FUND MANAGERS AND THEIR SELECTING CRITERIA

It is no fun being a fund manager for the last one year.  Some may be curse at, criticised, ridicule and degraded.  Why can't they do better than the 3.5% yield of fixed deposits.  After all, investing in stocks assumed a much higher risk than fixed deposits, such as cyclical downturn, industry slowdown, foreign exchange risk, operation risk, over supply, margin squeeze by competitors, bank slowdown and many more.

Example, I was lost of words when one of the fund managers I know recommended PROTASCO.  Short of being bankrupt by the fraud within the company, and the authorities (Bursa and SC) stood by quietly.  I suppose they like to be called eloquent silence.  This counter is tainted by fraud and misappropriation and the board is involved in legal case and lost almost RM80m.  Disregard the questionable character of the management and integrity of the board or officials, the fund manager choose to ignore this factor as one of the criteria for selecting a winning stock.  RM80m was misappropriated without a sign of getting it back, yet, this fund manager give a thumb up for their NUMBER ONE OFFICIAL OF THE COMPANY, and the Company.

If the Number One Official of the Company is not working for the interest of the Company, can you still trust him or her?  In an international scene, this company is history.  But in Bolehland, no problem la.  The Company even get good contracts.  We can understand if that was a business mistake, such as expanding too fast, or overlook the risk of investing in other country, but it was clearly a fraud.  Some fund managers and analysts are so forgiving, as if there are no other counters better than that.

At least now we know that integrity of the management is definitely not one of the criteria of choosing a winning stock, at least for some fund manager.

SO WHAT IS THE WINNING CRITERIA?

Well, the same old boring stuff like:

FUNDAMENTAL

1. ROE better than average
2. Strong Balance Sheet - not overgeared vs the industry (that doesn't make it right if the industry gearing is 8 times the equity, and this company is 6 times) 
3. Good and proven track record of increasing sale, profit and cash flow (and sometime good allocation of resources or capital) + catalyst for future growth
4. Sustainable barrier of entry - which not many considered as it is difficult to identify and measure them or comparable

TECHNICAL

1. Stock price is on an uptrend and RSI is not overbought

OFFICIAL NUMBER ONE

1. Ensure the Official Number One is not involved in any misappropriation or not accountable for its actions

PRICE IS UNDERVALUE

1. The share price must be lower (at least 20-30%, depends of type of stocks) of the intrinsic value.

VERY GOOD BIZ MODEL + GOOD TECHNICAL READING + UNCORRUPTED OFFICIAL NUMBER ONE + PRICE IS UNDERVALUE = WINNING STOCKS

THIS MODEL DOES NOT GUARANTEE SURE WIN, BUT INCREASE YOUR PROBABILITY OF WINNING (isn't it not investment all about)  If it guarantees sure win, wouldn't everyone mortgage their house and put all their wealth in it.

IS THE ROAD AHEAD SELECTING WINNING STOCKS GETTING TOUGHER?

Short answer is YES.  The next question is, is it worth taking this risk?  To do well for next couple of years is much tougher, but not impossible.  

The tougher environment is mainly due to:

1. Higher uncertainty of DEFLATION (i.e. when the tides goes down, all stocks follow, but it also provide good opportunity to accumulate)
2. Too high volatility - lately and in the foreseeable future, besides rates increase issue, Brexit or EU disunification, war, Trump or Hillary, Japan unconventional QE, NIRP + helicopter money experiments
3. Global slowdown - due to over supply that concentrated in China since globalisation + overgearing
4. Derivatives - the unfolding of mismatches in derivatives will also cause further tsunami in the financial markets

With this tougher environment, imho, new kids on the blocks may need to pay higher tuition fee while not enjoying the superboom.  

People make mistakes, so do investors.  So, going ahead, even veteran investors must be more VIGILENT, cannot always assumed stock market will go up in the LONG RUN (10-20-30 years), because, like the victims of sub-prime, in their life (at least over the last 60 years), they have never experience property prices going down trend.  

Its like playing a video game, as you go up the level, it is harder to win.  Thats why, one have to be VIGILENT.

SO WHAT ON YOUR MIND?

Still on look out for biz with SUSTAINBLE GROWING BIZ MODEL + STRONG CASH FLOW + GOOD OFFICIAL NO. 1 + TECHNICAL TREND ON YOUR SIDE + UNDERVALUE.  There are about 1,800 stocks to choose from, so, start going through your checklist or criteria.  Someone mentioned Focus Lumber and Poh Huat by Mr T.  Lets take a look.

ANY OTHER IDEAS?

1. DO diversify outside Malaysia - cash or stocks or other investments (Remember, our net worth dropped about 25% since late 2014, we are doing at USD1.00 against MYR3.20.  The British is feeling the same pain we went through after Brexit - at least against MYR).  As usual, I like boring Singapore stocks with about 4% yield.
2. Of course, we can go to USA and invest into MCD or Amazon, but, please, learn the game first.  Always remember, your own criteria for stocks.
3. WHAT ABOUT CURRENCIES - is putting money in other currency deemed as investment? Technically, it is not.  There are many views and debates on this, is very volatile nowadays due to currency wars QEs, NIRP, stimulus, and derivatives.  Is totally different ball game (vs stocks), but can be equally exiting or rewarding.  Learn the game, have a strategy.

Just like stocks, besides picking the winning stocks, we must also have a strategy.  I have seen many cyclical stocks went up many time and came down.  So, when buying cyclical stocks, make sure you strategise to unload gradually, or it will be back to square one.

ANY TIPS?

Consider diversify (outside Malaysia) gradually.  Don't let your hard earned net wealth reduced 25% again.  I believe OCK W still has potential at 25 sen.  Although, last couple of days it was overbought based on RSI.  Value wise, I hope is a winning warrant, but need to have a winning stock as well.  Have a strategy as well.   

To do well, we must have both:

1. Choose a winning stock
2. Have a strategy for the winning stock (buy over time, trade, collect when no one else is interested and sell a bit when overbought position) - buying and holding for long run also need a strategy.