Asset Management & Trading Education for KLSE

Archive Page 3

Bought Digi

Published by dirtydog March 12th, 2008 in Digi. 0 Comments

I have now raised my cash equity ratio up to 65% and bought into the post election panic by snapping up Digi for $21.20 on Monday and then $21.50 yesterday, giving me an average price of $21.35. Today it is already up to $23 as investors wake up and realise that opposition is a good thing for the economy.

Opportunities to buy into good companies like this for cheap are few and far between and should be taken advantage of. If you do that for every counter in your portfolio you will die a rich man.

Election Victory?

Published by dirtydog March 10th, 2008 in Investment Notes. 1 Comment

A few weeks ago almost every research house on the street were publishing recommendations on how to play the election in the stock market. Their reasoning was that the government will continue to pump prime the economy. So GLCs such as UEM, ECM, YTL Corp, ICP were being touted. Here’s what DB analysts had to say at the time:

“The election outcome is unlikely to be too surprising and hence, we believe it is unlikely to rock the market. We continue to believe the market will remain defensive amidst global volatility. “

Guess what? Over the weekend they all had a crash course on why one shouldn’t play the market on events and a reminder that they are analysts and not prophets. At last count UEM - down 20%, YTL - down 12.5%, ECM - down 19.8%.

So how does one prepare against such events? Well, the answer is not so clear-cut, but as always, it involves looking at the market and examining the writing on the wall. Last year we had the sub-prime crisis markets such as Japan and US reached a top. And remember the frightful few days when the Hang Seng lost 7000 points from 30,000 just on liquidity scares alone? Since then all those markets have been bearish. There are times when you just have to call a bear a bear.

Now, at trading school they always teach you to avoid developing any views on market direction based on news alone and that it is always the market’s reaction to the news which is important and not the news itself. So although the election results don’t actually have any impact on government policy, the market’s reaction to it is extremely negative. Every week there are many news events. Election results are only one of them (albeit very important), economic results, company results, political news etc. etc. Predicting whether the market will react to any one set of news, and if it does so, in which direction, is extremely difficult. But my point is that if you have a set of collective events which the market has been reacting to negatively starting from the sub prime crisis to the write downs of financial institutions to the liquidity scare, then it is likely that the bears will continue to react negatively to news going forwards.

In the case of Malaysian election results this is no different. If you put yourself in the shoes of an international hedge fund manager, you will not know who the DAP or PAS is, much less its candidates. You may have heard of Anwar Ibrahim, but you would not know much about his views - in particular whether he was business-friendly or not. And when you hear that the opposition has upset the government in its worst performance in 50 years, you’d probably be wondering whether there was something wrong with the country. Who cares? Hong Kong is looking cheap at moment. Let’s play it safe and put our money there…

If I had to surmise why the stock market is down today, this would be reason.

But my dear readers! If you live in Malaysia you will, for once be at an advantage to the international community. We know who DAP and PAS are, we know why they won, we know who won, and we know what they are like. Because of that, most importantly we have information which the international community doesn’t and we will be able to make a better assessment of how things are going to move forwards for Malaysia from here. For once, you will have better information compared to some research analyst working for an investment bank who does not even live in your country or in your world.

Although I encourage you to all make your own assessments as to whether the fears are founded or not, I offer my own analysis.

Firstly, BN still has a majority. It doesn’t have two-thirds anymore, but it is still the ruling party. Secondly, there is no opposition, there are 3 parties (DAP, Keadilan and PAS) splitting the gain between them (albeit pursuing the same election strategy). Thirdly I have not read anything published by any of the parties indicating that they were anti-free market or anti-commerce. No matter how much I try, I cannot imagine a situation where the economy will suffer because of this. The only scenario where this can happen, which is the scenario that BN likes to dwell on, is that it will create tension amongst the local population.

Although I agree that it will, I cannot imagine that this is a bad thing. I mean, we all want our country to remain competitive and we all want our stock market to be strong so that prices can go up. How on earth are we supposed to achieve that without competition? And how can we have a competitive market if we don’t have a competitive government? To me this is the first step in the long road towards real development, and although history will probably not look too kindly on Badawi, I feel that he has been somehow instrumental in helping give Malaysians a real voice this time. Mahathir may be right in thinking that had he still been in power then this would not have happened, but I don’t think that Malaysia would have been a better place. I don’t believe that the opposition are anywhere nearly as strong as they need to be to disrupt the government, and I don’t believe that there is any reason why our companies cannot continue to build and generate profits. I think that it will bring some much needed accountability to the government, and maybe, just maybe, somebody will wake up and realise that they are have to start delivering some results to the people of Malaysia.

I smell blood on the streets, which is my cue for going in. Time to pick up some blue chips for cheap!!

Why Timing The Market Should Be Unimportant

Published by dirtydog February 28th, 2008 in Investment Notes. 0 Comments

These days we hear even more about ‘timing the market’. Ever stopped to ask yourself what this really means? Most people assume it means buying at the bottom and then selling at the top. But that confuses outcome with the process, because how are we supposed to know when the market is at the bottom? Well, would it surprise you if I were to tell you that actually there is no need to guess or think of where the market is headed?

The first reason why there is no such need is this: the diversified portfolio.

Why You Should Have A Diversified Portfolio

The theory behind the diversified portfolio is that it’s not possible to predict when things are at the bottom any more than you can predict how much the Fed will change interest rates. Investors in this school tend to run diversified portfolios which consist of assets spread out across large cap, small cap, international, bonds, commodities etc. and make periodic, regular investments regardless of the performance of the market. The idea is that the portfolio balances itself out regardless of the market movements. You can say that the international portfolio on the left hand side of this blog is such a portfolio. It is something which I have been adding the same amount of money to regularly every month for several years without looking at a single chart or reading a single report and which has earned an average between 8-12% a year. Over the past few months when equities have tanked, the bond and commodity counters have shot through the roof, eliminating the losses on the equities. If you are running a similar portfolio my advice would be to continue buying. If you put the same amount of money into your portfolio every month, you will automatically pick up more assets which are cheap and less which are expensive. Over time, this forces your portfolio to balance itself towards the cheaper assets without you even having to do any research. So over 2008 if I perform the same strategy I will end up buying more equities that I did last year and fewer bonds and commodities automatically, which would be the correct thing to do even from a “market timing” perspective. In that sense I will be buying-low-and-buying-less-when-prices-are-high.If you are one of these investors then stay the course! As the worse thing you can do to the strategy (and your portfolio) is mess with that arrangement, because then you will find that things will not balance out over time and you have inadvertently become an active manager. I would advise you to keep investing regularly throughout 2008.

However as I have said previously you will not be able to follow this strategy if you invest solely in Malaysia. This is because we can only mainly buy equities. So what can the rest of us do?

This brings us onto the next reason why it shouldn’t be necessary to look for timing - Money Management and Bet Sizing.

Money Management and Bet Sizing

Now here I am going to argue that the second reason why you don’t need to guess where the market is going is because the secret to being a successful active manager is that you don’t put yourself in a position where you have to do so. So how is this possible?

Money Management

Real traders will tell you that being good at trading doesn’t involve knowing when the market will go up or what to buy. It involves cutting your losses and letting all the other trades take care of themselves. Although there are many many books on how to develop a trading system, in a way it doesn’t really matter what system you use to enter your trade. The important thing is just knowing when to exit.

For example, a simple stop loss strategy involves selling when the prices close below the low of the 3rd previous candle. This applies whether you are trading by the minute, hour, day or week. So assume that I have bought a share on Monday and am trading by the day. I will sell my position on Wednesday if the price closes below the lowest price which traded on Monday. It’s as simple as that.

Now anyone who follows this simple rule will be out of the market very frequently. Yes, it can be frustrating, and yes, your trading commissions will eat into your capital, but you will not get wiped out and the rate of your losses will slow right down enough to let the winning trades have a chance to work their magic.

But you will not be able to make money if you follow this strategy alone. This is because trading commissions will eventually eat up all your capital, so what can you do to help the situation?

Bet Sizing
Stopping yourself out all the time is not profitable unless you enjoy slowly bleeding to death. You have to do something else to make sure that the money you lost is more than made up by the winners. From experience, I can tell you that just leaving the winners as they are would not be sufficient as eventually they too will get stopped out. It will prolong the inevitable because you will make small amounts, but eventually commissions will eat them away too. So, you should add to your winning positions. This will increase the chances of you making even more money as you are buying into a stock that is showing strength. A simple rule involves just taking the money you obtained from closing out your losing trade and then putting it into the ones which have not yet been stopped out. I personally will just add however much money I get across all counters that are still making money. So, say I sell a share and get $100, and I have 5 shares that haven’t been stopped out yet. So I will add $20 to each share. Simple as that.

Now I dare say that if you follow this system you will make certainly make money. In fact, I even know pure technical traders who just buy everything without even investigating the companies and spend all their time cutting out the losers and adding to the winners without even so much as looking at the index or reading any report or newspaper, or making any guesses over where the market will go.

Conclusion

As you can see, either by employing a diversified portfolio and just adding to it regularly, or being more active and selling the losers whilst adding to the winners, you are automatically disciplining yourself to manage your money without even knowing where the market is headed.

But remember that in some ways it’s never really the strategy that works or doesn’t. It’s your application of it that makes all the difference. The most important thing here is to stick to your system and not deviate. Most people fail to do this and lose money.

Happy Trading!

Dlady

Published by dirtydog February 16th, 2008 in Dutch Lady. 0 Comments

Yesterday I changed my cash equity ratio from 40/60 to 50/50 and added DLady to my portfolio. This is because DLady is what we call a consumer staple, which are countercyclical stocks. After all, no matter what the economy we all need to eat. The only downside is that consumer staples are very rarely growth stocks so I am not expecting this one to shoot for the sky. Also with a PE of nearly 18 I am not exactly picking up this one for cheap. But the hope is that it will maintain its earnings in the face of an economic downturn.

I have also added the breakdowns to the portfolio so you can see the proportion of cash I have invested in each stock.

Happy Trading!

A Comment on Research Reports

Published by dirtydog February 15th, 2008 in Investment Notes. 0 Comments

Here are some extracts from research reports I have gleaned over the last few days:

“We expect the government to continue pump priming into 2008″

“While CPO prices continue to break new records, above RM3,400/t presently, our concern is that earnings could peak this year.”

“Election stocks may see some selling pressure”

“According to a poll conducted by a local daily, Malaysian voters are most concerned about the cost of living, social issues, the crime rate and illegal immigrants.”

What do they all have in common?

These statements are all unquantifiable. And they do not deal in facts. Only opinion. I would not buy stocks based on opinion anymore than I would buy a television or car just because the salesguy in the shop thinks is good.

It’s important to understand that research reports are published by brokers and banks, whose only source of income lies in providing banking or broking services to their clients. Put simply, the more a client trades, the more money a broker or bank makes. Also, hedge funds and institutional clients have fairly short horizons because they have to compete with one another and report their performance monthly or even daily to attract investor attention.

Whilst I do not believe that research is published solely to encourage investors to trade, the client-centric focus of brokers and banks necessarily means that they have to pander to shorter term investors, which is why the majority of reports contemplate issues and news which are only relevant in the next 6 - 12 months. Therefore it is no surprise that research reports are all focusing on construction, election and commodity plays.

The problem with this is that it creates a herd effect as the majority of investors will base their investment decisions on the same criteria. Worse, analysts also get comfort from the masses in that if everyone recommends palm oil IOI corp, then the research analyst who also does so will not suffer as much rebuke if the price of the stock tanks, compared to if he or she went out on a limb and recommended a small unknown company manufacturing electronics, for example.

And going back to my original point, an investor should have very clear criteria based on what he will buy and sell, whether it be a car, television, property or shares.

So firstly I don’t think that anyone can predict where commodity prices will be at the end of 2008 with any certainty, or whether the government’s pump priming (which, incidentally, is something that the government has always been doing as long as it has been around) will benefit a particular company - after all who cares whether a company gets its projects from the government or from another organisation or as a sub-contract?

And would it matter where in the election cycle we would be or where commodity prices are? If a company has good assets capable of generating quality cashflow for a long period of time, can organise its internal structure and debts well enough to make good profits and is valued cheaply, then would that not be the safest place for your money compared to all other types of companies?

Prisoner’s Dilemma

Published by dirtydog February 4th, 2008 in Investment Notes. 0 Comments

First of all I’d like to wish everyone a Happy New Year… May you have a fortunate year coming u ahead.

Judging from volumes, it seems that many investors are unloading or rotating into defensive sectors for the New Year. The question is will the bulls be raring to go again after the CNY? There does not seem to be a clear view from the street as yet, but many blue chip counters have been demonstrating classic symptoms of technical breakdown - which is characterised mainly by a fall below a moving average and the majority of bears out there being technical analysts as a result. These traders will be out of the market and waiting for consolidation.

Value investors however, should pay attention. Because with the technical traders out of the market, any bullish action after CNY will have to be generated by you. The question therefore is, do the value investors consider things cheap enough yet? If you’re not familiar with this type of analysis, it’s called the Prisoner’s Dilemma and breaks down as follows:

Assume that there are two prisoners in a room. Both are given the option of either laying the blame on the other or staying silent. If both lay the blame on each other, then both get 2 years. If both stay silent, then both get 6 months. If one blames the other and the other stays silent, then the prisoner who blames the other will go free and the prisoner who stays silent will get 5 years. From the perspective of each prisoner, the theory states that it is always preferable to betray the other. This is because if he stays silent, then he runs the risk of being put away for 5 years. If he betrays, then the maximum penalty he will get is 2 years, with the potential upside that he will walk away a free man.

Of course investing in the stock market is not as simple, but the thought processes are fairly similar in that each investor will balance his options in the light of what other people are doing, and pick the course of action which best upside and the least downside. Whether you are out of the market, partially in, or fully invested, the secret lies in being able to determine which prisoner you are right now…

Book Review: Against the Gods

Published by dirtydog January 28th, 2008 in Book Review. 0 Comments

When this book was published, I was an active fx day trader who relied on technicals and economics to make my trading decisions. It was difficult to see how this book would be of any use to me so I passed up on reading it.

As my trading grew, my interest also expanded to other areas. First, to equities, where I learnt how to put a value on a company and now, to portfolio management, where I am learning how a combination of assets in my portfolio affects its level or risk and reward.

One of the key lessons in portfolio management is that when you combine a bunch of assets together the level of risk and reward in the portfolio is not just a product of the individual risk and reward profiles of the assets. In other words, it is possible to decrease the risk and increase the reward of the company by combining several assets which, if owned individually would produce the same reward but be riskier to hold. This book does a magnificent job of tracing how mankind developed theories of risk management such as this from the earliest beginnings. As such, it is a great book if you want to understand what risk management is and how it has evolved.

Then about 4/5’s into the book, the author goes onto explain subsequent research, especially on how human beings make decisions, improperly and sometimes irrationally. For me, this is the most interesting part, because as any trader will tell you, the market not always rational because human beings themselves are not rational.

Let me provide an example:

Suppose that a family is on a beach during a vacation, alongwith a hundred other families. Their child, alongwith several hundred other children are paddling in the water. Suddenly at a distance, there is a tsunami and the warning goes out to the families, who realise that the tsunami is almost upon them. There is only a slim chance that each family will be able to rescue their own child from the water because of the time it takes to locate the child. Let’s assume that only 4/10 families will be able to do so before the wave hits. However, it is possible that instead of trying to locate their own child, each family just rescues the child which is closest to them. This cuts down on the time taken to rescue a child and makes the whole process more effective. And if every family did this, the probability of the child surviving shoots up to 8/10. Twice as likely to survive.

However if the child were yours, would you adopt this strategy? The interesting this is that most people will say no.This is because human beings prefer to avoid loss rather than to seek a gain, and explains a lot about why people hold onto losing positions when they trade.

Questions like this are being considered at the forefront of the finance world, and whilst I do marvel at how far human beings have developed in their ability to play games and trade I am in awe of how little we still know about what drives financial markets.

Global Outlook: Diversify Into Strength and Stock Pick Into Weakness

Published by dirtydog January 21st, 2008 in Periodic Outlook. 0 Comments

When markets head south, the extent and speed to which it does so can surprise many. In the last 3 months the US and Hong Kong markets have fallen about 15 - 20%. Can you imagine losing 15 - 20% of your net worth over 3 months? Usually it takes even professional money managers several years to make that kind of return. And don’t forget that even 30% drops are ‘normal’ in a bear market.

But any downturn in the market are buying opportunities so I have been busy thinking about potential buys - except that since almost nothing has escaped the clutches of the bears, everything looks considerably cheaper than they were. And since I do not believe that it is possible to time a bottom, the wisest approach would be to accumulate into the weakest performing sectors over 2008, buying a little bit every month.

I would like to base my decisions on the premise that the long term stories have not changed. And that Asia continues to grow and consume. Basically that means going long everything that China wants. So I have been thinking of putting money into commodities, international banks, infrastructure related companies, and clean energy. But how will that affect my balanced portfolio? Herein lies the problem: How do I maintain a properly diversified portfolio when I’m out there actively picking stocks? If you remember, a properly diversified portfolio does not depend on active stock selection. It depends on maintaining a proper proportion of assets which are diversified (in my case, it’s US and emerging market stocks, fixed income bonds and commodities).

The truth is that it is impossible to do both, and if I had faith that I will be able to outperform the market in the long run I would look to buy into the weakest performing sectors and changing the weighting of my portfolio over time, which means selling into the highest performing asset classes and buying into the lowest performing one. If things get bad for equities then over the long run then that means that I will eventually be almost 100% invested in equities. The only question is whether by cycling into cheap assets in this way I will outperform the market over the long run. Warren Buffet or Benjamin Graham would say yes, and I would agree.

So taking a step back from all this, the overall strategy can be summed up as: diversify into strength and active stock picking into weakness, which will be theme for 2008.

Using A Trading Screen To Compare Companies

Published by dirtydog January 12th, 2008 in Digi, Investment Notes, Mega First Corporation Bhd and Tanjong Public Limited Company. 0 Comments

Considering the financial information of one company on its own does not usually give an investor sufficient information to make an investment decision. This is because we don’t have anything to compare the numbers to. For example, a company with a declining profit margin might be a good investment in a cyclical industry if all other companies in that same industry are suffering from an even greater decline, or a company with growing profits may be a bad investment if all its peers are growing even more.

Short of ordering every financial report and plugging all the numbers manually into a balance sheet, this exercise can be performed relatively easily using a trading screen.

Now, many people get a bit confused by trading screens because they simply plug in made up numbers which seem reasonable to them. Then when a result is obtained there is nothing to compare the results against. To use a screen effectively it is important to plug in only real numbers of specific companies.

Below, we run through a simple exercise using KLSETRACKER’s trading screen (or filter) to show you how a trading screen should be used properly.

SCREEN 1

In the login screen below you will see the filter options on the right (in the red circle).

SCREEN 2

As you can see, there are three filters - Market Price Ratios, Accounting KPIs and Total Yield). We’re not sure why KLSETRACKER does not just have them all on the same page since combining them altogether would result in a more powerful filter. But we shall use the Accounting KPI filters in this example.

The next step in the exercise would be to find a company we want to compare against others. We have written a little bit on MFCB recently so lets use that as an example.

Either by looking at the annual report, or online (or looking up the counter’s financials in KLSETRACKER itself) find a number (e.g. ROE or RORA) and plug that into the filter. In this example I used the ROR, which 9.64%.

This brings up MFCB as per the below (in the middle of the page).

In the final step, note down the key ratios for MFCB you are interested in. Our advice is to just take one ratio from each indicator group (i.e. 1 from “net profitability”, 1 from “investment”, 1 from “liquidity” and 1 from “gearing”), otherwise the filter will exclude too many companies.

Then go back to the filter page and plug in these numbers, and voila! you will come up with a list of companies which share the same ratios as the company you are looking at. For MFCB, I plugged in the ROR, dividend yield, operating cash flow ratio, leverage ratio and operating cashflow/total assets ratio and got these 7 other blue chips: BAT, BJOTO, DIGI, NESTLE, TANJONG, YTLPWR.

This tells me that MFCB is a fairly well run company and can stack up against these other giants. Also, it is cheap compared to them, with a much lower PE. However, it also tells me that other companies sharing these ratios are also much more profitable.

From hereon, it’s possible to relax the numbers a little bit to capture more companies. For example it’s possible to go back into the main filter page and plug in the same numbers but use an ROE figure which is slightly lower, like 12%, instead of 14.65%. This will bring up more results.

CONCLUSION

KLSETRACKER’s trading screen is an extremely useful tool. That is not to say that it is perfect. Apart from having all the filters together we would also love to compare historical key ratios so that we can know how these change over time. (We should add that KLSETRACKER currently shows historical ratios, but offers no ability to compare them on the same screen) We would also love to be able to filter historical prices. But those features are more like icing on the cake. If you’re looking for a robust basic screen then we would recommend using this feature (especially as a tool for comparing companies !)

Happy Screening!

Disclosure Policy

Tradingmalaysia is an independant website and values its integrity greatly. Therefore it does not review services or products which it does not genuinely believe to be good, and promises to disclose any arrangements or benefits which it enjoys from services which it reviews.

For this review Tradingmalaysia would like to disclose that its editors receive free subscriptions to the KLSETRACKER services and has a rebate arrangement for referring customers.

Popular Myth #3: Investing in blue chips will not make you rich

Published by dirtydog January 7th, 2008 in Investment Notes. 0 Comments

Many investors are under the impression that one cannot make a lot of money investing in blue chips. The predominant feeling is that blue chips are well researched and hence any information regarding the stock will already be out in public. Therefore it is difficult to get the information edge. In fact, this website also advocates looking for neglected, well-valued firms which by definition rules out blue chips from the start.

But whilst it is true that it is difficult to get the information edge on a blue chip, this does not mean that you will not be able to make money from them. Before we go onto explain why, we will explain why it is important that investors do not neglect analysing blue chips.

The one advantage which blue chips have over small caps is that they are more difficult to manipulate and hence more properly priced compared to small caps. By studying why a blue chip is priced as it is, you can get a lot of information on what the investment community is valuing at the time. Is the company valued at such because of good management? Core product? Dividend yield? Government linked? By doing this exercise over several companies, one will be able to derive a pretty good understanding of the values which are currently in vogue in the investment community. Then, it is possible to apply such values to smaller caps to see whether they stack up. If a small cap shares the same qualities as the blue chip, then you will be able to say that the small cap is relatively undervalued.

But, I digress. Blue chips have another property which is important. They are usually more highly correlated to the KLCI due to their larger market caps. This is important for risk management purposes because whilst it might be beneficial to invest in small caps and participate in the chance that they may explode upwards, you may not want to risk all your money on these small caps. By keeping a significant amount of money in a basket of large caps which are highly correlated to the KLCI, it is possible to reduce the overall volatility of your portfolio and hence your sanity if prices start to move drastically. After all, getting rich involves not only being able to pick good stocks, but also managing your risk/reward ratio when things go crazy.

Conclusion: Blue chips are an important way to manage your risk/reward ratio and give you an accurate idea of the values or factors favoured by investors.