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I have received this article from Mr. Koon Yew Yin, one of the co-founders of IJM and also a very experienced investor. I think it is a very good read. No matter how experience you are, I think you will benefit from reading this.
How to interpret company announcements
Koon Yew Yin
According to Malaysian Securities Commission’ rules all listed companies have to make announcements of their quarterly results and other business activities that are unusual to their daily business operations.
I would like to share with you my experience on how to interpret and take advantage of the various announcements as follows:
Under the current condition, I will not read announcements by building contractors and property developers. I am not interested to know about huge land transactions.
I will also not read companies that have poor profit growth prospect.
As you know, our Ringgit is the lowest in the last 5 years and readers should look at announcements by companies exporting their products in US$. "
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Referring to the screenshot below, over the long term (22 Years), the KLSE - ETF has generated a return of 55%. (Even when you have invested during a period of exuberance when stocks in general are over-valued.)
This may be due to several reasons:
1) As the population grows, the economy grows too, leading to increase corporate profits.
2) As productivity increase, more value can be created by using less resources thus generating extra income in a shorter time.
Both of the above reason trend seems to be here to stay. Therefore, can we say that the ETF will likely to replicate the same performance?
If Investing for the long term in the ETF is almost a sure way to make money in the stock market, why do most people lose money?
(Source : http://finance.yahoo.com/echarts?s=%5EKLSE+Interactive#%7B%22range%22%3A%22max%22%2C%22scale%22%3A%22linear%22%7D)
Warren Buffett once said "Stocks are a wonderful thing to own over the long term, you only need to avoid:"
1)Buying The Wrong Stocks
If I have shown you the graph above, you probably wouldn't be too interested in investing.
After conducting classes for hundreds of students, I noticed that the reason why most people lose money is that they try to get rich quick by beating the market. (Hence, they won't buy the ETF)
In the process of trying to do so, these investors constantly look for the next big thing. What happens is they began to be involved in speculative stocks, futures & options.
(I am not saying that futures & options are bad things, it is a very good hedging tool under the hands of the Pros but I think it will be very dangerous for the amateurs to try them)
Of course, as investors in common stocks, our goal must be to beat the market as a whole. However, good investors know that they should do this by sticking to their principles. Value investors will stick to their mantra to "Price is what you pay, Value is what you get" whereas Trader would stick to their mantra of "The Market Is Always Right, Never Go Against The Trend"/
Whatever it is, those that are profitable does it systematically.
Lesson: Get educated & disciplined before picking your own stocks.
2)Buying at the wrong time
Most people who lose money try to time the market. Unfortunately, most have a wrong concept, the buy on rumors and sell on panic. Of course, once in a while there will be some quick bonanzas but that is just the market fooling you. Most people do not have an entry & exit strategy. That's why they tend to buy when it is expensive and doesn't know when to sell.
Is timing important in stocks? Yes, it is very important. If done correctly.
Referring to the graph above, you would see that if you have bought at 1997 when the index was 300 against 1993 when it was 1275, you will see the great difference between them.
If you have bought at the lowest (unlikely), you would have made a 500% gain versus when you have bought at 1993 with a gain of 50% (In fact, you lose money in real return after accounting for inflation).
So, stop telling yourself timing is not important. But here's what you need to know:
No one can time the market perfectly but there are methods to guide your buy & sell.
If you are a value investor:
Buy only when you have a good safety of margin.
If it is a very attractive business, buy when it is at least 20% undervalued. Say, you calculate that the intrinsic value is RM2.00, then buy when it is RM1.60 or below.
This way, you would have prevented yourself from buying at the time when stocks are expensive and only allowed yourself to buy when stocks are cheap.
If you are a trader:
Only buy when the signal says so. However, I think what is more important is the trading strategy & discipline.
You must set a target price & a cut loss threshold. That way, you could avoid huge losses & when the downside is taken care of, the upside will take care of itself.
Lesson: Know Your Style & Follow The Strategy
Investing for the Long Term:
Dear reader, long term means at least 3 years. Do not get frustrated when your stocks doesn't perform in the short term. It is extremely difficult to invest in the short term in the increasingly volatile market. When you buy a stocks, you are getting a business, if done right, your chance of incurring permanent loss is minimal. However, even if you have bought the best business in the world at a bargain price, there is absolutely no guarantee that you will make money in the next month, or quarter, or even year. But if you have the holding power & the right emotional strength, you will profit.
I can tell you, it is easy to learn about the fundamental analysis & the technical stuffs, but the right psychology, it needs to be developed & that is where most people fail.
Note: If you want to profit while being able to sleep at night, you must only invest with the money you do not need. Only invest if there is no short term foreseeable need for a lot of cash.
You can get the best investing education in the world but if you are not ready to see your portfolio stagnant or going down in the short term, then maybe investing for the long term is not for you.
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Today, I will attempt to talk about market price. To discuss this market price concept, let's take this scenario.
There is a condominium for sale at Damansara Foresta for RM700,000 as an investment property.
Damansara Foresta (Homes within Nature)
(This is an ongoing project of L&G Bhd, a company that I invests in. Beautiful isn't?
If you do wish to buy a condominium (luxury), do check this one out, it has won the best landscape architecture in Asia Pacific Award. )
Say, Every year, you are able to generate 6% return from this property without leverage, which amounts to RM42,000. (RM3,500 per month).
Since it is built in a prime location, you reckon that with the increase in demand and inflation, the rental yield in relation to the price you paid should increase . After contemplating, this is a good deal (in addition, you get enjoy the benefit of leverage) and you decide to buy the property. You paid RM700,000 for it and that price you paid is your "initial investment".
Across the next few years, your calculation turned out well, demand is strong, you're able to generate the 6% return that you want.
That's case 1. Now, let's make this story a little more interesting. We will add a moody neighbor into the story.
Let's call this neighbor, Mr.Market.
Every day, Mr.Market will shout at you a price which he will buy or sell your property.
On the first year, when there are not much stimulus, being prudent, he will shout a fair price at you, RM700,000 plus minus RM20,000 to buy your property or sell you his. That price that he shouts at you is the "Market Price". Knowing the gain is so little, you decide that it is not worth the trouble of getting a new property. You just let him be.
One year has passed, you have gained your RM42,000 from rental.
That RM42,000 is the "return on investment".
The next year is a roller coaster ride. You've got news of Economy Slowdown, Tension in Ukraine, Possibilities Fed Interest Rates Hike, Oil Price Slumps and etc. These uncertainties make him feel insecure. He shouts a very low price at you, maybe RM420,000 to buy your property or sell you his. At this moment, you have 3 choices, buy, sell or hold. You calculated that if the rental yield is still RM42,000 a year, you could get a 10% ROI from this deal. If you have more cash, you can buy the property but if you don't, you can just ignore him again.
Assuming that you ignored him, you would have collected a total of RM84,000 from the cumulative rental yield of the two years.
That's a 12% return on your initial capital.
On the third year, economic data seems good, low unemployment rate and fed announces that they will not raise the interest rates until years later. He suddenly feel bullish and doesn't want to miss out on the action. He offers to buy your property at a very high price or offer you his at RM 2,000,000 . Again, You can decide to sell to him, buy from him or you can still keep the property. After calculating and considering, you decide that this is an "offer you can't refuse".
You sold the property to him and made a gain of RM1,300,000 + RM126,000 in rental yield.
That's a total of 204% return on your initial investment in 3 years! Very good!
The above illustrates how an investor usually profits from a trade by understanding what is Market Price. Do you agree with me?
This story can be related to the stock market by changing the terms.
In the above story
Mr.Market = Other Investors as a whole
The Price he shouts = Market Price
The daily shouting of price = Stock Market
Condominium = Stocks
Rental = Dividend
After reading the story above, let me ask you one question, what is market price in reality?
Market price is simply a reflection of human perception.
When human perceives the economy or the business is good or going to be good, demand rises, pushing prices up.
When human perceives the economy or the business is bad or going to be bad, demand drops, pushing prices down.
How fast can human perception change?
As you can see from the 5 days KLSE chart above..
In an instance.
The real aim that I want to achieve with this article is this.
To break the misconception that
"When the price of your investment drops, you lose money. - Amateur"
One of the ways that I think investors can profit is by trying to position yourself to get lucky. Try to find investments that are like bank deposits that comes with a lottery ticket. Low Risk with a chance of Very High Return.
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"A process where after thorough analysis promises safety of principal and a satisfactory return" - Benjamin Graham
Warren Buffett once said that the secrets to investing has already been revealed many years ago. Yet,the majority of the markets seemed to ignored the right teachings, instead,they prefer to chase hot news and to speculate on the market's daily movements. If you would take some time to do some research, you will find that there are already quite a number of people who are living quite well off because they can profit from the share market consistently using those teachings. What's more, these are just ordinary people without any sophisticated finance degree.
Therefore, I wrote this article to highlight the essence of the teaching : Value Investing, in hope that this will inspire and benefit any aspiring investors to pick up the right investing philosophy and to help them to profit from the market consistently.
There's a difference between investors and speculators. Not that being a speculator is wrong legally or morally, but it is just not my thing, if you would like to live the exciting life of a speculator, that's your call, however, I've never seen a speculator who can profit from the market CONSISTENTLY. A speculator guesses where the price will move tomorrow or in the next week because of some hot news and etc. This ,to me, is equal to gambling and it is just not my thing. I believe the stock market is a respectable place, not a casino.
Do you know what's the worst thing that can happen to a gambler in a casino? They win.
In one trade they may make explosive profits of over 1000%, then, feeling confident and invincible,they might borrow more in the next trade in hope or making even more money, unfortunately, many of them end up in huge debt when their trade turned sour.
If you want to be an investor, here's how:
An investor only make a trade after the following aspects are analysed thoroughly:
Management of the Business
Market Price VS Business Value
Only invest in a business you understand, shares are a claim of piece of ownership of a business. Would you invest in a business you don't understand (Say, Six Sigma Consultancy Firm -Whatever it is) in real life? When you purchase a business, of course you would like to know what is the business about, what is the mechanics of the business, what will affect the business,why do this business stand out in its industry and where will the industry be in a few years right? Why do most people not do the same when purchasing shares?
Management of the Business
If you have a cash churning machine (Business), you need someone to run it. That someone is the management. Would you allow an incompetent and dishonest people to run your machine (Business). No, right? This is because chances are,not only will they ruin your machine and but they will also keep some of those cash into their own pocket instead of yours.
A business can look like its thriving but still roll up in the end. Why? Cash flow Problem. A business can be making paper profit and generating good earnings on paper and still have liquidation issues. Why? Some of these businesses might be getting good business because they have a long receivables term. Some of these businesses might be taking on too much debt to fund their projects and when the project turned sour, they struggle to pay back the debt (With Interest). There are so many things you can infer from the financial statement. Once you know how to read the financial statements, an annual report will become like a story book to you.
Market Price Vs Business Valuation
Once you understand what's going on with the business, you can roughly figure out how much the business is worth using some valuation methods. Then, what you need to do is to compare what is the business selling for and what is the value of the business. If you find that the value of the business is far greater than the asking price of the business, you may put the buy order.
It's just that simple. Even though I did not go into the details of each of these aspects, but this is roughly what investing all about. Note: You don't even need to look at the price chart.
"There seems to be a perverse nature that likes to make easy things difficult" - Warren Buffett
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This is not another article on why you 'need' to invest. We have already got so many articles on that subject. What we are looking at today is something deeper and more personal. We are going to discuss on why you 'want' to invest.
If Investing is defined as "an operation which upon thorough analysis, provides safety of principal and a satisfactory return", then we can say that we invest so that we can generate more money. (Obviously). What I notice is that there are so many programs out there that teaches you how to make money, however, what they do not do, is to discuss on why you want to make money. Many might think that knowing why you want to make money is not important or it is so obvious that making money is a good thing and there is no need to discuss about it. However, this is a very dangerous mentality. Let's do an exercise with me, try to ask yourselves the questions below.
Why do you want to make money?
When you have money what can you get?
Why do you want to get that thing?
Do you agree with me that Money is just a piece of paper or some numbers in your bank account that you exchange in return for some goods or services? Generally, we want to make money so that we can afford to buy the things we want, go to the places with the people we love, to have more time, perhaps some may be more noble, that is to help the less fortunate people. No matter what it is that you want to get with the money you make, I believe we can say that what we ultimately want, is to get happiness. Buying the things you want and going to places you like may bring you happiness, having more time may let you do the things you like or to spend more time with people you love,which also brings happiness, even helping other people may bring joy to our lives too. (Notice the keywords, happiness, love and freedom to do the things you like.)
The danger with us is that if we do not clearly define these ultimate gains that we want,is that we might lose them while chasing money. How often do you see people who blindly chase money while ignoring their loved ones or those who get depressed along the way or those tying themselves up with the job they don't like so that they can have more money. I certainly do not want that to happen to me, therefore, I have clearly defined what I want (You should too). That is, happiness, love and freedom. It is not logic to sacrifice these for money because it is a just a tool to buy those things. Do you agree with me that money can't buy everything? You certainly can't buy back the deceased loved ones that you have ignored while making money.
Then the question is, does money buy happiness? The answer is yes, and no. Yes, it does buy happiness, but it is for very short term. Have you ever experienced the excitement, thrill and happiness you get when you have purchased a new car? Of course you are very happy with it's sleek look, fast performance and comfortable seats. But after 6 months, does it feel the same? No, by that time, it will only be just like any other things, dull. You will resort to buying other things to give you the temporary high of happiness. This is not the way to achieve happiness.
What's even more dangerous is the greed that money brings out. You just can't have enough.
I have had first hand experience of this problem. Just 15 months ago, making my first profit has been so magical to me. RM1,500 is so much and I am so grateful and happy to be able to make that kind of profit. However, as I notice, I became more and more discontent,that even when making a profit of RM15,000, I still do not feel happy. Why? It is because I have already grown numb to that kind of earnings and is now aiming for much higher gains. Is this a good thing? You can argue so, as it helps me to aim high and achieve more. But how much is enough? or will I ever get enough? One year ago, I thought that I would be very happy to be where I am today .However, I notice that the higher you go, there is always something that you are not satisfied with, always someone that you want to be better than, you will never stop as long as there is room for growth.(I'm thinking about millions now) So, is money evil? If you do think so, please contact me, I am very willing to adopt them from you.No,I believe money is like fertilizer. It enhances you. If you're greedy within, it will make you more greedy. If you're already happy, it will enhance that happiness.
So,now you would ask, which one am I ? The one that is happy inside or the one that is hungry for more. I would say both, though I want to be better and better, I want to do it healthily, that is without sacrificing happiness,freedom and loved ones. The most important revelation comes from this understanding.
"Happiness is not found at the destination, happiness should be throughout the journey".
How to find happiness throughout the journey? I believe the key lies in gratitude. To be grateful of what you have now. Think about it, if you're reading this, you should be grateful. How many people doesn't even have access to clean water and ample food, not to say to have access to internet and learning sources. Even if these people wants to improve their lives, the lack of resources and the environment makes it extremely difficult for them to do so. I noticed that as soon as I focus on being grateful of what I have, I immediately felt joy in my life. I have a loving parents, close friends that support me, a comfortable house, a business that I enjoy doing and most importantly, health. Think of all the things I could accomplish with the health that I have. You really don't want to sacrifice health for money. One of the things that I am most grateful of is to be blessed with the knowledge of value investing. Because of it's low risk,high return and passive nature, it is a way to generate wealth while giving me the freedom I want without the emotional stress involved (Unlike trading, which requires time in monitoring that also taxes on the state of mind)
Since making money is not a problem anymore (I may be wrong, but I believe that as long as I continue investing in stocks by following the right method + right mentality , I believe I will achieve the financial freedom I want eventually), I can now try focus on doing what I love and spending time with loved ones while I still can. Each day, I will try to find things to be grateful of in my life, and you should too.
(Also,understand that happiness is a choice, you can choose to be happy now for no particular reason (and also get out of depression), but that needs a very good control of your state of mind, for us now, we can be happy by focusing on the positive things, life is already tough, don't make it worse by focusing on the negatives.)