Old Investing Advice Gems from Wallstraits days

(13-07-2011, 12:51 AM)d.o.g. Wrote: The most effective way that I know of is to start with "A". There are only 700-odd companies on the SGX so it won't take that long, a couple of months if you are devoting 1-2 hours a day. You will get faster as you get more practice.

Learn to analyse by elimination: first remove companies that are losing money, heavily indebted, very small etc. This will only take 1-2 minutes per company and should cut the list down by at least 50%.

There is a "Shares Investment" book that costs $6 and supposedly lists the SGX companies by PE, ROE, P/B, dividend yield etc. I flipped through a few editions and never found it useful because invariably the companies that came up on the list were distortions e.g. property companies on the low PE list, companies booking extraordinary gains on the ROE list etc.

I use Shares Investment but instead of the book version, I would recommend the online digital version. Similarly to the book version, you get to quick glimpse of the past 2-3 years of financial performance of the companies which is particularly useful if you are skimming through 700+ companies continously. The online version has the advantage of all 700+ stocks where the book will only showcase the popular 300+ stocks and at a small fee of $6 for a month (abt the price of the book). This will save some time wasted from googling the company or downloading the AR pdf and searching the financial data.

The disadvantage is that you can have the book forever but limited period for Shares Investment digital.

Another free alternative I know is to use Clarity of DBS Vickers if you subscribe an account. However, it is not as user friendly in my opinion and does not show ROE trend.

Please share if you have other more effective methods. Thanks!

Appreciate the time taken by u guys to draft the replies to my question, am grateful

As I expected, have to consider all stocks then truncate the list.

- When u say a coy being too small is an eliminiation factor, do u look at it just by it's market capitalisation?

- How many years of Financial Statements/Annual Reports do u think is adequate for initial analysis? 3yrs? 5yrs?

- Do you think it's prudent to consider newly listed coys(having listed for 2 years or less)?

Ah, Share Investment. The digital version sounds helpful. But does it just show the calculations/analyses/summaries of the financial ratios/performance or does it also provide downloadable versions of the actual Financial Statements(past and present)?

Thanks again for ur input, and sorry for the additional questions

Quote:Learn to analyse by elimination: first remove companies that are losing money, heavily indebted, very small etc. This will only take 1-2 minutes per company and should cut the list down by at least 50%.

Thanks d.o.g for another insightful posting.
May i know why the "very small size" is one of the filtering criterias? Any concerns?

Quote: the only way you can do "better than average" is to buy only during a recession, and at all other times (especially during a bull market) you should not put new money into the market.

Before i am more toward "Munger", I thought of tweaking the DCA that was mentioned by Buffett.
Instead of putting money in fix timing (eg: monthly), the money only invested (or rather speculated) when the market is depressed.

Satchmo Wrote:- When u say a coy being too small is an eliminiation factor, do u look at it just by it's market capitalisation?

I look at the size of the business. The reason is because random events not only strike at random times, they also do random amounts of damage. A small company could be badly hurt by a random event, while a larger company might be able to continue with only minor interruptions.

For example, take the extreme case of a shipping company with only one vessel. If that vessel sinks, revenues come to a halt. Insurance can be claimed but that takes time, and the company continues to incur costs in the meantime. If the company's reserves are insufficient it may well go bust.

A company with 20 vessels would face proportionately less risk from random events.

Certainly, at the investor level, a diversified portfolio would also mitigate random event risk. But since it is easy to almost entirely eliminate this risk by avoiding tiny companies, I see no reason not to.

Satchmo Wrote:- How many years of Financial Statements/Annual Reports do u think is adequate for initial analysis? 3yrs? 5yrs?

It depends on the stability of the underlying business. For cyclical industries e.g. shipping, steel, construction, property development, cement, aviation etc it may be necessary to go back 10 years or more in order to understand how bad things can get.

Personally, I think 5 years is a sensible minimum. 3 years, if taken in the tail end of an economic boom, may well paint an overly optimistic picture, with tragic consequences for the inexperienced investor. 2 years is definitely not enough - any 2 points form a line, and the human tendency is to extrapolate the recent past into the distant future, with unhappy results virtually guaranteed.

Satchmo Wrote:- Do you think it's prudent to consider newly listed coys(having listed for 2 years or less)?

No defensive/conservative investor should consider newly listed companies.

First, companies tend to go public at the height of a boom. That means that generally their shares will be overpriced at IPO, and their shares may stay overpriced for some time.

Second, newly listed companies have only a short operating history available so it is not clear how well the companies will fare in bad times. Many companies also bend accounting rules to maximize their reported profits in the years leading up to IPO, so the real earning power is not easily calculated.

Third, the managers have not had a chance to show their true colours, so the investor cannot easily distinguish the honest businessman from the crook.

Aggressive/enterprising investors are of course free to consider such companies, with the proviso that they have done all the necessary homework and do not rely on others (especially the brokers) to inform their judgment. And certainly they have nobody to blame if they lose money.

Thanks moolah and others for bringing back the old Wallstraits posts.

In the old Wallstraits, d.o.g's posts were always insightful. Dennis' posts were frequent, sometimes useful, and probably benefit the new investors more often than not.

Nonetheless, I think I benefitted most from Curtis (or Sage) real-time portfolio and replies to questions. As I was new to investing then, it was a real eye-opener to see how he constructed his portfolic, his logic behind each purchases (even though you don't agree with him) and other forumer's discussion/disagreements on with his investment logic. It was probably the best $100+ I spent annually on investment education.

Nowadays, you cannot find such educational stuff.

Quote:When he made losses in Unifood, no reflection was done. The Unifood losses were just brushed aside with something like "We are still confident about Unifood's future prospects, but other stocks and wine are more promising.". So, sell Unifood at a loss. Imagine your fund manager use this sort of excuse everytime he loses your money.

I think Sage's explanation was fine. Probably he meant that he found better investments and due to lack of cash, he had to sell the less promising Unifood. Nothing wrong if one investor switches to other more promising stocks, even if he takes a loss.

thinknotleft Wrote:I think Sage's explanation was fine. Probably he meant that he found better investments and due to lack of cash, he had to sell the less promising Unifood. Nothing wrong if one investor switches to other more promising stocks, even if he takes a loss.

As I recall I had a debate with Sage over his reasons for selling one stock to buy another. His rationale was that stock A was better than stock B so he sold B to buy A. My quibble was that he didn't show that stock B was the worst holding in the portfolio, that it was not only worse than A which wasn't in the portfolio, but that it was also worse than C, D, E and F which were already in the portfolio. He refused to discuss the matter further so that was it.

As for United Food, there were many debates about the validity of valuing it using DCF. Sage's standard approach was to use DCF for everything in the portfolio, on the basis that it was the best tool to use. BRK (another forum member) and I disagreed with Sage on the basis that United Food was heavily impacted by things like disease and feed costs, so the business results were not easily predictable.

BRK and I also had issues with the use of DCF to value Westcomb (now delisted) since it was a boutique investment bank where most of the profits were one-off in nature - how many times can you help a company go public?

I think in the end fundamentally the big divergence was whether DCF should be the only valuation tool used. Sage felt so, while BRK and I did not agree.

Today I seldom use DCF because I rarely find businesses that lend themselves well to a DCF analysis. Exceptions include the shipping trusts and KGT, where revenues are fixed for a long period of time and expenses are modest in relation to revenues.

For most of the companies I end up investing into, I am confident that they will do well in the future, but I have no idea how well. I only believe that, based on their track record, their current balance sheet and the price I am paying, my future investment results will at least be satisfactory.

(14-07-2011, 02:04 AM)d.o.g. Wrote:

thinknotleft Wrote:I think Sage's explanation was fine. Probably he meant that he found better investments and due to lack of cash, he had to sell the less promising Unifood. Nothing wrong if one investor switches to other more promising stocks, even if he takes a loss.

As I recall I had a debate with Sage over his reasons for selling one stock to buy another. His rationale was that stock A was better than stock B so he sold B to buy A. My quibble was that he didn't show that stock B was the worst holding in the portfolio, that it was not only worse than A which wasn't in the portfolio, but that it was also worse than C, D, E and F which were already in the portfolio. He refused to discuss the matter further so that was it.

As for United Food, there were many debates about the validity of valuing it using DCF. Sage's standard approach was to use DCF for everything in the portfolio, on the basis that it was the best tool to use. BRK (another forum member) and I disagreed with Sage on the basis that United Food was heavily impacted by things like disease and feed costs, so the business results were not easily predictable.

BRK and I also had issues with the use of DCF to value Westcomb (now delisted) since it was a boutique investment bank where most of the profits were one-off in nature - how many times can you help a company go public?

I think in the end fundamentally the big divergence was whether DCF should be the only valuation tool used. Sage felt so, while BRK and I did not agree.

Today I seldom use DCF because I rarely find businesses that lend themselves well to a DCF analysis. Exceptions include the shipping trusts and KGT, where revenues are fixed for a long period of time and expenses are modest in relation to revenues.

For most of the companies I end up investing into, I am confident that they will do well in the future, but I have no idea how well. I only believe that, based on their track record, their current balance sheet and the price I am paying, my future investment results will at least be satisfactory.

hi d.o.g. From the last paragraph, it seems that you calculate the margin of safety using some other valuation methods. Can I know what they are? Or are you now more actively managing your portfolios to reduce the conservative requirement of margin of safety?

(14-07-2011, 02:04 AM)d.o.g. Wrote: Today I seldom use DCF because I rarely find businesses that lend themselves well to a DCF analysis. Exceptions include the shipping trusts and KGT, where revenues are fixed for a long period of time and expenses are modest in relation to revenues.

For most of the companies I end up investing into, I am confident that they will do well in the future, but I have no idea how well. I only believe that, based on their track record, their current balance sheet and the price I am paying, my future investment results will at least be satisfactory.

Hi d.o.g., thank you so much for your insightful posts!

I would like to know how do you determine at what price to buy if you do not do intrinsic value calculation through DCF?

Also, I believe DCF can be done on companies with predictable cash flow for the past 5-10 years. With such predictability, we can project the cash flow into the future to get the intrinsic value. Since we might not have perfect projections due to random errors, we use a margin of safety (I prefer MOS of at least 25% for stable companies). What's your take on this? Thanks.

(14-07-2011, 10:17 AM)FFNow Wrote: Also, I believe DCF can be done on companies with predictable cash flow for the past 5-10 years. With such predictability, we can project the cash flow into the future to get the intrinsic value. Since we might not have perfect projections due to random errors, we use a margin of safety (I prefer MOS of at least 25% for stable companies). What's your take on this? Thanks.

I have a different view. Cash flows and profits are notoriously difficult to predict with certainty even in 1-2 years into the future, much less 5-10 years. The dynamics of business could mean more competitive forces acting on the company, the industry may suffer/prosper and many external factors may also impact the company which would be unforseen (e.g. recessions, natural disasters etc). Thus, DCF (I feel) is very good for theory lessons but in a world of uncertainty, it cannot be used reliably without inputting many assumptions, most of which will surely be off-tangent far into the future. Hence, you will get a very distorted and inaccurate number. If you rely on that imprecise number and factor in say 25% margin of safety, it may not help much at all because the number may be really far off in the first place!

Hence, I don't use DCF at all during my analysis. I use a more holistic approach where I look at quantitative and qualitative factors, and "simpler" approaches such as P/B and PER as well as NAV (in certain cases) works well enough.

Investing is more "Art" than science I feel. You can churn all the numbers you want, but there are always intangible aspects of a business which may affect it that cannot be quantified. That will measure and test the skill and experience of the investor to achieve a consistent return.

(14-07-2011, 03:31 PM)Musicwhiz Wrote:

(14-07-2011, 10:17 AM)FFNow Wrote: Also, I believe DCF can be done on companies with predictable cash flow for the past 5-10 years. With such predictability, we can project the cash flow into the future to get the intrinsic value. Since we might not have perfect projections due to random errors, we use a margin of safety (I prefer MOS of at least 25% for stable companies). What's your take on this? Thanks.

I have a different view. Cash flows and profits are notoriously difficult to predict with certainty even in 1-2 years into the future, much less 5-10 years. The dynamics of business could mean more competitive forces acting on the company, the industry may suffer/prosper and many external factors may also impact the company which would be unforseen (e.g. recessions, natural disasters etc). Thus, DCF (I feel) is very good for theory lessons but in a world of uncertainty, it cannot be used reliably without inputting many assumptions, most of which will surely be off-tangent far into the future. Hence, you will get a very distorted and inaccurate number. If you rely on that imprecise number and factor in say 25% margin of safety, it may not help much at all because the number may be really far off in the first place!

Hence, I don't use DCF at all during my analysis. I use a more holistic approach where I look at quantitative and qualitative factors, and "simpler" approaches such as P/B and PER as well as NAV (in certain cases) works well enough.

Investing is more "Art" than science I feel. You can churn all the numbers you want, but there are always intangible aspects of a business which may affect it that cannot be quantified. That will measure and test the skill and experience of the investor to achieve a consistent return.

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Hi MusicWhiz,
Agree, Agree. For me, i believe in this quotation:-
"In God we trust, everyone else brings data"