumptions will be difficult to formulate, but provided you understand the assumptions and the disadvantages of each, you will be able to utilize each tool to great effect.
Relative valuation
The common method used for valuation by retail investors, professional analysts and investment bankers alike is what we term as relative valuation. Metrics used are as blow,
- Price-earnings ratio
- Price-to-book ratio
- Dividend yield
- Price-to-cash flows
- Price-to-sales
- Enterprise value to Ebit or ebitda
Many investors, including professional analysts and investment bankers use only the first 3 relative ratios. Most just use the first one, i.e. the PE ratio. Hardly anyone uses the rest.
I have deliberated the use of each and their limitations and advantages in the link below,
https://klse.i3investor.com/blogs/kcchongnz/162226.jsp
In fact, the above are merely pricing of a company or stock, rather than valuation of a business. There is nothing wrong with pricing of a stock, and many investors are successful by just doing that. But just be aware that it is pricing, rather than valuation, and price process can be driven by mood and momentum and can be significantly different from value for extended periods.
Absolute valuation
In 1991, Seth A. Klarman published “Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor.” This book outlined his thoughts and approach to investing.
“To be a value investor, you must buy at a discount from underlying value. Analyzing each potential value investment opportunity therefore begins with an assessment of business value…. While a great many methods of business valuation exist, there are only three that I find useful.” (Margin of Safety, page 121).
The table below contains these three business valuation methods that Seth Klarman finds useful. This table also contains definitions for these valuation methods, some thoughts as to when it might be appropriate to use each valuation method, and some notes related to each valuation method. Following this table, I have also included some of Klarman’s related thoughts on business valuation and investing.
|
Valuation Methods |
Definition |
When to Use it |
Notes |
|
1. Net Present Value (NPV) Analysis |
"NPV is the discounted value of all future cash flows that a business is expected to generate." (Margin of Safety, pg. 121) |
Going concern value. "Net present value would be most applicable, for example, in valuing a high-return business with stable cash flows such as a consumer-products company; its liquidation value would be far too low. Similarly, a business with regulated rates of return on assets such as a utility might best be valued using NPV analysis." (Margin of Safety, pg. 135) |
"A frequently used but flawed shortcut method of valuing a going concern is known as private-market value. This is an investor's assessment of the price that a sophisticated businessperson would be willing to pay for a business. Investors using this shortcut, in effect, value businesses using the multiples paid when comparable businesses were previously bought and sold in their entirety." (Margin of Safety, pgs. 121-122) |
|
2. Liquidation Value |
A) Liquidation Value is the "expected proceeds if a company were to be dismantled and the assets sold off" (Margin of Safety, pg. 122). B) "The liquidation value of a business is a conservative assessment of its worth in which only tangible assets are considered and intangibles, such as going-concern value, are not." (Margin of Safety, pg. 131) |
"Liquidation analysis is probably the most appropriate method for valuing an unprofitable business whose stock trades well below book value." (Margin of Safety, pg. 135) |
"Breakup value, one variant of liquidation analysis, considers each of the components of a business at its highest valuation, whether as part of a going concern or not." (Margin of Safety, pg. 122) "Most announced corporate liquidations are really breakups; ongoing business value is preserved whenever it exceeds liquidation value." (Margin of Safety, pg. 131) "Liquidation value is generally a worst-case assessment." (Margin of Safety, pg. 131) |
|
3. Stock Market Value |
Stock Market Value "is an estimate of the price at which a company, or its subsidiaries considered separately, would trade in the stock market." (Margin of Safety, pg. 122) |
"A closed-end fund or other company that owns only marketable securities should be valued by the stock market method; no other makes sense." (Margin of Safety, pg. 135) |
"Less reliable than the other two, this method is only occasionally useful as a yardstick of value." (Margin of Safety, pg. 122) |
Relate thought on business analysis and valuations
- "Each of these methods of valuation has strengths and weaknesses. None of them provides accurate values all the time. Unfortunately, no better methods of valuation exist. Investors have no choice but to consider the values generated by each of them; when they appreciably diverge, investors should generally err on the side of conservatism.” Margin of safety Pg 122
2. "Often several valuation methods should be employed simultaneously. To value a complex entity such as a conglomerate operating several distinct businesses, for example, some portion of the assets might be best valued using one method and the rest with another. Frequently investors will want to use several methods to value a single business in order to obtain a range of values. In this case investors should err on the side of conservatism, adopting lower values over higher ones unless there is strong reason to do otherwise." Margin of safety pg 135.
3. The Reflexive Relationship Between Market Price and Underlying Value: "A complicating factor in securities analysis is the reflexive or reciprocal relationship between security prices and the values of the underlying businesses. In The Alchemy of Finance George Soros stated, 'Fundamental analysis seeks to establish how underlying values are reflected in stock prices, whereas the theory of reflexivity shows how stock prices can influence underlying values.' In other words, Soros's theory of reflexivity makes the point that its stock price can at times significantly influence the value of a business. Investors must not lose sight of this possibility.... Reflexivity is a minor factor in the valuation of most securities most of the time, but occasionally it becomes important. This phenomenon is a wild card, a valuation factor not determined by business fundamentals but rather by the financial markets themselves." Margin of safety, Pg 135-136.
4. "Not only is business value imprecisely knowable, it also changes over time, fluctuating with numerous macroeconomic, microeconomic, and market-related factors. So, while investors at any given time cannot determine business value with precision, they must nevertheless almost continuously reassess their estimates of value in order to incorporate all known factors that could influence their appraisal." (Margin of Safety, pg. 118)
KC Chong
ckc14invest@gmail.com
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Discussions
8 people like this. Showing 50 of 59 comments
Posted by qqq3 > Jul 21, 2018 05:30 PM | Report Abuse
kc
http://klse.i3investor.com/blogs/guru/166204.jsp.......loves this.
ME: FIRST OF ALL, THE ARTICLE ABOVE IS A GREAT ARTICLE. BUT LET ME TELL YOU, YOU CAN'T UNDERSTAND WHAT THE ARTICLE IS ABOUT.
YOU DON'T EVEN KNOW THAT Vishal Khandelwal IS A GREAT VALUE INVESTOR. YOU DON'T KNOW HE DOES VALUATIONS FOR ALL STOCKS BEFORE HE BOUGHT ANY.
This is what I mean...u fake value investors, fake teachers because you read a few soft cover investing books from popular book shops, maybe a few textbooks and speeches by that Wallen the Buffalo.....no use.....lose money, still don't know why lose money.
ME: WAY BEFORE I RETIRE, I ALREADY HAVE MANY TIMES RM100K IN MY INVESTMENT ACCOUNT. OVER MANY YEARS, MY CAGR IS MORE THAN 10%. SO, PLEASE, NOT EVERYONE LIKE YOU LOST MONEY.
qualities that I look for in fund managers....compromises, flexibility, no ego, adaptable, Golden Means, zen like qualities.......the same qualities that can last forever whatever challenges the stock market throw at me....the link above is well written.
qualities that will lead the followers to holland......the same qualities shown by OTB and KC Chong.....robot like, no flexibility, no learning, no adaptability, maths teacher but no business sense, ego big enough to explode any time, ....very dangerous qualities especially in view of the fact this is already a 10 years old bull market, Trump tariffs taking the world to uncharted territories, the next crisis may not be far away.....but the cari makan sifus still got to cari makan, still need new fresh victims to replace those who got buried already.
ME: THE VALUE OF MY PORTFOLIO DID GO DOWN RECENTLY. BUT OVER SAY 10 YEARS PERIOD, MY CAGR IS STILL MORE THAN 10%. OTB HAS MADE MANY PEOPLE MADE A LOT OF MONEY. YOU HAVE O COMPARISON.
Mahathir is right in saying.....the country cannot just carry on by borrowing money and finance and gambling in the stock market.
What we need are real economy stuffs, jobs, factories and new ideas. . new services.
ME; TRUE. SO, PLEASE STOP ASKING PEOPLE TO SAILANG, MARGIN TO THE MAX IN THE STOCK MARKET.
I would also say the most important quality is Think Different. Got to Think out of the box and cannot keep repeating the KC Chong and OTB stuffs.
ME: THE PROBLEM IS YOU DON'T EVEN THINK AND HAVE NO CAPACITY TO DO SO.
This is wrong Era for them.
Every Era new heroes,
Too bad people do not know new Era has come until it is over and too late.....so Think Different is best advise.
lastly, I like to repeat....
do u start with the price/ valuation or do u start with what you want / like?
ME: MANY PEOPLE, YOU ARE NOT EXCLUDED, WHEREVER THEY START, THEY HAVE NO IDEA OF VALUE VERSUS PRICE.
I think misers and losers start with price/ valuations.....and winners start with what they want / like.........
ME: NEVER HEARD OF BUYING WHAT YOU LIKE MAKE YOU RICH. i KNOW YOU LIKE JAKS AND EVERSENDAI. HAVE THEY MADE YOU RICH, LIKE WHAT YOU WISH IN A WEEK, A MONTH, OR EVEN A YEAR?
2018-07-21 17:52
KC contribute good articles.We in i3 made up our own minds.All are adults.
qqq3,what do you contribute in i3?Everyday talk business sense but unable to come out with a single useful article.You are just a TIN KOSONG.
2018-07-21 18:37
apabagus.....I never say Think Different is easy.....
if think different is easy....It would be useless just like KC article,
2018-07-21 18:55
Usually when I can't explain something yet I want to prove I know better than author. I usually use some bombasatic or fuzzy words/terms to mask my ignorance. That is qqq3. Full stop. I guess, guess only using my intuition ya. Qqq3 investment result should be poorer than kc la.
2018-07-21 19:04
apabagus
at least if you sailang, u know what you are doing, very transparent.....the good, bad, the ugly. and quickly learn to deal with it...and got chance to make a difference in a short time.
2018-07-21 19:05
cheoky > Jul 21, 2018 07:04 PM | Report Abuse
Usually when I can't explain something yet I want to prove I know better than author. I usually use some bombasatic or fuzzy words/terms to mask my ignorance. That is qqq3. Full stop. I guess, guess only using my intuition ya. Qqq3 investment result should be poorer than kc la.
=============
I do not know KC results but I can guess.....really.
And I am very satisfied with mine.
2018-07-21 19:07
OTB is the best Sifu. He follows trends
Kcchong is the worst Sifu. He follows text book.
2018-07-21 19:51
Qqq is still at “lanjialang”’s level. He’s just good at criticise Sifus
2018-07-21 19:54
Nobody cares about how you "know" your bank account very well, your subscribers only care about how you often give wrong buy calls at wrong timing which cause them loss a lot of money
Want to show off, please go somewhere else
Posted by Ooi Teik Bee > Jul 21, 2018 09:24 PM | Report Abuse
I have very good records to show in I3.
I know my bank account very well,
it is growing year after year.
To me, I do not bother any other comment,
I will feel disappointed when my bank account is reducing.
Touch wood, so far it is growing in last 5 years.
To be honest, hopefully I do not need to lose money in 2018.
I come from a very poor family.
My parents teach me a good lesson in my life.
Do not bully people, do not tell lies in public.
I believe my credibility in I3 is still very good based on my records.
Thank you.
Ooi
2018-07-21 21:48
Ooi Teik Bee > Jul 21, 2018 09:24 PM | Report Abuse
I have very good records to show in I3.
I know my bank account very well,
it is growing year after year.
To me, I do not bother any other comment,
I will feel disappointed when my bank account is reducing.
Touch wood, so far it is growing in last 5 years.
To be honest, hopefully I do not need to lose money in 2018.
I come from a very poor family.
My parents teach me a good lesson in my life.
Do not bully people, do not tell lies in public.
I believe my credibility in I3 is still very good based on my records.
Thank you.
Ooi
=============================
I am sure Najib says that of his record too.
2018-07-21 22:03
qqq3 apabagus
at least if you sailang, u know what you are doing, very transparent.....the good, bad, the ugly. and quickly learn to deal with it...and got chance to make a difference in a short time.
ME: HOW COME YOU DON'T EVEN HAVE RM100K TO INVEST IN THE STOCK MARKET EVEN AFTER RETIREMENT AT 60+?
NOT EVEN WITH YOUR SAVING IN SO MANY YEARS OF WORKING?
I HAVE MANY FOLDS OF WHAT YOU CAN INVEST. HOW COME?
2018-07-21 22:30
qqq3, the fact is that you can't even smell our fart. so why condemn us on whatever we share?
after retirement and have not much saving and still sailang? Good luck.
For us it is a distribution stage now when you are still trying to accumulate. Too late. Beware you have not enough money to last your retirement. Seriously!
2018-07-21 22:33
Posted by Gary Siaw > Jul 20, 2018 12:32 AM | Report Abuse
Yet a thoughtful and useful piece from kcchongnz.
Posted by Apabagus > Jul 21, 2018 06:37 PM | Report Abuse
KC contribute good articles.We in i3 made up our own minds.All are adults.
qqq3,what do you contribute in i3?Everyday talk business sense but unable to come out with a single useful article.You are just a TIN KOSONG.
Posted by cheoky > Jul 21, 2018 07:04 PM | Report Abuse
Usually when I can't explain something yet I want to prove I know better than author. I usually use some bombasatic or fuzzy words/terms to mask my ignorance. That is qqq3. Full stop. I guess, guess only using my intuition ya. Qqq3 investment result should be poorer than kc la.
Thank you very much for the kind words. That keeps me motivated to share.
For the last comment, I am very sure about it. But maybe not "poorer", but way behind. That is because, yes, my portfolio gone down recently. But over long-term of 10 years, I still have double digit CAGR.
2018-07-21 22:49
Well, I don't just simply make statement. Just goggle my portfolio which have more than 5 year record in i3investor. They are public information.
You have to show your record qqq3. But I doubt you have any public record. You only claim that you buy a stock and sold it and make so much so much. But that is only what you say. Can believe ah?
2018-07-21 22:52
Posted by cheoky > Jul 21, 2018 07:04 PM | Report Abuse
Usually when I can't explain something yet I want to prove I know better than author. I usually use some bombasatic or fuzzy words/terms to mask my ignorance. That is qqq3. Full stop. I guess, guess only using my intuition ya. Qqq3 investment result should be poorer than kc la.
Comment :
Those made money from stock market are always wish to learn from others.
To make the least mistake in stock market means you are better than others.
Those keep on attacking people is because of inferior complex, he cannot make money and become jealous of other's success.
I feel very happy for others when they make money.
I wish to learn new trick from these winners.
Thank you.
Ooi
2018-07-21 22:57
I am sure KYY can buy and keep for 2.5 years......
a remisier can buy a share at the beginning of the year and keep a winning share until the end of the year is as fake as his fake records.
.....and that is also then...one thing about share market....every era has new heroes......
2018-07-22 00:02
Mr Koon bought VS through my recommendation in December 2014 at 2.33, keep for 2 years and sold for 8.00 making 243% gain.
Likewise, Liihen, Latitude and Gkent.
I bought good shares like VS, Liihen, Latitude and Gkent, buy and hold for a year or more is nothing as long as the shares are good growing stocks.
If I kept KESM for > 1 year, I bought it at 5.20 in 2016, I could have sold it at 20.00.
Please refer to the below link :
https://klse.i3investor.com/servlets/pfs/54173.jsp
Buy and hold a share > 1 year is a faked record.
Cannot afford to take out RM 100,000 to buy share in KLSE, only can afford to buy on contra basis only, how to be rich ?
Buying and holding a share > 1 year is a faked record.
Value investors will laugh at this type of low class and poor investor.
He will be poor permanently.
If I bought a good growth stock, I will continue to hold it until there is no more growth and sell it. Hence I made big profit.
When you buy a good stock, let profit runs is a good strategy.
Thank you.
Ooi
2018-07-22 00:07
qqq3 otb, kc
I don't make groundless accusations.....
those are my observations and conclusions after watching KC and OTB for some time...its their process....too many holes and too robotic.....
ME: NOT GROUNDLESS ACCUSATION? SO WHERE ARE YOUR EVIDENCES?
JUST BY WATCHING? HAVE YOU SEEN ME BEFORE?
I HAVE WRITTEN HUNDREDS OF ARTICLES IN I3. WHAT IS WRONG WITH MY PROCESS? ROBOTIC? PLEASE ELABORATE.
if so many holes and so robotic also can be good ...then AI will take over the market...OTB and KC are just inferior versions of AI.....
ME: WHAT HOLES? PLEASE ELABORATE.
2018-07-22 08:35
Risk assets and oil prices would likely tumble as worries about growth arise, hitting currencies of commodity-exporting countries particularly hard -- namely, the Russian ruble, Colombian peso and Malaysian ringgit -- before taking down the rest of Asia.
“Asian central banks will initially try to stem currency weakness through intervention,” Brooks said. “But then Asian central banks will step back, and in my mind, the big underperformer on a six-month horizon could be EM Asia.”
https://www.bloomberg.com/news/articles/2018-07-20/currency-war-erupts...
22/07/2018 09:10
X
Weak ringgit will give Malaysian export-oriented stocks an edge.
2018-07-22 09:19
You do not need to show off? Wake up stupid, you did it again and again, and you did it now
I think you are suffering from delusional disorder, you are the one who really need to take your medicine timely
Ans :
Please show me your records if you are better than me.
Ans : None. Talk what ?
You are not my subscriber, my subscribers made money or lost money, it is none of your business.
I do not need to show off.
I care that I am at least better than you many times in term of everything. Being it a reputation, wealth, records and fame.
You need to jump 10 times also cannot beat me.
Sour grape, please take your medicine timely.
I do not wish to visit you in Tanjong Rambutan.
I will not need to reply to this liar and idiot in I3.
2018-07-22 10:38
kc
when I first came here I thought u were doing some thing good....until I realised when u do stock picks and recommendations....u are only interested in Ace counters, the smaller the better, the more risky the better, the less track records the better....easier for u to manipulate , maybe....specialist in small caps....
I tell you many time......hang pig head to sell dog meat is very dishonest, very misleading and very unprofessional.
u try to give yourself a conservative image in i3 in order to promote the small caps....what kind of hanging pig heads to sell dog meat is that?
I think you are a very irresponsible person for doing so....despite trying your very best to give a conservative image.
I don't like people who hang pig head to sell dog meat. Cannot ah?
2018-07-22 14:40
Alternatively......forget about all these confusing stuff....
........and JUST DO ' DAN ZANGER'
2018-07-22 15:24
qqq3 kc
when I first came here I thought u were doing some thing good....until I realised when u do stock picks and recommendations....u are only interested in Ace counters, the smaller the better, the more risky the better, the less track records the better....easier for u to manipulate , maybe....specialist in small caps....
I tell you many time......hang pig head to sell dog meat is very dishonest, very misleading and very unprofessional.
u try to give yourself a conservative image in i3 in order to promote the small caps....what kind of hanging pig heads to sell dog meat is that?
I think you are a very irresponsible person for doing so....despite trying your very best to give a conservative image.
I don't like people who hang pig head to sell dog meat. Cannot ah?
POOR YOU. AFTER SO MANY TIMES OF EXPLAINING, EVEN AN ANIMAL WOULD HAVE UNDERSTOOD WHAT VALUE INVESTING IS. BUT SADLY IT IS NOT YOU. IT IS OK YOU DON'T UNDERSTAND, BUT IT IS NOT NEED FOR YOU TO EXPOSE YOUR IGNORANCE, YOURSELF.
WHAT IS VALUE INVESTING? WHO TOLD YOU YOU HAVE TO INVEST IN GENTING, MAYBANK, CARLSBERG, CIMB, ETC? WHERE YOU LEARN THIS?
WHAT IS RISK? A COMPANY, WHETHER BIG OR SMALL, HAVING STEADY EARNINGS AND CASH FLOWS AND GOOD MANAGEMENT, AND SELLING CHEAP, A RISKY COMPANY?
HANG WHAT PIG HEAD, SELL WHAT DOG MEAT?
HEY, YOU ARE A 60+ ACCOUNTANT. DON'T YOU KNOW THAT ALL THIS TIME YOU ARE EXPOSING YOURSELF AS HOW IGNORANT YOU ARE? GOOD FOR YOU MEH?
2018-07-22 15:56
qqq3 http://klse.i3investor.com/blogs/guru/166204.jsp.......loves this.
compare and contrast your approach with this guy....
This guy I like...he promotes essential qualities I like in fund managers.....
You said "love this" for at least 3 times. However, very sadly you are continuing to expose your backside. You don't know what the writer was talking about.
Doing thorough analysis before buying a stock is what almost every true value investor does, including the writer of the above link. Whereas trying to know everything by spending to much time on every details is what a true value investor needs not do. That is the message.
No investor, I am not talking about a speculator and gambler like you, buy a stock based on BS(Bullshit), panic moment, sailang, dynamite investing like what you do. Firstly, nobody knows what you actually trying to say.
You need to improve your English comprehension brader!
2018-07-22 18:27
kc
u want to speculate Ace counters or any thing u fancy, go ahead, your choice....
I hate people who hang pig head sell dog meat, my choice. And i will continue to expose your scam.....
kc, you are just a scammer.
2018-07-22 20:19
yes Dan Zanger.....calls a spade a spade ......not one who hangs pig head to sell dog meat.....
Like the guy.
2018-07-22 20:45
Posted by qqq3 > Jul 22, 2018 09:07 PM | Report Abuse
kc is a scammer or a maths teacher with no business sense.
take your pick
Me: I would be proud to be a maths teacher, whether if I have business sense or not, but definitely not that Bullshit (BS) of yours.
Scammer: a confidence game or other fraudulent scheme, especially for making a quick profit; swindle.
I propagate investing in good stocks selling at cheap prices by going through thorough analysis of stocks before buying.
You have been shouting on sailang, margin finance, panic investing, dynamite investing, or whatever it means.
Who sounds like a scammer?
I have written 324 articles in i3investors with thousands of motivating comments. I have also made 5824 comments, all of them stay in i3investor and none of them have been deleted.
You also have made thousands of comments with many nicks, Desa, Stockmanny, Brightsmart, qqq3 etc. Each of the nick was banned by i3investor admin due to the hundreds of nonsensical comments.
Lets make an educated guess.
Who likely is a scammer, kcchongnz or all the other nicks of the latest qqq3?
2018-07-22 22:20
kc
anyone can say any thing they like or don't like about me....including you...I have no problems with that...really....
Its never about me...and I am not here looking for member fees or any thing like that.
I m here to express my opinion....Period.
any opinion about me...right or wrong...fair or unfair, true or false....doesn't bother me.
2018-07-23 12:50
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Posted by qqq3 > Jul 20, 2018 01:43 PM | Report Abuse
do u start with the price/ valuation or do u start with what you want / like?
I think misers and losers start with price/ valuations.....and winners start with what they want / like.........
ME: FOR VALUE INVESTORS, IT DOESN'T MATTER WHERE YOU START, BECAUSE THE PRICE YOU PAY DETERMINES YOUR RETURN. IT IS GOOD TO ALSO START WITH WHAT YOU LIKE, AND THEN DO A VALUATION.
THE PROBLEM WITH MANY RETAIL INVESTORS IS THEY DO NOT BOTHER WHERE TO START, BUT JUST FOLLOW WHAT OTHERS DO, A LEMMING BEHAVIOR. SOME JUST SIMPLY BUY AND HOPE THAT THERE WILL BE A GREATER FOOL TO TAKE OVER FROM THEM IN THE END OF THE DAY, THE NEXT DAY, THE NEXT WEEK. THAT IS WHAT THE COMMENTATOR HAS BEEN DOING, AND KEEP ON TELLING OTHERS TO FOLLOW HIM TO DIE SOMEWHERE.
SOME MAY START WITH WHAT THEY LIKE, BUT THEY HAVE NO IDEA IF THE COMPANY THEY LIKE ARE SELLING EXPENSIVE. tHAT IS WHY MOST RETAIL INVESTORS LOSE MONEY.
2018-07-21 16:48