Share Investment Philosophies

Sun Tzu once said:

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Though the emphasis is to KNOW YOURSELF, but for this article, I would like to zoom into the other keyword; Knowing your enemy. In our context, the “Enemy” could mean other retail investors but I want to define the enemy as the investment itself, or the stock that we are investing in.

So, when you invest into a company/stock, how well do you know the company (your enemy)? How has the company been performing in the last 5 or 10 years? Is their revenue/net profit improving or dwindling? Have they been declaring any dividends? Are the major shareholders accumulating or distributing their stocks? Is the cash flow healthy? Who are the management running the company, etc.

One key reason investors lose money in stocks is because they invest without knowing their enemy (stock) well enough, its characteristic, behavior and pattern. As a result, 80% of investors lose money in stocks and eventually give up!

As for myself, I combine fundamental and technical into my analysis as they serve different purposes. While fundamental analysis provides information on WHAT TO INVEST, technical indicators help me to identify the TREND and determine the HIGH & LOW points of a stock.         

Please refer the diagram below for an example of a good stock. Typically, I look at a few metrics to give me a general overview of a stock. If the preliminary assessment looks encouraging, I will dwell further to ascertain my evaluation.

Some of the more common metrics are discussed below:-

 

CHart

  1. P/E Ratio

My rule of thumb is to find stocks with a P/E Ratio of 10 or lesser. The P/E ratio indicates the number of years an investment double its returns. So if the P/E is 10, it means the stock will be worth twice its value in 10 years. So, in general, the lower the P/E, the better it is. Based on the diagram above, the P/E of the stock in discussion is 8. So, it fulfills my criteria.

  1. Dividend Payout

Every business aims to be profitable and would like to increase profits over time. Generally, when a company is in profit, it has to decide how the profits will be deployed. For growth companies like Apple, it is common to reinvest all profits back into business to fuel future growth.

An alternative approach is to apportion part of the profits to grow the company and issue the remaining as dividend to its shareholders.  Therefore, issuing of dividends can be a good gauge of how a company is performing generally. If the dividend amount gets smaller over each quarter, this may be a red flag to shareholders, unless the company could justify the reduction in dividends issued.

Based on the chart above, the company has declared a $0.10 dividend to be paid in June, which is about 5.6% of the current share price of $1.72.

 

If you would like to learn how I choose good stocks, please attend my free stock workshop by registering HERE.

 

  1. Price to Book Value

Price to Book value, or P/B ratio indicates if a stock is currently being sold at a discount or at a premium to its fair value. The fair value is the actually worth of a stock. For example, an Iphone 6s is currently retailing for $1048, so we can consider that price being its fair value. If someone offers you the phone for $940, you are getting a 10% discount. On the other hand, if the phone is being sold at $1152, it is selling at a 10% premium.

It is not uncommon to see stocks being offered at a discount. Investors just need to do their homework to uncover these stocks. As for the stock we are analyzing, the current price at $1.72 is close to 50% discount of the company’s fair value.

From the perspective of the stock price, it is quite an attractive stock. An investor should do some further analysis to see what is causing the price to be suppressed. For now, just assume that there isn’t any negative news on this stock. As a conclusion, the greater the discount, the higher the chances of profiting from the stock.

  1. Stock price is at historical low

An added bonus being that the current share price is at a historical low level and this translates to even lower risk. Generally, an undervalued stock is like a gem waiting to be “discovered” by institutional investors. Barring from any disastrous news, a stock should not remain lowly priced for extended periods of time as analysts will bound to uncover and highlight this stock, creating a lot of attention and eventually driving the price upwards.

Therefore, it is just a matter of time that the price for this stock is adjusted upwards, closer to its fair value. So, the investor just need to wait patiently for it to happen. Of course, instead of going up, the price may slip further and the investor need to have a contingency plan and react accordingly should this happen.

Above are part of the reasons that help me in my decision making. I will enjoy a good 50% return if the price head towards $2.50, in addition to the dividend I am due to receive next month. Apart from the 4 reasons I shared, there are other analysis you need to perform before you invest your hard earned money. I will share more during my workshop and I am inviting you to join me at the upcoming workshop. Click HERE to register. I will share more information during the workshop so you could experience a full analysis on how I select my stocks.

Thank you,

Kenneth

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