15 Aug 2012
A friend asked why I am still in the stock market when there are so much of uncertainties. Both the United States and Europe have so much of financial difficulties and unemployment, India’s Rupee is at historical low and China has lower GDP growth. Under such conditions, how can you still expect to make money from the stock market?
In fact, this is the best buying opportunity to pick up undervalued growth stocks when most fund managers and investors would reduce their holdings -be a contrarian investor.
Sustainable profit growth prospect
As you know, there are many criteria for stock selection, such as P/E ratio, NTA, intrinsic value, cash flow etc. In my opinion, I consider the most important criterion in stock selection is sustainable profit growth prospect. I will never buy any stock, however cheap it is, if I am not sure it can make more profit in this year than last year because when the company announces its annual report with reduced profit, most investors will dump the share and the share price will be depressed.
Picking winning stocks means that we pick the companies that can meet the constant challenges of competition, supply and demand, change of fashion and style design, obsolete stocks write off, etc. There are also unforeseen factors such as variation in interest rates, import and export restriction, foreign exchange variation, change in Government regulations, etc. Unpredictable inclement weather like the recent flooding in Bangkok which affected production, that even the most well run of companies such as Toyota and Honda could not escape.
Best form of investment
In my view, investment in the stock market is the best form of investment. They are tax free, have no management problem, and you can reduce or liquidate all your holdings at any time. There is a classical saying in the market – “You can buy the winning horse after the race”. This means that you can still buy a good share after the company has announced its profit.
Reasons for share price to go up are:
a. Exceptionally good profit growth prospect
b. Fund managers must be interested, liquidity, publicity etc.
c. Dividends are an important catalyst for moving share prices up
d. Unexpected good news of profit, bonus issues etc.
What is the best Buy?
After having seen so many unexpected surprises in the stock market, I consider the safest shares to invest are undervalued oil palm shares. Almost all the leading Plantation Companies have a compound growth rate of more than 20% per annum. That means you can double your capital in about 3 years. If you have bought KLK, IOI, United Plantation or Genting Plantation, you would have been able to double your capital in about every three years in the last 10 years. All these Companies are famous and are no longer cheap. But there are many other less known and undervalued plantation companies for you to buy.
The reasons for this exceptional growth rate are:-
a. The production cost for Crude Palm Oil (CPO) is about Rm 1,300 per ton and the average selling price has been more than double the production cost in the last 10 years or more. The average CPO price for 2012 is about Rm 3,000 per ton. Due to the current drought in the U. S. which is affecting the production of soya and corn, many analysts believe palm oil price will go up. Which business can offer such big profit margins?
b. The demand and profit are sustainable due to population increase. Moreover, both China and India who are our largest buyers have been improving their populations and economy. The financial problem in Eurozone and US has little or no effect on our palm oil market.
c. A palm tree will start fruiting after 3 years. It will continue to bear more fruits until it is about 16 years old after that age it will begin to bear less fruits. Only after about 22 years a palm tree needs replanting.
d. The land always appreciates in value.
e. There is good profit growth prospect and sustainable profit
I am obliged to tell you that plantation shares form the major part of my investment portfolio. If you decide to buy, I am not responsible for your profit or your loss.
How to become a super investor?
I started serious investing in public listed shares when I retired from executive work at 50 years old. I was not an accountant nor have I a MBA degree. I was just a civil engineer and I hardly knew how to read a balance sheet at that time.
I started by reading to understand the basic fundamental principles of share selection as practiced by Warren Buffet, Peter Lynch and other great investment gurus. These are the key traits to being a super investor that I picked up.
Trait 1: Be a contrarian investor, that is, the ability to buy stocks while others are panicking and sell stocks while others are euphoric. In 1983 when China declared that they wanted to take back Hong Kong, the people were selling as if there was no tomorrow because the Communists were coming. The Hang Seng Index plunged to about 700. Currently it is around 18,500.
In such a situation at that time, would you buy Hong Kong shares? I did.
Trait 2: Obsession in playing the game and wanting to win. Winning investors don’t just enjoy investing; they live it. They are obsessed in enhancing the value of their holdings.
Trait 3: The willingness to learn from past mistakes. Most people would much rather just move on and ignore the dumb things they’ve done in the past. I believe the term for this is repression.? But if you ignore mistakes without fully analysing them, you will undoubtedly make a similar mistake later in your career.
Trait 4: An inherent sense of risk based on common sense. Most people believe analysts’ reports which are often ‘a buy’ recommendation. It is very seldom they recommend ‘a sell’ because they would lose the business from the company he has recommended ‘a sell’. You must always take any analyst report with a pinch of salt. I believe the greatest risk control is common sense.
Trait 5: Confidence: Great investors must have confidence in their own convictions and stick with them, even when facing criticism. Buffett never got into the dot-com mania though he was being criticized publicly for ignoring technology stocks. He stuck to his guns when everyone else was abandoning the value investing ship. He was proven right when the dot com bubble bust.
Trait 6: Clear thinking. When considering a share, you must try to understand the nature of the company’s business and its inherent difficulties so that you can evaluate your risk exposure. There are a lot of people who have genius IQs who cannot think clearly, though they can figure out bond or option pricing in their heads.
Trait 7: And finally the most important, and rarest, trait of all is the ability to live through volatility without changing your investment thought process. This is almost impossible for most people to do. When the market makes a severe correction, most people dare not buy more shares to average down or to put any money into stocks at all when the market is plunging. They would begin to doubt their own judgement.
How to take advantage of margin financing?
After you are sure that you can pick good stocks, you should take advantage of margin financing to maximize your profit. Currently most Banks have too much cash and they are offering loan at base lending rate or lower. At this cheap rate, any investor with reasonable skill should be able to make more money than the interest rate.
When you borrow money to buy a house, the house as collateral will most likely appreciate in value. But when you borrow money using shares as collateral to buy more shares, the share price can often come down in value and you will have a margin call if you borrow to its limit.
To avoid being forced to sell, you must not borrow to its limit. You must always have spare facility so that you can buy some more when the share price plunges. Most ordinary investors would be afraid to buy some more shares when the share price is cheaper than what they paid earlier. You must be smart to buy when it is cheaper than the price you paid before.
To be able to maximise your profit, you must take full advantage of margin financing. Most good business mangers borrow money to be able to do more business. If they trade within their own capital they are considered inefficient.
You must have confidence in your own share selection skill and buy while others are panicking and sell stocks while others are euphoric in buying.
This article is posted by Koon Yew Yin.
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