Framework for buying stocks

here is a program i use to buy a stock and i strongly suggest that you follow it:

a. Select the way you choose a stock that meets your criteria
what is the reason you are buying a stock? Is it for capital appreciation? is it for dividend gains? Are you buying the stock because it is a consistent performer in the past with a low PE? or are you buying it because of future growth prospect? Select your investment criteria and you will be able to zoom in on the stocks that would capture your eye.

Once you determine your investment criteria, do NOT break it in any way, do not break it because your investment criteria is your circle of competence and you ought to be good within your circle of competence to make a buy/sell call. Anything that is outside your circle of competence i would strongly advise you not to buy at all,

b. Write down why are you buying it.
I normally write down in a piece of paper why i am buying the stock that i am buying, only on a piece of paper. anything more than one piece will be a waste of time, and i never use sentences that most analysts do to make them look smart. " Due to the economic uncertainty, the yield between the US treasury and the KLSE is expected to bla bla bla". NO. Just write down in really simple words ( of course if you ask your broker, he would tell you so many financial jargon that would make you feel stupid.) Im buying it because their PE is low, their profit is increasing and their main competitor just went out of business etc etc.


c. Write down why you are selling it.
Many people would buy stocks not knowing when to sell. selling is an afterthought, the result of market movements and factor in which they cannot control. Don't be like a deer caught in the headlights of a car. Prepare yourself. Remember the market is inefficient, everyday it will go topsy turvy like a freaking roller coaster. Will you sell because it dropped 20% yesterday? Well, you freaking should not if you know the reason to sell. You should only sell of the company's fundamentals deteriorate as what you expect and nothing less will make you liquidate it.

Me? I normally sell when the profit is starting to decrease, the company is mired in an industry where profit margin is shrinking and management do not know what they are doing.that is my cardinal sin.


d. Write down how it would happen.
You can write down what will happen if your company performs as you expect. Would the stock price increase? if it does not, is there a reason?

write down any other things that may happen that could affect your stock price? Is there a financial storm coming? if there is what will you do? what i normally do is that i always keep at least 20% of my portfolio as cash, this is to ensure that i have a security net to profit from any panic selling. I cannot predict what will happen tomorrow or next week, but i can safely predict that if the company increases their profit by x% this quarter, the stock price will eventually follow. thus the 20% cash is to ensure that any panic that causes a price decrease i can profit from it.

Company in a boring industry

As promised, I will select one stock in a boring company which has all the potential to be a multi bagger, but do make your own judgement call:

Emivest:

Profit attributable to shareholders
2008-RM 11, 273, 373
2009-RM 17, 348, 627
2010-RM 21,434, 809
2011-RM 37,000,000

Fundamentals
As can be seen, from 2008-2010 their profit has increased albeit slowly in very lousy industry. The industry: livestock feed and duck breeding. Not something you would be particularly proud to own.
but for crying out loud, look at that earnings! i always use 2008 as my base because if you can earn money in 2008 (financial turmoil), you can be damn sure they can earn in the future.

PE: less than 2, ( for those who do not understand how PE works, i will explain in my next blog and why i adamant on selecting low PE stocks.) where on earth can you find a company that grows their profit every year at such a low PE.

They have branched out to Vietnam in their pursuit of growth for their duck business and in the future, their earning will still be growing ( nothing spectacular) as they can replicate their successful business model, their efficient operations without much of a glitch or errors that may impair their earnings. This is what i would call Replicable Development Model. The higher the RDM the better it is for their earnings.

Heaven


Now with the current market situation, share prices will definitely drop. And with the company in such boring industry it will take a while before lady luck shines on her.

A risk associated with heaven would be that a bird flu suddenly comes along and all the ducks are killed off. Now that would be catastrophic but it is something that we cannot have control over. Just be weary of such forces of nature.

Human

Your share price will only go up if there is someone who is willing to pay a higher price for your part ownership. And Emivest has very low trading volume, thus their share price may just linger there for months of not years as nobody would pay any attention to them. Is that a good thing? Well, if you are here to make a quick buck, i suggest you just dump all your money into football betting, twice the thrill and twice the potential pay-out!

I am perfectly happy to hold on to a part ownership of a profitable company for many years, waiting for their stock price to reflect their true value. Thus if you have the same mentality, just be aware of this.

Conclusion:
Multi bagger in the making? Only time will tell but at current price of RM0.90 i would say it is a good buy.

Selecting a good stock

This is the first blog for Monnaie, a blog to reach out to the masses on financial literacy, but focused more towards stock selection. The main reason stock selection is chosen is because this subject has caused many debates among many scholars, professors and fund managers with each touting the merits of their own strategy; thus leading to more confusion.

When I first started, I was also totally confused. Spent many days ( and sometimes night) trying to figure out which works. Technical analysis? Fundamental analysis? PE ratio that is high or low is good? ( if you browse through google, there are 100 sites saying a high PE ratio is good and another 100 saying that low PE ratio is good! sheer madness if you ask me!) cash flow analysis? 

Which leads to my First rule of Investing: Don't listen to anyone!

That is my first piece of advise to you. I learnt it the hard way by trusting people, my uncle's second cousin's wife's neighbor's maternal grandmother gave me my first stock to buy; which was a mining company. Rumour was swirling that the share would soar in a few days and that it is good to buy in now. I jumped in with two feet, hoping to make a quick buck.

Big mistake!

The share price tanked shortly afterwards. At first, agony, then despair, then anger, acceptance, guilt, the emotions going through that order.

I learned that day never ever trust anyone. Not the neighbors, not the analysts in the papers (most times all the time, when an analyst's report comes out to encourage masses to buy a stock, I am ready to sell.) not my dog. I trust myself.

Selecting a stock is not hard, all you ever need is to trust yourself, even when the tide is going against you, the stock fell 10% the day after you bought it. No problem, so long as you have done your research and the fundamentals did not change.

Don't trust the management of the company you plan to buy either; they will sprout all nonsense about how good their company performance will be next year ( remember Gpacket? A malaysian company in the internet provider business, for the past 4 years they had been saying that their company would be turning around the next year. They are till turning around! Im guessing they are turning in a big circle.) 

The first key to selecting a good stock is to understand the company. To people wo tout a top-down approach( basically meaning select an industry and drill down to individual companies under that industry) I say bullshit. They normally choose industries that are doing well, which means more competitors, which leads to lower profit margin in the future. I make the most profits from companies found in dying or boring industries. why you ask? Simple, in dying industries, companies tend to be cost-cutters, be more efficient leading to at least profit during bad times, and in most cases, exceptional profit during the good times; and when most competitors are out of business, well, good companies get the whole pie to themselves.

Do that! Select a company that is basically tanking; no1 has ever heard of, bothered too much about it. I can think of a few and in my next post i will share one company in that particular industry