Invest on quantitative financial numbers;disregard all other qualitative aspects

[wahkao]

Invest on quantitative financial numbers;disregard all other qualitative aspects

I got to admit that I invest heavily on the financial numbers and disregard all other qualitative aspects of the company.

I do a intensive study of the past 5 year financial history (quarter on quarter) to ensure this company has profitable and continuous results, good balance sheet and cashflow.

Others have been criticizing me for believing the financials, and leaving out the other qualitative aspects.

Some qualitative factors that are commonly discussed:
- Economic moat
- Competitors
- Trends
- Management competency
- <please help to insert more>

I would like to invite people to criticize this "Invest on quantitative financial numbers;disregard all other qualitative aspects" method so that I can discover the weaknesses of investing purely on financials.

And please throw in as many examples as you possible can.

[wahkao]

Criticism : Numbers can be forged

its true that numbers can be fabricated.
The chances of the numbers being fabricated is much less than me being able to correctly analyze the stock base on other qualitative measures.

Hence I still believe in the numbers at face value and weigh them heavily when making my investment decisions.

In the past 5 years, how many companies have uncovered fraud? Maybe only 0.5% of the exchange, leaving the financial numbers to be 99.5% credible.

Compare that to being able to make correct judgement on a piece of qualitative information. I think the chance of making correct judgement is 60%, leaving qualitative judgement to be 60% credible.

Hence, I believe numbers are still more powerful than qualitative factors.

[Greenrookie]

Just take a look at GRP,

If u just look at numbers, a few months ago. U would think its a great company with super high yield, consistent FCF, little debts etc.

But u would have miss the change in business direction,

They are embarking on Mammyar expansion, as a result -

Issue highly dilutive rights and warrants.

It has overnight change from a defensive yield play to a high risk high growth play.

The price went up when the deal is announced, then tumbles by almost 90%. Just looking at numbers will make u suffer heavy losses in the case of GRP

[wahkao]

Just take a look at GRP,

If u just look at numbers, a few months ago. U would think its a great company with super high yield, consistent FCF, little debts etc.

But u would have miss the change in business direction,

They are embarking on Mammyar expansion, as a result -

Issue highly dilutive rights and warrants.

It has overnight change from a defensive yield play to a high risk high growth play.

The price went up when the deal is announced, then tumbles by almost 90%. Just looking at numbers will make u suffer heavy losses in the case of GRP

Let me provide some pictures to illustrate your example.
[Image: xLPLeyr.png]


Thank you for the good example.

I also think they had very conflicting dividend policy. Immediately after ex rights, they executed a dividend issue.
[Image: hy5OqC3.png]



Its historical PE as at Jun 2013 is 13.8. I honestly say I could have been taken in by their wonderful year on year financial track record
[Image: s9udqRI.png]

I would implement a "sell on rights issue" rule to my investing criteria. Any companies who ask me to do rights issue or do anything dilutive, I will sell immediately, regardless of the story.

Mathematically, Rights issue is the exact opposite of dividend.
If you love dividends, you will hate rights issue.

[Greenrookie]

Hi Wahkao,

I am not sure about pure quantitative analysis.

3 important questions come to mind:

How do you manage risks? (religare- litigation land issue, foreland-customer's suit case, NamLee- pending expiry of contract with major customer in 2014, APTT tax issue, funny expansion etc), Most of these issues do not have numbers whether they do rights or not.

How do you identify or gauge the depth or width of economic moat? (I am still reading up on this, reading Pat Dorsey as recommended by musicwhiz, and I really can't put down the book except due to fatigue and work committment)?

Different companies require different treatments (see peterlynch's classification of stalwarts, growers, turnarounds, asset plays, and cyclical.), you cannot hold on to cyclical thinking they can better their earnings year after year, and much money can be made if you see a company turning around.

--------------

Even graham who uses a lot of quantitative data and ratios uses qualitative data/information to answer "why" of the numbers.

But,

I do all these but still do not get good returns from investment, but I see it as MY competence level/problem, rather than a problem with my approach.

Starting with a lesser approach and be very good at it might yield better results in the short term or relatively do better than others who are still learning, but the potential IMO will be capped.

Why not start with the convention wisdom of doing both qualitative and quantitative analysis, as with people like Phip Fisher, Warren, Graham, and Peterlynch all talk about? If all these "experts" do not just do quantitative and disregard all qualitative, I think there is some convention wisdom why it is that way.

Of course, after you master the rules, you can break them.

Just my 2 cents worth, good luck

[specuvestor]

You study the quant numbers, PnL, B/S, cashflow, relative valuations, chart formations, etc for 3 months and they announce M&A tomorrow

Numbers don't make things happen. We live in an age where people think numbers are reality when they are mere pale reflection of reality. Reflection yes but pale. People make things happen and it is generated into numbers, not the other way round.

Like I said, listco are at least 3 layers: the asset, business and structure. PEOPLE controlling the structure control the previous 2... that is why you have S-chip and value traps.

As usual 中庸之道

[Clement]

I think that financial numbers in isolation are not very useful for investment appraisal.

1) In my view, financials are lagging indicators of performance. Qualitative data such as industry outlook and firm positioning must also be taken into consideration to get a better forward looking view to future performance.
2) When finding a very cheap/undervalued stock, i would like to know the possible reasons for the undervaluation. This way, i can better appreciate the risks i'm taking and develop a framework to test my investment thesis and assumptions.

[wahkao]

How do you manage risks? (religare- litigation land issue, foreland-customer's suit case, NamLee- pending expiry of contract with major customer in 2014, APTT tax issue, funny expansion etc), Most of these issues do not have numbers whether they do rights or not.

It is my belief that quantitative numbers will stack as much odds in my favor as possible.

I honestly do not know how to see through these facts and I am not going to act like I know.

I treat these unfortunate events as unique risks that can happen anytime. I treat them as 100% unpredictable events. No matter how much study I do, or how much due diligence I conduct, even if I am an employee of the company, there is absolutely no way to predict them.

The only way to manage these unpredictable risks is to diversify.

If anyone here can teach me how to make them more predictable, I am all ears.

[wahkao]

Why not start with the convention wisdom of doing both qualitative and quantitative analysis, as with people like Phip Fisher, Warren, Graham, and Peterlynch all talk about? If all these "experts" do not just do quantitative and disregard all qualitative, I think there is some convention wisdom why it is that way.

Yep, I am pretty confident with my quantitative already. I am really crappy at the qualitative.

if today a drug company says they have discovered a patented FDA approved cure for cancer, I could 100% confidently say that we should buy the stock, and its earnings will surely move up. But then guess what? Everyone else is buying and the stock price will immediately reflect this piece of news.

If today an engineering company unveiled an expansion plans into India, I have 0% confidence on how this information will reflect into future stock price. On 1 hand, expansion will grow revenues. On another hand, there are risks involved when expanding into another foreign country. I will be disregarding this piece of news.


And sometimes the worse thing is when quantitative and qualitative tell 2 completely different stories!!

[wahkao]

Numbers don't make things happen. We live in an age where people think numbers are reality when they are mere pale reflection of reality. Reflection yes but pale. People make things happen and it is generated into numbers, not the other way round.

When I look at financials, I am not thinking about cause and effect. I am not thinking about company management making right moves and it caused earnings to shoot up. I honestly do not know how to do it and I hope someone will teach me how.

When I look at financials, I am thinking about finding strong evidence of company management making right moves. I assume that they will continue to make the right moves in future. I assume that these right moves will translate to a predictable and profitable stream of revenue.

I believe this is assumption has very strong predictive powers. And to stack more odds in my favor, I only buy when its intrinsic and relative valuations are cheap.

Maybe I am right, maybe I am wrong. This is a risk. To manage this risk, I have strict stop losses and diversification.