Value Investing 101 - How to make money in value stocks

(29-04-2012, 09:50 AM)Mr Nobody Wrote: If you are hopeless, you hand your monies to the advisers, fund managers, insurance companies and hope that you have chosen the right ones.

My humble opinion - I think it's better to buy ETFs like STI ETF than handing money over to fund managers to manage. Firstly, by handing over, you won't have control over your money. Secondly, fees to the manager will erode your returns and studies have shown most fund managers get below market return.

Andrew Hallam of Millionaire Teacher fame also recommends investing in ETFs for its low expense ratio. That's assuming you are either a "know-nothing" investor or a "hands-off" one.

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(29-04-2012, 10:21 AM)yeokiwi Wrote: The main problem of trying to have a more focused investment is "how to select a small group out of a big group of value stocks".
And, may be I am not that good in analysis, therefore it is hard for me to determine whether stock A or stock B is better if both stocks are inherently undervalued.

Besides, the performance of any stock in the future is basically unknown. We can only predict and provide with it a probability that it can rise in value in the future based on its current earnings and assets.

In that case, it became harder to favour A over B or B over A. One may outperform the other due to unforseen events in the future(delisting, special dividend, won a big contract, sell away undervalued assets at inflated value).

Since performance of any stock is not for certain, why should we be so certain of our stock selection especially a small portfolio??

The selection is made after taking into account the following factors, and allowing for the passage of time for the business to grow:-

1) Resilience of the business model

2) Industry factors

3) Quality of the Management and their track record in producing good returns

4) Margins, profit growth, gearing and cash flows

5) Dividend payment consistency and history

6) Fair valuation (as determined by suitable metrics such as ROE, PER, P/B or a combination of the above).

That said, judgement is still required, which is why investing is intellectually challenging! But if done correctly, it is financially rewarding.

Personally, diversification is inevitable for small fries like us (me). We're not like Warren Buffett who is a genius and who moves large sums of money each time he buys. Warren Buffett makes the market!

Diversification is inevitable because new opportunities arise and the old ones that we hold, lose part of their lustre, as the price of the stock moves closer to its true value. Being a believer in the 'buy and hold' strategy, we will hold on to the 'old' counters and wait for them to do their magic. However, we continue to search for even better bargains and most of the time though not always, the better value lies out there in the market rather than within our portfolio.

I have now come to undertand how Peter Lynch (who happens to be one of my favourites) ended up with thousands of companies in his portfolio- there are many duds just as there are many multibaggers but in the end the multibaggers make much more than what is lost in the duds. As somebody famously said (can't remember which great investor it was), putting money in a dud company means putting yourself at risk of losing all that you have put in the ocmpany, but only just that. But should you hit a jackpot company, the sky is the limit for the possible profits that one can make.

When we diversify, it is true that we increase the exposure and therefore risk but if one did his research and work well, the odds are in our favour. This is different from gambling, where the odds of winning is severely loaded against us. That is why casinos are more than thriving.

There is no amount of research which can guarantee success in investment in stocks, at most, it just increases the probability of success only.

considering the amount of energy and time spending on researching on a simple company, sometimes, for average investors, it is better just buying all the possible good value stocks (diversification) than researching one by one and selecting a few only.

personal opinion only, feel free to correct.

Hope this is not off-topic.

I just completed reading The Little Book That Still Beats The Market as recommended by the value investing guide from stockopedia.
Greenblatt mentioned looking at the Return on Capital which he defined as EBIT/(Net Working Capital + Net Fixed Assets).

Anyone care to explain how to derive Net Fixed Assets (tangible only) and how to calculate it from the financial reports?

The problem is - too many budding investors take such hard numbers/ratios too seriously.

Perhaps you should also ask, are those numbers past? Will they continue or improve? If they are future estimates, how probable?

How about the intangibles e.g management, brand names? Do you understand the business models?

Do you have the patience to wait for a margin of safety to appear?

By then, would you be able to re-evaluate the business, and have the guts to pull the trigger? Will you have the money?

(30-04-2012, 12:25 AM)freedom Wrote: There is no amount of research which can guarantee success in investment in stocks, at most, it just increases the probability of success only.

considering the amount of energy and time spending on researching on a simple company, sometimes, for average investors, it is better just buying all the possible good value stocks (diversification) than researching one by one and selecting a few only.

personal opinion only, feel free to correct.

i don't know really much about research but i try to learn what they all are talking about. Examples, from DBS, SGX, ValueBuddies, Yahoo Finance, Singapore Investment Bloggers, BT, INT., anywhere, anyone. Never stop learning and try to find one investing style suitable to your character as earlier as possible.(Don't ask me how, you have to discover yourself. No one is the same) As you go along, you will or should understand yourself better and better in the investment world. i have been at it for so many years already and i still enjoy it. At least it keeps me using my grey matters or else i will be going to pot. HA! HA!

(11-05-2012, 09:56 PM)Temperament Wrote:

(30-04-2012, 12:25 AM)freedom Wrote: There is no amount of research which can guarantee success in investment in stocks, at most, it just increases the probability of success only.

considering the amount of energy and time spending on researching on a simple company, sometimes, for average investors, it is better just buying all the possible good value stocks (diversification) than researching one by one and selecting a few only.

personal opinion only, feel free to correct.

i don't know really much about research but i try to learn what they all are talking about. Examples, from DBS, SGX, ValueBuddies, Yahoo Finance, Singapore Investment Bloggers, BT, INT., anywhere, anyone. Never stop learning and try to find one investing style suitable to your character as earlier as possible.(Don't ask me how, you have to discover yourself. No one is the same) As you go along, you will or should understand yourself better and better in the investment world. i have been at it for so many years already and i still enjoy it. At least it keeps me using my grey matters or else i will be going to pot. HA! HA!

Yes, totally agree. Investing challenges the intellect and makes one understand human psychology and emotions better. It helps one take control of his or her own emotions. It is about being creative and being able to strategise. Its about being observant and informed of the trends. Of course a good memory and mathematical mind helps too. And of course some luck!!

(30-04-2012, 12:25 AM)freedom Wrote: There is no amount of research which can guarantee success in investment in stocks, at most, it just increases the probability of success only.

personal opinion only, feel free to correct.

Or just adding a couple more percentage points in portfolio yield.

Ultimately it is a journey and evolving

(11-05-2012, 08:10 PM)mysterion Wrote: Hope this is not off-topic.

I just completed reading The Little Book That Still Beats The Market as recommended by the value investing guide from stockopedia.
Greenblatt mentioned looking at the Return on Capital which he defined as EBIT/(Net Working Capital + Net Fixed Assets).

Anyone care to explain how to derive Net Fixed Assets (tangible only) and how to calculate it from the financial reports?

Net Fixed Asset = Fixed Asset minus Accumulated Depreciation = Property, Plant , and Equipments as usually reported on balance sheet.