The second part of Cold Eye's sharing is found here.
Essence of his comments:
1. Do not buy stocks which does not have fundamentals (Think: strong stable fundamentals with long-term shareholders). Only stocks with fundamentals can rise in its value.
- During the bear market, the investor can be rest assured to purchase more and more of stocks with good fundamentals with a cheaper price, thus lowering its average cost price and improving the odds of making a handsome profit when prices recover later. The lower the cost of equity, the bigger the benefit, so why not overweight on it?
- Investors who do not purchase a stock after a correction usually did not perform their own due diligence on the stock nor understand its value.
- By just looking at the stock's price and not its intrinsic value, speculators ignore the fundamentals and therefore misses the opportunity in investing in a stock that will create a huge success in their portfolios.
- You may risk losing everything if you decide to buy a stock without fundamentals. Beware!
2. Be overweight on stocks you have confidence in
- After a market correction, the investor must have the courage to invest in good stocks that have been thoroughly researched on.
- However , the lazy investor will never do their homework and thus not understand the true value of a good stock during the market reversal, leaving good market opportunities untapped and losing a great investment opportunity.
3. Characteristics of a Strong Fundamental-Stock
- Reasonable profits
- Reasonable dividend
- Reasonable business growth
- Financially stable
- Reasonable share price
4. Why do we purchase stocks?
The prime reason is because we want to become shareholders(or owners) of the company. If a company is not growing, there is no reason why we should endeavour to become its owner. So, in buying a stock, do ensure that the company is making profits, otherwise do not buy it.
5. Avoid Stocks without Dividends
Some companies avoid paying dividends to its shareholders and conserves cash due to excuses such as reserving cash for future development, contrary to the wishes of the shareholders themselves who would like dividend payout as part of their income. Therefore, avoid dividend-less stocks so as to avoid being trapped in the stock market in a long period of time without any return of income.
In fact, by focusing on the D/Y (as a sign of company's of income stream stability), it also indicates the long-term profitability, low-risk and stability of these companies.
By researching on a stock, the intelligent investor can avoid many pitfalls :) Even if you do not have time to research on a stock, ensure that your stock pick provides a reasonable profit and a reasonable dividend. It is the minimum you should do to avoid buying the wrong stock.
6. Choose a company with moderate business growth
Operating cost ( labor etc) will continue to escalate. Without growing its business, the company will find it difficult to maintain profitability, not to mention increasing it. If the profit declines and the company fails to pay dividends, the stock price will be worse off. Even if the company remains profitable and gives out dividend payments, but without real growth, the share price performance is often below par.
A case in point is China Steel(CSC): Moderate growth, shareholders have a long-term investment horizon, resulting in most shareholders achieving significant returns. With earnings, dividends and business growth, coupled with strong stable financial conditions, a business can withstand the test of economic turmoil, hence a worthy buy!
7. Choose a company with a strong cash flow and low debt
Some companies have very low or even zero gearing(debt), and hold a large amount of cash. These financially-sound companies can ride out the storm even business downturn. When a new opportunity arrives, they are more able to seize new investment opportunities and drive the business to a new high.
8. Cash is King but look at the Stock Price too!
There are two perspectives to holding on to a large amount of cash.
- From a negative perspective, by holding on to a large amount of cash, the investing community sometimes may regard business owners as not having sufficient resources to accelerate the growth of corporate earnings.
- But from a positive point of view, such shares possess tough vitality, and can withstand the storm. Therefore, "cash is king" is true in some cases.
Some listed companies generate good profits, dividends (although not high) as well as growth, but also holds out huge, persistent debt, while the "accounts receivable" is always increasing. In the unclear economic outlook, it is advisable to stay away from such companies.
With the profits, dividends, growth, finance is also robust. If the price is too high, and do not buy. Buying overvalued stocks is equivalent to paying for the value of the stocks a few years later. :)
An example is Guinness Anchor Berhad (GAB). It is definitely the best blue chips, with all the conditions of a high-quality stocks. However, if the intelligent investor had bought the stock in June 2013 at RM22 per stock, GAB would have been a disastrous investment since GAB had fallen to RM 13.50 at the moment. Therefore, even if a stock meets all the characteristics of a good stock ( profit/dividend/growth/stable), one would still need to buy it ONLY at the right price.
9. Pay attention to the company's Price-Earning Ratio (P/E Ratio)
Cold Eye cautions the intelligent investor to pay attention to the stock's P/E ratio before investing. Rule of thumb: The price of the stock should not be more than 10 times of its P/E ratio for an undervalued stock. Learn to calculate P/E ratio here.
The intelligent investor should also look at the company's growth prospects.
- If growth is higher and is quite stable, it is still acceptable for the investor to pay for the stock at 10-15x times P/E. If it isn't, then 10x is already high, and one should be buying at less than 8x P/E.
10. Five conditions of a stock-picking success
After the "quantitative easing" movement, Cold Eye advises that the equity investment strategy should be:
i) Do NOT borrow money to buy stocks;
ii) Do NOT buy too unpopular stocks
iii) Insist on buying only fundamentally-strong stocks.
Compared to 2009, investors who want to make a profit must now have higher intelligence. "Stock picking" will be the key to success - selected stocks, must meet the above five criteria.
Commentary on the Current General Economic Conditions
- After the end of US "quantitative easing", the European economy is likely to decline. The Japanese has also decided to launch their own version of QE, therefore EU is also pressured to conduct their own QE.
- Continuing trends: Elusive movements in interest rates and therefore, the stock market's future will be full of uncertainties( hence volatility).
- The intelligent investor only have one choice: To have a clear investment strategy, in order to make a difference in this environment.
- One thing is certain: the stock market is no free lunch. No pain, no gain.
