The third thing you need to do is to read financial news on the paper. You cannot invest if you don’t even know what’s going on to local and global economy. Besides, your very own analysis could be bias. So it is good to know what investing public or other analysts think about the economy or the company you going to investing. In Singapore, Business Times is the best source for business/financial news. If you don’t want to pay for it, you can read it on the net or download it F.O.C. after about 7pm everyday.
“7pm! So late? The war is over!”
But you are not trading/speculating, why do you need to be so updated? Don’t you have work to do during office hours? And that is exactly the wonderful thing about value investment – you don’t need to be updated every second! Yes you need to be updated but not every second! You can start your reading comfortably at home after work and after your dinner. Now that you know the three things you need to do, the next obvious question is how to do?
Identify Potential Companies
You want to invest in potential companies and you got a copy of an investment journal, but how to start your stock selection? Stock selection process requires basic skill/knowledge in ratio analysis. Fortunately, a copy of the ratio analysis is in my blog’s archive. It may take a while for you to fully understand all the ratios but for a start, you don’t need all of them. My method is to use a few important ratios so as to narrow down to those companies that met my criteria. The following are some of the more important ratios I used to identify companies that worth my time for deeper study.
1) Price-Earning (PE) ratio and Price-To-Book (PTB) ratio. Let say I will only looked at company with PE of 12 times and lower or PTB of less than 1 time. I will reject anything higher than that. In Singapore context, generally, 10 time PE or less is quite safe, i.e. the price of a stock not likely to be excessive. Of course PE alone is insufficient.
2) Net tangible assets (NTA) per share. For a non-service company, usually I prefer to have share price lower than its NTA. So for non-service companies with share prices higher than its NTA will be reject. You may wonder why this criterion is only used for a non-service company. For a company providing services, its assets are usually low as these companies have low assets investment. Also, some companies may have high stock prices relative to its NTA due to excessive speculation or growth factors. For a beginner, it may be difficult to understand.
3) Last 3 years operating profit or net profit (is it making a profit and any growth trend?). Certainly, loss-making companies will be rejected immediately. A loss-making company may turnaround making it a good buy but for a beginner, you may not be ready for such analysis.
4) Dividend yield. One of my all time favourite strategies is to invest in high yield companies. I may decide that a yield of 5% and above would be acceptable.
How about the share price? Well, the price factor, whether the existing price is acceptable, is captured in the PE ratio. Again, you need to study these ratios for a start. If you can’t even do this, then forget about investment. Let the fund managers do it for you; at a small commission of course.
Detail Study On The Potential Companies
After you identified a few companies that look attractive, you need to do a research. Our research will be simple. There is no complex methodology and no chance to interview the CEO. To do a simple research, you need to gather and put all information together. This is how I do it:
Step 1) Download these companies past years audited financial report (at least most recent 3 years) from their websites. An audited report is trustworthier than an unaudited one although still not a 100% guarantee.
Step 2) You need to learn and apply more ratios to confirm on the company’s financial health and performance. E.g. ROE, liquidity ratio, cash per share, gearing etc. In addition, study its past years’ growth in term of:
- Revenue
- Expenses such as administrative expense
- Operating profit
- Cash generated from operations
- Growth of each business sector or product type
You can take a look on my articles on Breadtalk and Popular and you will know what I mean.
Step 3) Numbers alone is not enough to make investment decisions. You also need to do qualitative analysis. For example:
- The strength of its management team, especially the one sitting right on top. If you refer to my article on “Investment Based On The Character Of Those At the Helm”, you will know what I mean. And I can tell you that Warren Buffett emphasize a lot on CEO selection.
- Company’s expansion plans and whether those plans make economic sense.
- Strength of company’s brand name.
- Locations to customers and suppliers.
- Market share and ease of new entry.
- Contracts awarded recently.
And the list goes on. All these qualitative information is difficult to collect and the only source to a retail investor is the analysts’ report or from newspaper. That’s why you have to read the papers and corporate announcements regularly.
Form Your Final Conclusion
So after all these microscopic analysis and you final have a “feel” of this company. Assuming you concluded that target company is a good investment, the last question would be – is existing price the right price. Is current price undervalued? Looking at the company’s historical price movement, does current price reflects all the good news? You may think that share prices always reflect all announcements made by the companies. I assure you, NOT EVERY TIME. For example, recent US subprime problem caused a deep correct in global stock market. Here in Singapore, we have numerous companies making good profit based on sound economic fundamental; some even exceed analysts’ expectation but yet all their price gone down hill. Why? It’s a game created by mankind remember? Just accept it. I can bet with you with all my savings, it will happen again. And when it happens, it is our lucky day. That’s the great thing about value investing and I always share with my friend that we (value investors):
“ARE QUALLY HAPPY WHETHER MARKET MOVE UP OR DOWN”
Once you concluded that this particular company is wonderful and price “looks” cheap, go buy it!
FAQs
How to know if my decision is correct?
You cannot judge a decision by staring at its share price for next few days, weeks or month. That is silly because you are not trading. You will know whether you made the correct decision based on the result of your analysis. For example you concluded that the company’s operating profit will grow, or its expansion will be translated into higher revenue, or higher revenue due to its competitive advantage etc. So did those things happen? If no, then there is an error in your decision and you must find the root cause.
What if someone else have different conclusions?
You must understand that another person conducting his own analysis on the same company may come out with different conclusions. At this point in time, nobody is for sure who is correct. I would suggest that since you have done your homework thoroughly, have faith on your own work, not others.
So what if my analysis is really wrong and I made a loss?
If finally the company you invested performed poorly with bad news everywhere, cut loss immediately. Don’t be discouraged, you’re still on learning curve. Find out what has gone wrong in your decision and make sure you don’t make the same mistake again. A good fund manager will tell you that “it is ok to make mistake; is it not ok to stay with the mistake”.
So with value investing, I still can incur losses?
If you think that learning value investing will ensure 100% correct investment decision, you come to the wrong place. Grow up! There is no investment without risk. Personally, I don’t believe that Peter Lynch or Warren Buffett has never made a single (investment) mistake! You want zero risk then put all your savings in the bank, and you will earn peanuts out of it. I mean get real! Banks make big money by borrowing from you cheaply (through saving account) and lend it out expensively (bank loan) to you! Don't tell me you don't have a savings account plus bank loans for your car, house, renovation or study etc.
But through value investing, your success rate will be much higher than monkey throwing darts. If you make seven good investment decisions out of ten, you are going to make a lot of money. That’s what I experienced after I adopted value investing. Since then, I made a reasonable profit every year (>10%). It’s not like lots of money but definitely many times higher than bank rate. And I can assure you that there are many more value investors earning a much higher returns than me.
Lastly, knowing what, how and when to buy is not enough. This is only part of the lesson. You also need to know when to sell. Yes, when to sell is just another important topic that you cannot live without it. I will share on this topic some other time.
“7pm! So late? The war is over!”
But you are not trading/speculating, why do you need to be so updated? Don’t you have work to do during office hours? And that is exactly the wonderful thing about value investment – you don’t need to be updated every second! Yes you need to be updated but not every second! You can start your reading comfortably at home after work and after your dinner. Now that you know the three things you need to do, the next obvious question is how to do?
Identify Potential Companies
You want to invest in potential companies and you got a copy of an investment journal, but how to start your stock selection? Stock selection process requires basic skill/knowledge in ratio analysis. Fortunately, a copy of the ratio analysis is in my blog’s archive. It may take a while for you to fully understand all the ratios but for a start, you don’t need all of them. My method is to use a few important ratios so as to narrow down to those companies that met my criteria. The following are some of the more important ratios I used to identify companies that worth my time for deeper study.
1) Price-Earning (PE) ratio and Price-To-Book (PTB) ratio. Let say I will only looked at company with PE of 12 times and lower or PTB of less than 1 time. I will reject anything higher than that. In Singapore context, generally, 10 time PE or less is quite safe, i.e. the price of a stock not likely to be excessive. Of course PE alone is insufficient.
2) Net tangible assets (NTA) per share. For a non-service company, usually I prefer to have share price lower than its NTA. So for non-service companies with share prices higher than its NTA will be reject. You may wonder why this criterion is only used for a non-service company. For a company providing services, its assets are usually low as these companies have low assets investment. Also, some companies may have high stock prices relative to its NTA due to excessive speculation or growth factors. For a beginner, it may be difficult to understand.
3) Last 3 years operating profit or net profit (is it making a profit and any growth trend?). Certainly, loss-making companies will be rejected immediately. A loss-making company may turnaround making it a good buy but for a beginner, you may not be ready for such analysis.
4) Dividend yield. One of my all time favourite strategies is to invest in high yield companies. I may decide that a yield of 5% and above would be acceptable.
How about the share price? Well, the price factor, whether the existing price is acceptable, is captured in the PE ratio. Again, you need to study these ratios for a start. If you can’t even do this, then forget about investment. Let the fund managers do it for you; at a small commission of course.
Detail Study On The Potential Companies
After you identified a few companies that look attractive, you need to do a research. Our research will be simple. There is no complex methodology and no chance to interview the CEO. To do a simple research, you need to gather and put all information together. This is how I do it:
Step 1) Download these companies past years audited financial report (at least most recent 3 years) from their websites. An audited report is trustworthier than an unaudited one although still not a 100% guarantee.
Step 2) You need to learn and apply more ratios to confirm on the company’s financial health and performance. E.g. ROE, liquidity ratio, cash per share, gearing etc. In addition, study its past years’ growth in term of:
- Revenue
- Expenses such as administrative expense
- Operating profit
- Cash generated from operations
- Growth of each business sector or product type
You can take a look on my articles on Breadtalk and Popular and you will know what I mean.
Step 3) Numbers alone is not enough to make investment decisions. You also need to do qualitative analysis. For example:
- The strength of its management team, especially the one sitting right on top. If you refer to my article on “Investment Based On The Character Of Those At the Helm”, you will know what I mean. And I can tell you that Warren Buffett emphasize a lot on CEO selection.
- Company’s expansion plans and whether those plans make economic sense.
- Strength of company’s brand name.
- Locations to customers and suppliers.
- Market share and ease of new entry.
- Contracts awarded recently.
And the list goes on. All these qualitative information is difficult to collect and the only source to a retail investor is the analysts’ report or from newspaper. That’s why you have to read the papers and corporate announcements regularly.
Form Your Final Conclusion
So after all these microscopic analysis and you final have a “feel” of this company. Assuming you concluded that target company is a good investment, the last question would be – is existing price the right price. Is current price undervalued? Looking at the company’s historical price movement, does current price reflects all the good news? You may think that share prices always reflect all announcements made by the companies. I assure you, NOT EVERY TIME. For example, recent US subprime problem caused a deep correct in global stock market. Here in Singapore, we have numerous companies making good profit based on sound economic fundamental; some even exceed analysts’ expectation but yet all their price gone down hill. Why? It’s a game created by mankind remember? Just accept it. I can bet with you with all my savings, it will happen again. And when it happens, it is our lucky day. That’s the great thing about value investing and I always share with my friend that we (value investors):
“ARE QUALLY HAPPY WHETHER MARKET MOVE UP OR DOWN”
Once you concluded that this particular company is wonderful and price “looks” cheap, go buy it!
FAQs
How to know if my decision is correct?
You cannot judge a decision by staring at its share price for next few days, weeks or month. That is silly because you are not trading. You will know whether you made the correct decision based on the result of your analysis. For example you concluded that the company’s operating profit will grow, or its expansion will be translated into higher revenue, or higher revenue due to its competitive advantage etc. So did those things happen? If no, then there is an error in your decision and you must find the root cause.
What if someone else have different conclusions?
You must understand that another person conducting his own analysis on the same company may come out with different conclusions. At this point in time, nobody is for sure who is correct. I would suggest that since you have done your homework thoroughly, have faith on your own work, not others.
So what if my analysis is really wrong and I made a loss?
If finally the company you invested performed poorly with bad news everywhere, cut loss immediately. Don’t be discouraged, you’re still on learning curve. Find out what has gone wrong in your decision and make sure you don’t make the same mistake again. A good fund manager will tell you that “it is ok to make mistake; is it not ok to stay with the mistake”.
So with value investing, I still can incur losses?
If you think that learning value investing will ensure 100% correct investment decision, you come to the wrong place. Grow up! There is no investment without risk. Personally, I don’t believe that Peter Lynch or Warren Buffett has never made a single (investment) mistake! You want zero risk then put all your savings in the bank, and you will earn peanuts out of it. I mean get real! Banks make big money by borrowing from you cheaply (through saving account) and lend it out expensively (bank loan) to you! Don't tell me you don't have a savings account plus bank loans for your car, house, renovation or study etc.
But through value investing, your success rate will be much higher than monkey throwing darts. If you make seven good investment decisions out of ten, you are going to make a lot of money. That’s what I experienced after I adopted value investing. Since then, I made a reasonable profit every year (>10%). It’s not like lots of money but definitely many times higher than bank rate. And I can assure you that there are many more value investors earning a much higher returns than me.
Lastly, knowing what, how and when to buy is not enough. This is only part of the lesson. You also need to know when to sell. Yes, when to sell is just another important topic that you cannot live without it. I will share on this topic some other time.
