The Capricorn Effect and May Sell-off

[VestedInterest]

[quote='freedom' pid='24763' dateline='1336798560']
dividends as a predictable cash flow can help offset everyday expense in the case of job loss or unexpected larger expenses e.g. one more kid. if you were to sell a counter for such cash flow problem, normally, you would not have a chance to buy it again or switch to another counter because the proceed would have been spent.

Essentially, what dividends really help is buying time for a recovery in your portfolio so that you don't have to sell at the bottom of the market.

I believe what Ben Graham described the distribution between fix-income security and equity still applies, especially for people who has retired or has no stable income. just like any company, you need cash to pay for everyday expense and you surely don't want to sell your equipments and machinery for cash flow problem.

In my IDEAL factory, I'd maintain enough 'Working Capital' for normal operations + some extra for unforseen circumstances (in the more than ideal situation, I'd even have extra for unusual circumstances to acquire other factories at a good discount). The FCF generated would ideally be ever growing so as to qualify me as a 'Growth' biz under normal circumstances and allow me to at least have enough even under poor biz conditions.

In such a case, I'd be having more 'Equipments & Machinery' than required (to maintain a minimal FCF). During extraordinary times, if I see better 'Equipments & Machinery' that are more efficient which happens to be selling at a huge discount, I'd dip into my excess cash to buy them. Assuming I'd run out of cash, it's not unforeseeable for me to sell some of my less efficient 'Equipments & Machinery', even at a loss (based on Cost / Book Value, depending on your own accounting recognition) to swop for the better ones.

Even in a less well managed factory where I run out of excess FCF, I'd still go ahead and sell some of the excess 'Equipments & Machinery' to swop for the better ones, as long as the discount is attractive enough. The more efficient 'Equipments & Machinery' would after all result in more FCF.

Under the situation where I don't have any excess 'Equipments & Machinery' and the FCF generated is just barely enough for my 'Working Capital' then ya, your are right!

I had a concentrated portfolio of 5-8 stocks for a long time, way beyond the $50k level. The key is to be able to have the time and energy to be put into knowing the stocks well. The main risk comes from ignorance ie. the less you know about the stocks, the higher the chances of 'surprises' and losing money! Unfortunately, now, with young kids around, short of locking them out of my life, I went on a diversification approach to mitigate the risks of not doing enough to know all I ought to know about my stocks...

Can help but recall the analogy of dairy cows and cows farmed for their beef. Was this from Robert Kiyosaki, or did he quote someone else. So sometimes one has to slaughter the dairy cows for their meat, especially if they are not yielding much milk anymore?

[KopiKat]

I had read Peter Lynch book. He has a slightly different approach vs WB. Although he endorses "value investing" as WB, but he uses different approach with different type of stocks. Dividend stocks typically fall under his "Slow Growers" and "Stalwarts" categories. His way is to "rotate" Slow Growers and Stalwarts stocks to achieve higher gain.

After digested Peter Lynch approach, one feasible way is to sell if sufficient gain achieved. You can buy back other "Slow Growner" and "Stalwarts" stocks when their price is right. There is no rule saying you have to buy back the very same stock.

With sufficient number of Slow Growner and Stalwarts stocks in your watch-list, it is more likely to buy back stock ready with the right price to avoid lose of fixed income via dividend

I am starting to feel that maybe more productive approach available. I use to be "die-hard" long term investor like others in this forum. Never sell if the company remain as good

To further convinced myself, i had read Peter Lynch book. I spend 2 days to go thru "One Up On Wall Street" several time, and starting to believe it is feasible.

Story Telling Time!

Just to share my initial experience. I started out being not only skeptical but also had the same reactions as many Value Investors here... Ain't that like TRADING? As a die-hard fan of my many Stalwarts / Slow Growth stocks, I was also afraid that after I sell (when it'd gone up), I may not be able to buy back again at a lower price. But, deep down in my heart, I know I'd been through too many rounds of heartache when I see my stocks hit a high, followed by a slow decline to a trough, before it recovers again. There seems to be a regular pattern there somewhere. But, hey! I'm not a TRADER, why on earth am I looking at patterns?? My head joined the debate by telling me "For goodness sake! Those are No / Slow Growth stocks! Why on earth would the Share Price ever shoot upwards?". Ya, head and heart are both right. Without any catalyst for strong and sustainable growth, there'll always be a flat Value to the stock, unless market somehow re-rate it upwards / downwards. Any fluctuations around this value is due to Mr Market having it's usual mood swings.

I struggled with myself, read and re-read Peter Lynch's 'One Up on Wall Street' again and again, wondering if it was just a gimmick to sell more books / seminars. I finally convinced myself that Peter Lynch must be genuinely sharing his own approach. Extracts of his profile,

Peter Lynch managed the Fidelity Magellan Fund from 1977 to 1990, during which time the fund's assets grew from $20 million to $14 billion. More importantly, Lynch reportedly beat the S&P 500 Index benchmark in 11 of those 13 years, achieving an annual average return of 29%.

I was at least convinced that he's not like our local 'gurus' who're more interested in selling seminars which comes with a free book.

Yet, I was still afraid. But, I decided to take my first steps... I may end up crossing over to the dark side.. Fears...

As a long term die-hard fan, I'd been keeping records of some key financial figures and even month end prices of my stocks and STI. I pored over the data and must have behaved like a TA practitioner, trying to see if there's any co-relation anywhere.

I finally decided on a KS (I blame on my interpretation of Benjamin Graham approach ie. BE KS - KiaSu) approach. Instead of jeopardising my entire stake, I'd now buy some extra shares to try. If I'm wrong, only that tiny stake of extra shares is impacted. If I'm right, "Holy Cow! This could be a path to riches!". Hee.. exaggerating a bit here.

Well.. I was lucky. It did work as I'd benefitted from my staring of my data - I picked the dividend dates as a target date ie. Buy well ahead of reporting (after using crystal ball to make sure EPS is going to remain flat), then sell before xd. The rest is history (to me). I continue to fine-tune and tweak my procedures, slowly increasing the % of my stake (to subject them to buy/sell) plus to my other stalwarts. Now, I behave like a Property Flipper, I flip Stalwarts whenever I'm free.

A word of caution here. It may not work all the time and it's never exactly the same each time or for each Stalwart (see how fast M1 and StarHub recovered from undershooting theoretical xd price while STEng is still lingering at a much lower level from theoretical xd price?). But, as long as I have a large enough group of stalwarts (as observed by 'CityFramer'), I can at any time find a replacement and will be holding enough shares which'll provide me with a similar level of dividend stream (assuming I stop 'trading' eg. I suddenly leave this world and my dependents have to rely on a regular stream of dividends for their regular expenses).

No, don't follow me blindly. Go read and re-read Peter Lynch's 'One Up on Wall Street' and convince yourself. I have recommended the book to many people but none have ever gotten anything useful from it! 'CityFarmer' may be the only pax who seems to be able to derive any use from it.. Haha.. Finally, if you really want to cross over to the 'Dark Side', please do it at your own level of 'Not Losing Sleep'. It's meant to be fun and profitable and not as if your livelihood is going to be totally dependent on it!

Oh ya, do take note that it's very unlikely to make you rich (unless you go create a seminar to "share" this and market it as "How you made your 1st Million" + give a free book). For most, perhaps only an extra couple of % or even -ve (ie would have been better off to just leave it there to earn div). Just some cheap thrills for folks like me to pass time and make some extra Kopi $$$..

Thanks for the compliment. One of your kung-fu in properties market esp. the mall rental biz, is always highly regarded in this forum.

A case of mistaken identity, it's 'swakoo' who has the kung-fu. I only tag on his expertise to dig for more data.

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Having said that, Peter Lynch is more focussed on 'Cyclicals', 'Turnarounds' & 'Hi-Growth' for his multi-baggers. That part, I don't have the kung-fu to follow..

One can always allocate say 5% to make life more interesting.

I get hell of a kick doing that

I do have 10%+ on a potential 'Turnaround' which looks like it'd started turning around and will likely be confirmed in their next quarterly report. Another 25% on another potential 'Turnaround' which continue to turn downwards. This one is still a profitable co. but I'm slowly paring down my stake as it's biz is linked to the state of our economy, which looks likely to be heading downwards. I have <2% on a potential 'Growth' stock but PE was closer to 30 and am unable to convince myself to pay a higher price for a great biz (blame on Charlie Munger if I do that) as I may be wrong on it's being a great biz!

Nope, not going to reveal the above cos.

Yes, I do get a kick out of it when I'm right! But, most times, I get kicked instead!

[Temperament]

i like Peter Lynch's "One Up ON Wall Street" quite a lot. It's from him that i have a clearer picture how to categorise stocks as stalwart, cyclical, turnaround and so on. And what to "expect" from each. He somehow makes me understand better. i always believe to try to understand something as simple as possible and as practical as possible to the "reality of the market". (i am not in University you know.)
Even though, i admit that i can not see the "reality of the market" most of the times. In fact i have mistaken illusions for the realities of the market more often than i should. If not i am already on the beach every day. Ya, a beach bum.

[swakoo]

Thanks for the compliment. One of your kung-fu in properties market esp. the mall rental biz, is always highly regarded in this forum.

A case of mistaken identity, it's 'swakoo' who has the kung-fu. I only tag on his expertise to dig for more data.

There are a few kung fu experts in this forum, including you. Unfortunately i'm not 1 of them. I'm just a mountain tortoise hoping to learn from the kung fu experts.

Your kung fu stories and tactics help make this forum more value-able (for the buddies), lively and interesting. Keep them coming.

[CityFarmer]

Just to share my initial experience. I started out being not only skeptical but also had the same reactions as many Value Investors here... Ain't that like TRADING? As a die-hard fan of my many Stalwarts / Slow Growth stocks, I was also afraid that after I sell (when it'd gone up), I may not be able to buy back again at a lower price. But, deep down in my heart, I know I'd been through too many rounds of heartache when I see my stocks hit a high, followed by a slow decline to a trough, before it recovers again. There seems to be a regular pattern there somewhere. But, hey! I'm not a TRADER, why on earth am I looking at patterns?? My head joined the debate by telling me "For goodness sake! Those are No / Slow Growth stocks! Why on earth would the Share Price ever shoot upwards?". Ya, head and heart are both right. Without any catalyst for strong and sustainable growth, there'll always be a flat Value to the stock, unless market somehow re-rate it upwards / downwards. Any fluctuations around this value is due to Mr Market having it's usual mood swings.

I struggled with myself, read and re-read Peter Lynch's 'One Up on Wall Street' again and again, wondering if it was just a gimmick to sell more books / seminars. I finally convinced myself that Peter Lynch must be genuinely sharing his own approach.

When i read your story, it seem that you are telling my story instead
I went thru exactly the same dilemma as you did. I had decided to go ahead with the new mind-set, but my approach may be slightly different from yours, probably with longer duration and non-cd-xd base

I do have 10%+ on a potential 'Turnaround' which looks like it'd started turning around and will likely be confirmed in their next quarterly report. Another 25% on another potential 'Turnaround' which continue to turn downwards. This one is still a profitable co. but I'm slowly paring down my stake as it's biz is linked to the state of our economy, which looks likely to be heading downwards. I have <2% on a potential 'Growth' stock but PE was closer to 30 and am unable to convince myself to pay a higher price for a great biz (blame on Charlie Munger if I do that) as I may be wrong on it's being a great biz!

I had started to invest on "fast grower", "Turnaround" and "Asset play" stocks. I will avoid "cyclical" for the time being since kung-fu not enough

Start with a low bet, and increase bet when you saw brighter future. It is similar as in most venture, you need not to be first to enjoy the benefit of it. Sound familiar? it is translated from Peter Lynch "Own stock is like playing an endless stud-poker hand"

[Temperament]

IMO, Turnaround play is quite related to Cyclical both need quite good "timing". i am actually afraid of both.

[KopiKat]

IMO, Turnaround play is quite related to Cyclical both need quite good "timing". i am actually afraid of both.

Both are similar in that their Profitability and Balance Sheet faces severe pressure. IMO, the key difference is,

For a Cyclical, the business cycle is not within their control (although how they deal with it is) whereas for a turnaround, many get into the mess in the first place due to some form of mismanagement eg. diworsification.

For the Cyclical, we'd need to be familiar with their biz and the cycles. IIRC from the Peter Lynch book, we need not be able to identify the bottom. There's still good money to be made even after the upcycle is obvious to all (lesser money but lower risk of being wrong).

For the Turnaround, the core biz is usually intact ie. GPM for Core Biz is still good. The problem is their overall profitability is being dragged down by mismanagement eg. Cost runaway, diworsification,..etc... For me, the key thing to look out for is the Mgmt's realisation they'd mismanaged (although they may not openly admit it) and started actions to clean up. Maybe a Quarter of losses followed by a tiny profit and then hopefully bigger ones in the following Qs...

In theory, both seems easy to identify. In practice, Turnarounds are easier for me to identify and to be KS, I usually go for those that are still profitable, albeit a tiny one. Unfortunately, kung-fu level is still very low and this is still a WIP for me. Bet small-small 1st and increase the bets along the way as profitability / kung-fu increases..

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When i read your story, it seem that you are telling my story instead
I went thru exactly the same dilemma as you did. I had decided to go ahead with the new mind-set, but my approach may be slightly different from yours, probably with longer duration and non-cd-xd base

I'd taken more than 5 years to try out Peter Lynch's approach (ya, blame him if anything goes wrong) for Stalwarts before I even dared to share my experience. It's still undergoing fine tuning and continuous tweaking and the total amount committed is still not a very large % of my portfolio. The main purpose of sharing was to get feedback (to help tweak my process), not to make the market more efficient. Hee...

I had started to invest on "fast grower", "Turnaround" and "Asset play" stocks. I will avoid "cyclical" for the time being since kung-fu not enough

Start with a low bet, and increase bet when you saw brighter future. It is similar as in most venture, you need not to be first to enjoy the benefit of it. Sound familiar? it is translated from Peter Lynch "Own stock is like playing an endless stud-poker hand"

Ya, no need to rush to lose $$. Like he said, "Sometimes the best stock to invest is one you already own". So, ya, slowly increase the bets as we get more familiar and the odds gets better.

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Unfortunately i'm not 1 of them. I'm just a mountain tortoise hoping to learn from the kung fu experts.

My mental image, from your nick and posts - the kung-fu grandmaster,

[Image: 180px-PoolOfTears.PNG]

[CityFarmer]

I'd taken more than 5 years to try out Peter Lynch's approach (ya, blame him if anything goes wrong) for Stalwarts before I even dared to share my experience. It's still undergoing fine tuning and continuous tweaking and the total amount committed is still not a very large % of my portfolio. The main purpose of sharing was to get feedback (to help tweak my process), not to make the market more efficient. Hee...

I appreciated your sharing. It has benefit me and probably others in this forum. I hope you got the feedback you are looking for. As a new practitioner of the Peter Lynch's theory, i will share my experience whenever is feasible, with the same intention as yours.

[CityFarmer]

IMO, Turnaround play is quite related to Cyclical both need quite good "timing". i am actually afraid of both.

Hi uncle Temperament,

IMO, there is a minor but critical difference between Cyclical and Turnaround.

In Cyclical, superior understanding of the company as well as the macro economic of its biz environment is necessary in order to catch the up-trend, and avoid the down-trend. In short "market timing" is critical

In Turnaround. insightful analysis of the company operation is required esp. on factors which make the company not doing well. If those factors changes for better, then oppurtunity arises. "Market timing" may not be critical here

[Temperament]

IMO, Turnaround play is quite related to Cyclical both need quite good "timing". i am actually afraid of both.

Hi uncle Temperament,

IMO, there is a minor but critical difference between Cyclical and Turnaround.

In Cyclical, superior understanding of the company as well as the macro economic of its biz environment is necessary in order to catch the up-trend, and avoid the down-trend. In short "market timing" is critical

In Turnaround. insightful analysis of the company operation is required esp. on factors which make the company not doing well. If those factors changes for better, then oppurtunity arises. "Market timing" may not be critical here

For me, i am not sure of research, so i need to depend on "timing" more. i mean it's safer to buy the ( any) counter only when the east wind is blowing as in "Romance of THE Three Kingdoms". Sorli for the mis-communication.