Next Assignment

Recently RT and I attended a 2-day technical analysis course which we find very useful, especially to fundamentalists like us. While we have started to appreciate more on TA, we still believe that trading with TA alone is not our style. Our strategy is to pick the right companies by using FA and put them on the watchlist and then trade them during obvious trends.

I was very tempted to come out a topic on TA for June’s assignment since we have just recently aquired new skills on this topic, but there is really nothing much to write about TA unless we drill into trading strategies which will require more practice and experience than research. Therefore, I have come out the topic on macroeconomics which is important to both fundamentalists and technicians and it is a topic that we can research on.

Have fun with the assignment.

Earnings vs Market Cap

I don’t usually get MSN messages at 8am in a public holiday morning.

But I did get 1 today from my good friend ET.

ET has read my report on Hyflux last night and he was eager to share with me what he thought first thing in the morning.

I really appreciate his enthusiasm.

Something new that I have learnt from him is that he uses:

EARNINGS/MARKET CAP x 100%

as the yield of stock.

Hyflux’s market cap is $3 billion. Earnings in 2007 is $32,949,000. Based on this formula: Yield of Hyflux stock is therefore 1.1%.

The following is an excerpt on what ‘discussed’ online:

ET:

i just read the report

ET:

was good in general, though conclusion is not firm

DW:

thanks

DW:

cos at this point, I want to wait for the market to be more clear before I can firm up a plan, so conclusion is to keep a close eye on Hyflux

ET:

anyway, good try, though if i were writing, definitely, the conclusion is: don’t buy @ current price

ET:

i would be uncomfortable owning something with PB > 2+ without strong reason

DW:

but the thing I don’t know what price is good.

DW:

cos some people like O’Neal, he cares more about growth than PB or PE

ET:

even growth has been inconsistent in the net profit

DW:

agree

ET:

revenue growth is one thing, but if it’s achieved @ net profit expense, growth is useless

DW:

net profit was not consistent because of 2006 figures

DW:

I think we can wait for 1 to 2 more years to see if the net profits are consistent, need more data to support

ET:

and u mentioned she bought sino….

DW:

yes, SinoSpring

DW:

she put in more stakes

ET:

well, i hope this is not just to drive up the revenue

DW:

was only 50% then 80%

DW:

no, in fact the year she bought SinoSpring, SinoSpring had a revenue decrease…that’s something I don’t understand!??

ET:

when growth slows down, companies tend to go M&A way

ET:

ic

ET:

is Sino spring @ public listed company?

DW:

Err…don’t think so…need to check

DW:

but SinoSpring owns a lot of desalination plants

ET:

Hyflux in general has a good future, but seems it’s priced in the share

DW:

i agree

DW:

PB and PE are ridiculously high. BUT BUT…again I want to find out if this is also equally high for other companies in the same industry in the world.

ET:

that’s a good idea

DW:

and also…..

DW:

1 thing I am not good at mastering is to come out a price objective.

ET:

well, I would do that with 2 measures

DW:

tell me more man.

ET:

1. p/e (if it has stabilized)

ET:

2. book value

ET:

if pe= 15, and PB = 2, I guess in general it seems to indicate fair value (with average growth rate)

ET:

however if pe < 15, or PB < 1, maybe worth buying, especially if the PE < 10, probably a bargain

ET:

that’s my standard

DW:

but how did you come out these benchmark numbers?

ET:

to make it simple

ET:

think of yield of bond

DW:

ok…i am familiar with bond..

ET:

earning/ market cap * 100% is stock yield

DW:

oh…

DW:

if earnings/market cap of Hyflux..say…10% then consider not bad?

DW:

this is interesting…

ET:

if earning has been stable, yes

DW:

did you come out this concept yourself..or you read it from somewhere?

ET:

I definitely read it from somewhere long ago

ET:

which i could not recall

ET:

i guess even intelligent investor has some section in it

DW:

very good..you remember the important concepts

DW:

okay…i’ll try to re-read.

ET:

it discusses valuation model -> by net asset, earning, and dividend

ET:

I tend to remember if I practise it

ET:

hence, i seldom write it

ET:

writing is a chore to me

DW:

haha…

DW:

Don’t need to write…just draw some mind map…

ET:

now, gtg

ET:

have a few hundreds pages to go

ET:

about john kenneth galbraith life

DW:

who is he?

ET:

great economist born in canada, who is influenced by  keynes

ET:

he has served in us govt during war time

DW:

interesting….

DW:

btw, is there anything more you want to add about Hyflux?

ET:

conclusion is “future is bright as people will need water forever, however, to expect the company to deliver as good investment is doubtful given the current valuation”

DW:

very good punch line!

ET:

remember, good company does not constitute as good investment if it’s bought @ a high price

DW:

thanks…what you write today is very valuable to me.

ET:

u should read another interesting book

ET:

four pillar of investing by william bernstein

DW:

cool cool….i will check it out at bookstore

AOTM Submission for May 2008 – Hyflux

For those who can’t wait, please click here for my report on Hyflux. Please do not forget to post or email your feedback, comments, critical arguments, constructive suggestions, etc…

In the meantime, I must make a few confessions:

1. This is the first time I really enjoy reading a company’s annual reports.

2. This is the first time I seriously work on an assignment since my O-levels. (I didn’t really put in a lot of effort in my University days either!)

3. This is the first time I really walk-the-talk by seriously applying what I have learnt in the past on analysing a company for investment purposes.

I remember the first time I came across the terms like “fundamental analysis”, “value investing”, “understanding financial statements”, etc. etc. was way back to year 2000, since then I had a great collection of classical books such as Benjamin Graham’s The Intelligent Investor and others on my bookshelves (you may refer to the book list tab for the complete list), which was put into ‘very good use’ that was no better than merely impress family visitors. I briefly read some of them, occassionally talked about them during coffee breaks only to impress fellow coffee-breakers on how widely read I was. I at best knew the theories well enough to talk intelligently with jargons but I had no practical experience on applying those theories into my real-life investment (although I did get lucky on some stocks I had bought). Of course, as I grew older and became more mature, I started to appreciate the theories, methodologies, mindsets of those great investors much much better; however, procrastination became my biggest road block. I knew the importance of applying what I have read and learnt on real-life cases through practice and trial-and-error and improve from there, I just simply didn’t really seriously take a first step into serious investment. Not until setting up this website early this month, which is 8 years later. (Warren Buffett would have killed me for losing the compounding opportunities of 8 great years without seriously investing!)

I remember my other good investment buddy, DmS, he once tested me with an IQ question: “Hey, in a dark night, you have a torch light and it can only reach 10 meters in front of you, what do you need to do if you want to see the road 20 meters in front of you?”. I proudly told him that the answer was simple, “Just walk forward 10 meters, so that your torch light can reach another 10 meters in front of you!”.

That was a wakening call.

No matter how smart, how widely-read you are, you need to take action and take small steps forward, in order to reach the goals you want to achieve.

I know my report on this little assignment is not flawless, but I am quite happy that I have moved forward with my little torch light and no matter how small the steps were, I know I am already closer to where I want to be.

I am happy because I have taken action. And I feel much cleverer after the assignment, and I hope I will become slightly richer soon.