Asset Management & Trading Education for KLSE

Archive Page 4

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…

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.

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. 2 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.

Music Review: Red Earth

Published by dirtydog January 1st, 2008 in Music Review. 0 Comments

Tremendous Effort for Dee Dee!

Although Africa is an immensely musical continent, Mali enjoys a prominent place on the musical map because of artists like Salif Keita and Toumani Diabete, through whom I’ve also become acquainted with Malinese instruments and melodies. I love the sound of the kora, a guitar-type instrument, which has the effect of taking me back to earth and simple mother nature everytime I listen to it. I also love jazz.

But.. I like very few fusion albums because to me, different styles embody different philosophies and usually an artist will resort to producing a fusion album when he or she runs out of original ideas - just because at the superfluous level the sound is intriguing enough to cobble together 45 or so minutes of music, but the result is a strangely hollow experience, because most fusion music loses the appeal of both types of music when mixed together.

To produce a good fusion album it’s important not to lose that essence and stay true to the music being blended. In fact, more energy and thought will need to go into the album (rather than less).

So when you listen to ‘Red Earth’, you will get what I mean. This is an album which has been thought through and through and as a result it stands up as a proper jazz album and also as an african album. No mean feat especially as Dee Dee Bridgewater, an American jazz singer, is properly matched against proper Malinese singers (like Diabete) and made most of the recordings in Mali itself. I fully agree with the review given to it by Guardian Newspaper. Wonderful!

Quick Comparison of Power Companies

Published by dirtydog January 1st, 2008 in Mega First Corporation Bhd, Tanjong Public Limited Company and Tenaga Nasional Bhd. 0 Comments

Happy New Year Readers! May you have a prosperous new year ahead of you. There’s no reason why you should not, as long as you stick to good trading and risk management techniques.

In an earlier post I showed how to compare the companies against one another. In the attached you will find a PDF which compares all the power generation companies.

As you can see MFCB has the highest ROE, which is why it is one of the favourites in this sector - at least double that of its competitors like Tanjong and Tenaga. It also has the highest asset turnover, which means that its revenues are highest compared to its assets. It also has a pretty low equity multiplier, which means that it employs lower leverage compared to its peers. On the flipside, its profit margin is fairly low. Compared to the stalwarts like Tanjong and YTL it is only half, which means that it is pricing its products very cheaply and selling lots of them to compensate.

So, compared to its competitors this company is making more money, taking on less debt and selling more, and the only negative thing about it is that it is not that efficient. I would love to see its profit margins improve in the following years. And finally going through all the numbers, the runner-up in the list would be Tanjong whose only downside is that its ROE has nearly halved in the past 5 years. Other than that it is demonstrating better profit margins and hence greater efficiency - the only difference being that its asset turnover is not as high, indicating that it does not share the same pricing strategy as MFCB and is lagging somewhat as a result.

When analysing these companies, remember to keep one eye on the PE ratio. Tanjong is currently almost twice as expensive as MFCB with a historical PE of around 14 compared to about 7 because investors have more faith in its management. But the numbers speak for themselves. Could MFCB be undervalued? I’ll let you be the judge.

power-companies.pdf

Review: KLSETRACKER

Published by dirtydog December 24th, 2007 in KLSE Tracker. 0 Comments

Hurray! Today we finally get around to reviewing this service, which we have been using pretty much since we started analysing Malaysian companies.

This service primarily provides fundamental and stock price information and is extremely useful in many ways. If you are a looking for fundamental information and don’t wish to trawl through company reports, this is a very quick alternative because it displays all the important information on a single page. By conducting a search on the company database, it is possible to pull up individual pages on companies and from the top down you get all the info - a brief description of the company business, share price information, news and corporate actions, analysis of shareholders, summary of latest financial statements and key ratios.

The other great advantage is that you can pull up profit, balance sheet, cash flow and key ratio information separately and it will display the information going back 5 years, which is key for meaningful analysis because it is then possible to identify trends. And finally, another great facility is the ’stock picker’ or filter. With this tool it is possible to search for companies satisfying criteria which you decide, based on a variety of factors which as financial ratios, balance sheet information, yield, accounting KPIs etc. In fact, if you familiarise yourself with all the filters and ratios in there, you will get a good grasp of fundamental analysis so it’s also a great way to improve your own understanding as well.

Therefore we use this service not only to get a good feel for a company, but also as part of our screening process when looking for companies to invest it. For a mere RM360 a year, we think this is a no brainer.

We won’t go on about this service too much now because going forwards we intend to post up mini tutorials to show you how we utilise some of the features on KLSETRACKER in the context of specific techniques for analysing companies. So we would just like to wrap up by recommending that you subscribe if you are a serious investor because of the time it will save.

Disclosure Policy

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.