Here are some questions by a purchaser of my book, “The complete guide to value investing that works!”
[Good morning Mr Chong,
I have read it reaching to the sections on financial statement analysis and interpretation, and valuations of your book. They prevented me further from accumulating those counters that do not meet the minimum criterion.
I have a few questions:
Thanks, and best regards,
I have written an article giving my response to your Question 1 above in the link below:
Here is my response to your second statement above.
I have written a few articles in i3investor on the pros and cons of using margin finance, or other people’s money (OPM) in stock investment. The most recent ones are below:
The above articles come with real examples; the share price movement of a real company listed in Bursa. It is worth reading them before you embark in using OPM in the stock market. Also read the comments section, especially in the first post above, as there are people with different opinions from mine. They shared that they had made a lot of money using OPM, and OPM is very, very good and that for those who do not use it don’t know what they have missed. So, have a balance view, and make up your own judgment. It is still your prerogative whether you should use margin finance or not. You know yourself better than anyone else.
However, you need to be clear about your goal in investing in stock market, whether is it to build long-term wealth steadily, safely but surely for a comfortable retirement, for your children’s education, or to get rich quick. If you are going to retire soon or already retired, and you have say RM1m, or RM10m and you just want to have a safe, secure and reasonable retirement life, but still able to give some out as charity, or you want to become a hundred millionaire. In investing, risk and reward are intertwined. There is no free lunch.
The following real example of the price movement of another stock will give you my view on OPM.
Let us look at the share price movement of a hot stock in Bursa from just 5 weeks ago on Feb 21, 2020.
Its share price was at its peak at RM2.91 on February 21, 2020. It was touted as the best stock to invest in then, with target prices of RM3.50, RM4.00, or even RM5.00. In less than two weeks, its share price plunged 27% to RM2.15 as on March 2. Just when most people thought that the worst is over, the share price crashed by another 65% to just 75 sen on March 19, in just another week, before recovering to RM1.18 at the time of writing on March 27, 2020.
An investor who invested RM1m, and borrow another RM1m, for a total investment in the share of RM2m on it would have lost RM540k on March 2 if he had to sell off all his shares. However, his loss would likely to be a lot more, due to the margin calls which would have just kicked in. If he was so certain about the great value of the share may sell his other assets to top up the losses and avoided the margin call, he would have ended up worse off as in another 2 weeks on March 19 when the share price crashed to 75 sen. He would have lost a whopping RM1.48m, or 148% of his initial RM1 investment then! If he has the capability to hold on to it, meaning kept on topping up. He would still have lost RM1.2m, or 120% of his initial investment when the share price recovered to RM1.18.
Another investor who thought that at RM2.15, the worst is over, and use the same amount of money and the same margin to invest would also have lost a whopping RM1.3m, or 130% of his own investment when the share price plunged to 75 sen in less than 3 weeks! Of course if someone was so clever and had a crystal in front of him and did the same when the share price was right at its lowest at 75 sen, he would have made a very handsome profit with OPM.
That is the pros and cons of leveraging in stock investment, using OPM and hope to make more money.
Summary of share price movement
As the share price has dropped by 60% from RM2.94 to RM1.18 a piece in just 5 weeks, isn’t that a wonderful time to pick up the share?
I don’t know. But if you are so sure about the target price of the share, why not?
What about using 50% OPM again? Well, I have said enough, written enough, you really have to make your own decision.
Here it goes again,
“Understanding that we do not know the future is such a simple statement, but it’s so important. Investors do better where risk management is a conscious part of the process. Maximizing return is a strategy that makes sense only in very specific circumstances. In general, survival is the only road to riches. Let me say that again: Survival is the only road to riches. You should try to maximize return only if losses would not threaten your survival and if you have a compelling future need for the extra gains you might earn.” Peter L. Bernstein, the author of investment classics like “Against the Gods: The Remarkable Story of Risk”
As for your third question, I am here to provide guidance to those who ask from me, and not to give stock tips. Go through the book you have purchased from me. It gives you all the necessary knowledge on how to scout for good companies, and how to value them to see if they are good investment.
“Give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for a lifetime.”
Take your time. Learn the skills and acquire the experience. The stock market, not only in Bursa, but in US, Europe, China, Hong Kong and all over the world, are always there.There are plenty of good and great companies you can choose to fit your own personal risk profile.
Always remember this,
“Do not buy stocks purely based on tips, rumours and recommendation is one of the earliest lessons I learnt.”
K C Chong email@example.com