Showing posts with label Trading Strategy. Show all posts
Showing posts with label Trading Strategy. Show all posts

Friday, December 21, 2018

The Acquirers Multiple and Quantitative Value

After looking at momentum, I wanted to look at quant value screens/algorithms. Two interesting ones were "The Acquirer's Multiple", and "Quantitative Value".

The Acquirers Multiple

This single measurement is based on Enterprise Value (EV), which gives the cost you would pay to acquire the company. It takes into account a company's capital structure (eg: debt and cash), unlike market-cap based valuations such as PE. And it's more objective than book value.

Divide EV by earnings, usually EBIT1. The resulting number measures how cheap the company is - the lower the better. You need to take a portfolio approach and buy 20-30 of them: these stocks go to zero occasionally2 .

You end up with a bunch of shitty companies. Companies that are targets of lawsuits. Oil companies in the middle of a multi-year bear market. Retailers being killed by Amazon. Companies that no one wants to hold.

The theory behind this is mean reversion: After an industry has been is losing money for years, competition dries up, and eventually the remaining companies are profitable. They may not be very profitable, or have any growth prospects, but after their stocks have been priced for bankruptcy, any improvement in their situation means their stock prices will recover.

When trading using The Acquirer's Multiple, I should expect:
  • Long periods of underperformance. This is true of value investing in general.
  • Declines in bear markets:
(Source : Deep Value and the Acquirer's Multiple (28:20): QuantConn NYC 2016. This is not "The Acquirer's Multiple", but rather the lowest decile of value stocks - similar to TAM) 

The declines are less than momentum strategies, but still bigger than the S&P 500. I'd use the S&P 500's 200 MA to time the my entry.
  • Long term returns of 15-17%. See results from 1964-2016 here.

Quantitative Value

This book gives is a more refined version of The Acquirer's Multiple. It uses EV/EBIT as its main screen, but does some other things:
  1. First it screens out probable Frauds, Manipulations, and companies in financial distress, using statistical techniques.
  2. Then finds the 10% of cheapest stocks by EBIT/EV.
  3. Then tries to find stocks with strong Franchises (high ROA, ROC, FCF/assets, all over 8 years), and Financial Strength (profitability, stability, and operational improvements). The top half are chosen.

Backtesting

I was not able to do a reliable backtest on Quantopian because some fundamental data was missing. If I was trying again, I would try Portfolio123 or QuantRocket. Too bad. I would like to see the shape of the equity curve, the drawdowns, and how they would improve when we use a 200 MA to time entry. But I'm not willing to put any more time into this.

How would I trade this?

I could just buy the Quantitative Value ETF (QVAL), which selects stocks based on the book. Its holdings are equally divided among 50 stocks. Limited to the top 40% largest stocks (minimum market-cap is around 2bn). The expense ratio is 0.79%, meaning if I buy USD 100K and hold for a year, I'm paying $790.

I could also subscribe to the Acquirers Multiple screener for $500 a year, and buy stocks from their All Investable screen. I'd probably trade every week, and ease-in and out of the strategy based on the index's MA - similar to what I do for my momentum strategy.  After filling my portfolio, rebalancing would be quarterly.

Comparing the two: I'll probably go for the screener:

  • It also filters out Frauds, Manipulations and Financial Distress (same as QVAL).
  • It uses operating earnings instead of EBIT, which is slightly better.
  • And it accesses smaller cap stocks (around 150m, depending on market conditions).
  • It also eliminates stocks with high short interest (which QVAL doesn't do).
  • The only thing it doesn't do is check for Franchise and Financial Strength.  This screen is based on purely cheapness and believes we can't distinguish quality.




Footnotes:

1 Tobias Carlisle preferred Operating Earnings (Revenue - COGS + SGA + D&A), as it excludes special items. See FAQ: "What are operating earnings?"
2 In an interview - which I can't find - Tobias Carlisle said that an average of 2% of stocks go to zero every year - market wide. For Acquirers Multiple stocks, the average is 6% a year. But that's the average - the bankruptcies tend to cluster in certain years.

Saturday, November 17, 2018

Stock Market Momentum - Part 2

Rules & Implementation

My system is based on Andreas Clenow's "Stocks on the Move", a readable and entertaining book that adapts trend following strategies to stocks.  Its a long-only rotational trading system, where stocks are ranked by momentum and the highest ranking ones are bought.  It only buys or holds stocks that are above their 100 day MA.  And only takes new positions when the market index is above its 200 day MA.

I made some small changes:

  • I don't size and re-balance positions by volatility.  It makes no sense when a position is $2-4K.  Its hard to code.  And I don't see the benefits since a stock's volatility can change in a heartbeat, and the whole market usually changes with it.  I just buy 25 stocks 1.
  • I use the lower 100-day Bollinger band (1 std-dev) instead of the 100 MA to filter if a stock is in an uptrend.  This takes volatility into account, unlike a moving average.  I want to hold winners as long as possible.
  • His algorithm buys all positions when the market index is above its 200 MA.  I gradually 'ease in' to the market.

The 'easing in' part works like this. We usually hold 25 stocks.  The first day the index closes below its 200 MA, we will set the 'target number of stocks to hold' (N) to be 24.  We don't explicitly sell stocks to meet that target - the system just goes into 'bear mode' and stops buying (Stocks may be sold based on the other criteria).  For each day the index is below the 200 MA, N decreases by 1.  So N will be zero if the index is below the MA for 25 or more consecutive days.  The first day the index goes above the MA, N is incremented by 1.  And if we are holding less than N stocks, we buy up to N.  Therefore, the index needs to be above the ma for some time in order for us to be holding the full allocation of 25 stocks.

This subtracts from my returns a little, but I need it to be comfortable trading the system. Otherwise I won't be able to follow it.

I am running on Amibroker, and selecting stocks from the Russel 3000 with Norgate Data taking care of tracking index constituents.  I exclude stocks trading under $5, or with a median 90-day turnover less than $250K.   For slippage, buying and selling is at the day's average price.  Brokerage is $1 per trade from Interactive Brokers.  Starting amount USD 73K.  I run the system over the weekend and trade on Mondays.

Backtest Results

I get a 14.2% CAGR from 1999 to Aug 2018, and 17.4% from 1991 to Mar 2003.  Decent numbers.

Looking at monthly returns:



Returns are unpredictable.   We often get a few years of boring single digit positive or negative returns, followed by a year of stunningly good 30-60% returns.

The volatility is sickening.  There is a 61% drawdown in the 2000 tech wreck, and a 33% one in 2006.  20-30% drawdowns occur every few years.

Trading It

Can I stick with this?  Trend following strategies are notoriously frustrating.  You have to just follow the system mechanically, week in, week out, and not think about how much you're making.  Or losing.  From Nick Radge (What makes a Successful Trader? 37:00):

  • We have created a system with positive expectancy.  Like a casino.
  • Remove yourself from the trading environment. Place your trades, turn off the computer.  In the long term, positive expectancy will look after you.  All you have to do is be there for it.
  • Think 'Next 1000 trades'.

When will I start?  The Russel 3000 index is currently below its 200 MA, so I'll let the market decide.

1 The tests I saw measuring different momentum with holding different numbers of stocks started with 50 as the smallest number.  I am using 25 due to low capital.  May increase it to 50 later if account size grows.

Friday, November 9, 2018

Stock Market Momentum - Part 1

I'm looking at a systematic, momentum-based stock market strategy.  Why?
  • The existence of momentum in markets is proven by numerous academic studies.
  • The system I have gives a nice CAGR 14-20%, over 10-15 year periods.
  • I will be buying stocks that have gone up.  Completely different from the value stocks I normally buy.
  • I want to be able to trade the markets systematically, without having an opinion. 

What is Momentum?

From academic studies, stocks that have gone up in the past 6-12 months are statistically likely to go up in the next 1-2 years 1.  Most papers use similar methods to measure momentum, for example:

  • Value and Momentum Everywhere: Found evidence of momentum worldwide in stock markets, stock indexes, currencies, bonds, and commodities.  For stocks specifically: they selected large, liquid stocks from 4 markets over nearly 40 years.  Stocks' momentum was ranked by their past 12 month return, skipping the latest month.  They were sorted into 3 equal sized groups: Lowest momentum, Medium momentum and Highest momentum.  And re-balanced monthly.  The Highest momentum group outperformed the Lowest by 5.4% (US market), 6% (UK), 8.1% (Europe) and 1.7% (Japan).   
  • 212 Years of Price Momentum: Looked at US market from 1801 to 2012.  Same methodology as above.  The Highest Momentum group outperformed the Lowest one by around 4% a year.

Why does Momentum occur?

No one knows.  There are many papers arguing whether its due to 'risk factors' 2, or behavior.  I think its behavior.  Humans are herd animals.  Once we see other people doing something, we want to do it too:
  • Fads and Fashion.  Whether its primary school children playing, or women comparing handbags, how often have we seen some trend catch on, then grow in popularity, until everyone 'has one'?  At which point they become not cool anymore, and the cycle starts again.  Look at the stock charts of Crocs or Michael Kors for example. 
  • Capex Cycle: For mining and heavy industry, it takes years to bring new capacity online, so they respond slowly to increased demand, while the price of their commodity/product shoots up over several years.  At the end of the cycle, prices are sky high and everybody is prospecting/investing.  Leading to oversupply and a crash.  Look at Rio Tinto's stock chart for example: up 7 times from 1999 to 2008, then losing all of that in 2009.
  • Success begets success: As business become bigger and stronger, they entrench their position, leading them to become bigger and stronger.  Especially prevalent in technology, with winner-take-all network effects, like with Microsoft or Facebook.  Until someone new comes along, disrupting the market, and the cycle starts again.

Why is it still Profitable?

How can such a simple, dumb, and well known strategy - buying stocks that have gone up - still make money?  Shouldn't everyone be doing it, removing its effects from the market?

Momentum strategies are hard to follow.  They have long and hard drawdowns: a 30% loss every few years is normal.  50-60% losses occasionally occur (the 1929 great depression and the 2000 tech wreck).  And there are long periods...a year or more... of sitting around doing nothing.

There's an interesting presentation by Wes Grey on why Momentum still works.  He considers that, for most fund managers, there is too much career risk in following momentum strategies.  I especially like his 'God Portfolio' (33:00 to 37:00) - not even God can prevent drawdowns!

In the next post I'll look at the system I'm using, and what its like to trade it.


1 Not true for shorter or longer time frames: if we're predicting under one year into the future, or from two to five years, then stock prices tend to mean-revert.
2 i.e.: stocks that posses momentum have higher returns to compensate for being riskier.

Tuesday, April 24, 2018

Bought McKesson (MCK)

Bought 150 shares last night at USD 150.57 for a total of USD 22,590.44.

I'm wary of buying stocks this late business cycle.  But the drug distributors' revenues did not fall in the last recession.  Their profitability depends on the supply side, not demand. Their profits - and stock price - have fallen in the past few years due to generic drug price deflation.

The main long term risk is the consolidation of their customer base, which causes price competition.  But I think its already priced into the stock price.  I don't see a catalyst now for the stock or its earnings to go up, but by the time I do, so will everyone else.  I'm willing to hold this for a few years, through the next recession.  When a company is part of an oligopoly, has recurring revenue from an essential good, and is selling at 11X FCF, how can you not buy it?


I'm now 50% invested:


Looking to sell the banks in the next 6-12 months as we come to the end of the business cycle.

Friday, June 16, 2017

Sold Pacific Basin Shipping

Sold Pacific Basin Shipping (HK:2343) at HKD 1.60 on 8th June, for loss of SGD 1703.

I've changed my mind.  Not confident on this one, as new ships can be built in 18-24 months, limiting any sustained rise in prices.  We can't just look at a 10-year chart and say the BDI is gonna go back to 2008 levels. I think the time to buy shipping stocks is when even the best players have been losing money for 1 or 2 quarters - when things are so bad they can only get better.  At that point, you may get 50% upside.  It would be a small trade - trying to catch a falling knife - and I would be dribbling in slowly... maybe 1% after one bad quarter and another 1% after a second.

If I want to play at all.  Shipping is a tough sector.  There's no way to value a shipping company - earnings and vessel values are cyclical.




Sunday, February 1, 2015

Oil ETFs

I believe oil is priced below its sustainable price.  Beyond buying a few barrels to store in my flat, how can I invest in it?  All the individual companies I've looked at are not at low enough valuations for me catch a falling knife.  What about ETFs?

Oil commodity tracker ETFs, such as USO, are synthetic, since its hard to physically store  oil.  They suffer from large tracking error when the market is in contago, as they have to regularly roll over their (cheaper) expiring near term futures into longer term (expensive) ones:

(Source - bidnessetc.com - Seeking Exposure to Oil and Gas prices?  Here is what you should not do.)

ETF tracking Oil companies are better.  But most common ones, XLE or VDE, are heavily weighted towards large caps (with 22% ExxonMobil 22%, and 12% Chevron).  Looking at Jim Chanos' recent short position in XOM, I'm hesitant to bet against him.

XOP, tracking the "SPDR S&P 500 Oil and Gas exploration & production index" may be a better choice to track the WTI.   It is split by equal weightings into 80 companies, each less than 2%.  Holdings are 100% US based, around 77% are E&P.  They are all small E&P companies such as Laredo Petroleum or Parsely.  The top ten holdings make up 15%.  The risk here is that a large number of these companies go belly up -  based on 1-2m bbl/d oversupply on the global markets, US shale production needs to drop by 10-20%.

IEO, the "iShares U.S. Oil & Gas Exploration & Production ETF" is another option, which holds mostly mid-sized companies such as EOG or Andarko, with 73% E&P, also 100% US based.  The top ten holdings make up 60%.  IEO behaves as a lower beta version of XOP - they both track WTI, but IEO rises and falls less.

I'm thinking of taking a third of my planned position by buying IEO at the WTI support of $44 - too bad I missed Friday night (morning in US). Later buy another third if WTI drops below $40 - hopefully by then, valuations are down enough for me to buy individual stocks.  And then I may swap my initial IEO position into a higher risk XOP one.

Sunday, June 30, 2013

Still Waiting....

After a 9 month rally: finally a pullback! Due to the Fed's comments on 'tapering'.  And something about China.

My gut feeling is that this will probably be a 10-20% correction.  Don't think we reached the euphoria seen at the end of a bull market.  Maybe we get a *real* bear 1 or 2 years later.

We are also in the twelfth year of a secular bear market, which usually last 12-18 years.  I must consider the possibility, however wrong it feels, that the secular bear is over, and its 1982 again.

And there is the possibility that the market 'corrects sideways' for a long period, without giving me a big crash.

I am changing my investment strategy a little to account for the unknowns.  Using the S&P 500 as a yardstick, but in steps all the way down:
  a) Wait for a 15% decline (for now: S&P 1434), if it occurs, move up to 20% invested.  15% declines happen once every few years.
  b) If a further 15% decline occurs, move up to 60 % invested.  These 30% declines are rare.
  c) If a further 10% decline, go to 100%.

Nothing magical about these numbers, just a way to get *slowly* get into the market.  After a 3 year bull market, be very slow and careful.  I'll still probably be mostly in cash for the next few years.


What to buy?  Looking at the US and European stocks (multinationals), everything is expensive - PEs in the high teens (and these are not trough earnings).  The Singapore market is similarly expensive, but there are a *few* decent companies trading in the low teens.

Wait to see if the correction continues.  The S&P is retesting its trend line and moving averages.

Saturday, February 25, 2012

ECRI sticks with Recession call

Feb 24th 2012 (CNBC video)

In Short:
Recent jobs growth is a lagging indicator. Coincident indicators show slowing growth. Most leading indicators still support a recession, except markets, which are up due to central banks' printing.

In Detail:
Since the recession call 5 months ago, all the coincident data shows slowing growth:
  • YoY GDP growth: peaked 3Q10, falls to 1.5% in 2Q11 and flatlined since then
  • Personal income growth: same
  • Broad sales growth: same
  • Industrial production growth: down to a 22 month low as of Jan

Taking these together: the coincident index is at a 21 month low. And leading indicators (apart from the stock market) still support this.

Velocity of money is at a record low in US, Europe, China. The money is going to the market, hence the new highs.

Jobs are a lagging indicator: follows consumer spending growth. Expect jobs growth to flag in the next few months. Personal disposable income has been negative for 5 months.

Recession should be here by mid-year 2012, but the consensus would probably take 6 more months to recognize it.

Early 08: recession begins in Dec 07, but got a double digit springtime rally, Oil went to $147 inside a recession...because of the money being printed.

---

Hope they're right - I want to buy cheap shares. Mabye they are, and the market is being pumped up by piles of newly printed money. OTOH: Are they just finding excuses and moving the goalpost (first to June, then to saying it wont be recognized till 6 months after this)?

No matter what, I just wait. Buying in a recession is the easiest and lowest risk way to make big money. I am not good enough to trade the ins and outs of the market.

Market action definitely does not agree with ECRI yet. For the last 3 months, it has been very strong in its daily action: going up on high volume, ignoring bad news (Greece), and with pullbacks that are on low volume, or U shaped. We simply don't see any weakness. If ECRI is flat-out wrong, I gotta wait a year or two more before I get my wish.


Monday, December 26, 2011

Stocks I don't like

As a value investor, looking to buy solid, undervalued stocks when the markets go into a tailspin, these are the things I avoid.

Technology

Building a sustainable competitive advantage is meaningless in the tech sector, where industries quickly change to become unrecognizable. So I would not buy technology stocks based on low valuations or high market share (e.g.: Microsoft and Cisco today, Nokia several years ago). If I was to buy tech, it would be as part of a growth strategy: in a bull market, with a stock at all times high, with growing sales and their new products that are changing the world....just remember to leave once the party is over: today's hot product is tomorrow's junk....

I also like the idea of avoiding any product/service whose input and output is information (See 'Software eats part of the world'). e.g.: credit cards, newspapers, TV, bookstores.

Change is bad for value investing.


Banking and Finance

Banks are a black box. They make money by lending it out and hoping people can pay back. There is no way to judge the quality of earnings from their cashflow statements. In addition, banking crises occur regularly enough that we can consider them a part of human nature.

So for a long term investor, don't buy when times are good, as the next crisis will hit and drive down the share price of your bank. And don't buy when times are bad, as they can go to zero. Bill Miller beat the S&P for 15 straight years, then in 2009 he "bought ‘cheap’ financials after the credit crunch, but later they got even cheaper". Like Bear Stearns and AIG. He resigned a few years later.

Investment banks are worse, some seem deliberately designed to store risky assets until they blow up.

How do you know which banks are good and which are bad? If Bill Miller and GIC cannot get it right, what makes you think you can?

REITS

I've two main objections to REITS:
  • First, Singapore Reits must payout 90% of their income as dividends. So they are in perpetual debt. Meaning that you are taking for granted low interest rates and access to finance....forever. Ironically, I think they would be better long term investments if they could use their income to payoff their debt.
  • Second, how many REITS bought property at low, low prices during the 08/09 market crash? I cant think of any. A-REIT even made a rights issue at the bottom of the downturn. Some people may even get the impression that REITS are not run to benefit their shareholders.

Sunday, December 18, 2011

Stocks I'm interested in

Still waiting for a recession, and drawing up a list of stocks that I want to buy. And others that I still have to look in to (*).

Dominators: Buffet-like companies, with large market share and only a handful of competitors, these companies have a sustainable competitive advantage in their industries. These stocks will never go to zero, and could rise 50-100% from bear market trough to bull. Might be possible to hold these stocks forever:
  • Coca Cola: Buffet's largest holding. Strong distribution network gives it a moat.
  • UPS: Only a 2 or 3 competitors worldwide, and one in the US. Buffet also holds some.
  • Diageo: Largest spirits producer in the world , and a cashcow; sales nearly double its closest competitor.

Local Blue chips: Big players in Singapore or the region: Also will probably never go to zero, though they do not have a sustainable competitive advantage. Usually rise 50-150% from bear market trough to bull:

  • Diary Farm: Large player in Asia supermarkets & convenience stores. Low debt, generates cash.
  • SIA Engineering (*). Or maybe STE (*).
  • Raffles Medical Group (*), or possible its overseas competitors (eg: The hospital in Thailand...).
  • A property development company (freehold property only): Wheelock, SC Global (*), or CDL (*). Wheelock has historically been the most astute in its timing, but has been doing nothing for the past few years. Check the others, esp. their debt, and how their properties are values on their balance sheet.
  • Eu Yang Sang: Low debt, and a long history of being profitable and generating free cashflow.
  • Goodpack (*): Large share of natural rubber shipments, and gaining share in artificial rubber. Has it started generating free cashflow yet?

Small fry. Risky, but I try to target those with few competitors and good balance sheets, to avoid the ones that go to zero. These are also very illiquid. May rise 2-4 times from bear to bull.

  • Petra: Love their branded consumer distribution, as a producer and distributor of Chocolates in Indonesia. Not so keen on their cocoa processing.
  • Silverlake Axis (*): Handles a large proportion of banking transactions in SEA. Clients have long term (3-5 year) maintenance contracts, giving a stream of future profits.
  • HDD industry: There is a small company which makes a large percentage (worldwide) of the HD actuator arms - forget its name (*). Alternatively, Seagate may be worth looking at. Always a large risk of obsolescence when buying tech: this is a bet that HDDs will still be around to hold information in the cloud.
  • 2nd Chance Properties (*): Plans to change to the property business, by buying commercial property in a downturn. Interesting idea, though I have not looked at the company yet.

Punting:

  • China Mingzong. Currently selling at 5X earnings, (as far as I can make out) in a non-cyclical industry. They don't have pricing power, but their industry should grow. Largest competitor may be a fraud, no guarantees about this one either. May buy a little with money I can afford to lose in the hope it goes up 5-10X in the long term.
  • AirAsia: Don't know where to classify this one, they are in a new industry...in fact they are the industry - no one seems to be able to replicate them profitably after years of trying. But they have fuckloads of debt and unimaginable future capital commitments.
Lets see if 2012 brings a chance to buy....

Sunday, October 31, 2010

6 years is a long time....

I've stopped trading, I am not wired for TA. Position trading sounds good in theory, but in practice I cannot predict the market direction clearly enough. Whipsawed by non-trending markets. The time and risk to get a mere 10-20% return is not worth it.

My best bet is to wait for the next bear marker or recession, when I can easily get a 50-100% gain within a few years with less risk. I am comfortable going against the crowd. Wait for:
  • Newspaper says recession and job loss.
  • Stocks fallen 50% from previous highs
  • Revenues have fallen for 2 or 3 quarters, PEs become compressed.
Historically, bear markets may take up to 6 years in to occur Singapore (1998, 2001, 2003, 2008). 4 more years to go....

Next time, remember to:
  • Buy and hold. Bull markets last a lot longer that expected, and its painful not to participate. Don't know when/if I'd sell.
  • Beware the market taking off too fast (e.g.: Mar 09, or after the AFC).... Need a simple criteria to catch this and speed up my buying.
In the meantime, my goals are:
  • Save enough for a meaningful stake.
  • Research and track enough SGX companies (aim for 10) that I would be comfortable buying when things are going to hell..

Saturday, August 28, 2010

Neither here nor there...

The US market's uptrend came under pressure 11th Aug, correction on 24th Aug. To me, this 'uptrend' was not significant enough to position trade. IBDs ratings do not work in a trendless market. I do not yet have this crucial skill to judge the state of the market (up, down, trendless) without hindsight.

However, following IBD does work well in a bull market. The previous examples I saw were from bull of 2003-2004. Waiting for a FTD, when the (brief) corrections are over, buying stocks that did not fall would have been profitable then. I'll keep my subscription to IBD while I see if I can learn to judge the markets better.

I have done nothing since June. Zero gain, zero loss. Right now, I do not know if the current market is still in a trading range, or correcting.

I am not cut out for swing trading, especially with a full time job. Position trading is difficult as I can't judge the market. I am changing my strategy to wait for stocks to be cheap, similar to end-08 or the 2001-2002 bear market. I may have to wait another 5 years....


Resist the urge to do something....

[Update: 13th Sep 10]
There was a FTD on 1st Sept. I am still doing nothing.

Saturday, May 22, 2010

Sold everything

Sold everything abt 3 weeks ago:
  • 10 lots NOL @ 2.04
  • 5 lots parkway @ 3.31
  • 2 lots citydev @ 10.32
  • 18 lots midas @ 0.99
  • 10 lots wing tai @ 1.75 (bought @ 1.85).
Altogether a 6.5K loss, including brokerage.

At one point I was up 5.5K. Must change the way I trade:

- Don't feel compelled to buy just because of the bull, only buy carefully on retracement. Mkt takes money a lot easier than it gives it. It is not reasonable to go from 0 to 100% invested, or even 0 to 50% in a few weeks. Edge my way into a rising market.

- Learn to recognize when the market is overbought. The length and strength of the rally:

- Learn to recognize when individual S'pore stocks are overbought. This is harder: possibly I should just say that when a stock has shot up and is now far from support, I can consider selling. NOL for example?


Remember, speculating is just a way to skim a little off the market...to keep out of trouble.... until the next bear market opportunity.

Sunday, April 25, 2010

The rally that won't die

US:
  • Market still in uptrend. Despite Greece, Goldman Sachs... etc, it is still going up.
  • IBD reports favorable breadth (IBD 100 still rising).
  • 8th consecutive week of gains.
Back in Singapore:
  • GS sparked off a round of selling in the local market. Now we have had 5 days of almost continuous broad-based selling. My broker suggested that this is a safer time to buy, as all the contras are wiped out.
  • Also gives an opportunity to select stocks based that have retraced slightly (not below a previous low) on low vol... as a way to sort the wheat from the chaff.

Friday, October 31, 2008

Value Hunting: Introduction

Hunting for value in a fallen market. I have 20K cash (from here). I may also use CPF money.

When catching falling knives, I want to be absolutely certain of the value that I am buying. Like buying $1 for 50c. That way, even if they fall below my buying price, I still have the conviction to hold for the long term. I only want companies that have these characteristics:
  • Must have a recurring income stream, selling products that people will still use in a recession. Usually selling cheap, consumable goods for cash (e.g.: hamburgers, train rides, etc). Not for example, selling corporate IT systems or oil rigs.
  • Should have a projected PE of 8 with small projected growth. May have a larger PE of 12 or 13 if they have projected continuous annual growth of around 20%. These are the type of valuations I saw in the 01/02 bear market.
  • I prefer to deal with companies that have most of their operations in developed countries. I will halve the amount I buy for companies that have their main operations in third-world countries like India, China, Indonesia, etc. And I would not use CPF money for them.
  • The usuall stuff abt having some sort of defensive moat or compeditive advantage their operations, as well as a good balance sheet also apply.
If the stocks do not reach my target prices, I won't buy. If the market recovers and runs away from me, I can use a more 'growth orientated' strategy (with appropriate cut-loss). From past experience, whenever I rushed and felt 'compelled to buy something', I always lost money.

Saturday, October 18, 2008

Strategy and allocation: Oct 2008

Where I am now:
I have $67K cash. The only share I own is 11 lots of Pfood (spent 9K, currently worth about 4.4K @40c, ouch).

Where the world is:
  • Banking crisis: This is where where banks can't or won't lend money. Governments are doing everything possible to stop get banks to start lending. There have been many banking crises before - it is not the end of the world. For companies that need capital, monitor the TED spread (here), and the SOR and SIBOR rates.
  • Recession: I expect a recession. It is normal to have recessions after booms, and especially after credit crisises. Dont know how long it will last. Worst case, several years.
  • Bear market: We are probably still in a bear market - too volatile to call any direction. From IBD: All the single largest day gains have previously occured in bear markets. dont know if there will be a quick recovery, like after the Asian crisis, or a multi year bear market like in US the 70s.
My Plan:
Use 32K of my portfolio for value investing. This is 'buying on the way down':
  • Buy good companies when they become so cheap they are irresistible.
  • No need to rush, can buy slowly over the next year, as I find them.
  • Probably allocate small amounts to these companies (especially the second liners - around 5% each) as this style of investment has some risks - you lose everything if you get it wrong.
Use the other 35K (plus any extra if I did not find good companies to buy) for growth investment, speculation. This is 'buying on the way up':
  • Wait for IBD to signal a follow through day, and identify leading stocks which have either: broken out (or at least held their ground), or made bottoming patterns on the SGX.
  • Buy slowly and with cut-loss, as it may be just a tradeable rally, or a false signal.

How low can the market go?

Sometimes, stock values become so low they defy belief. Then you can just throw away your charts and buy for the long term, based on fundamentals. Are we there yet?

A look back....

First, lets wind back the clock 7 years to look at previous bear markets. I first came to Singapore in early 2001 with $5000 in my pocket. I arrived from Australia, which had escaped unscathed from the Asian crisis and had been in a bull market for several years. After buying a shares booklet from 7/11, I was astounded. Many mid cap companies with excellent fundamentals were trading at ridiculous valuations. From memory:
  • Comfort was trading at a PE of 7 or 8, with a yield of 7%. With excellent cashflow, low debt, almost a monopoly with queues of poor uncles lining up to drive taxis, it had been able to increase its profits by 10+% for several years. I sold remember selling 2 weeks before the takeover by Delgro was announced :( ....to fund my stupid HDB rennovations.
  • Robinsons was then a premier department store (as my wife said, it was the only one to segregate its offerings by price level (John little, Robinsons and 'Marks and Spencer') giving a more pleasant shopping experience. More importantly, it was profitable every year, and two thirds of its share price was cash. I didn't buy, no money. It eventually doubled.
  • Unisteel, with a 50% market share, trading at a PE of 12. It was to grow 20+ %for several years. I bought at 78c and tripled my money in 3 years. Before I bought it, it had traded around 30+c.
  • Want-Want, selling branded rice crackers, trading at a PE of 5 or 6, showing 20% growth. It traded at 60c, then moved up to 80c - I thought I missed my chance and didnt buy. It eventually reached $1.90.
I remember thinking that I thought I had come to Russia or Phillippines some other dirt poor, corrupt, disintegrating country! Where else would I find profitable companies with low debt, free cashflows, long operating history and potential 20+ percent growth, selling for single digit PEs?

Are we there now?

I cant find the same degree of undervaluation in the market right now. Key differences are:
  • In 2001/2002, we were in a recession and earnings were coming off a low base, hence the potential growth. After going several years through the recession , things were so bad that they could only get better.
  • The stocks mentioned above usually were blue chip (Robinsons) or had a sustainable competitive advantage (Comfort and Unisteel). Want Want was the exception. Looking at the blue chips today, for example, Comfort-Delgro, SMRT, Ascendas REIT, they do not yet have projected single digit PEs or yields of 7-8%. Trailing PEs are cheap, projected ones are probably not. The companies that have the ridiculously low valuations are the second liner companies which are a little weaker (eg: Cambridge REIT) or have a small market share (eg: TPV) in their industry, are are operating in China where it is hard to even determine their market share and count their competitors (let alone list their competitors).
  • Also, I don't mean to say that once stocks reach that level they will not fall anymore. My past experience does not even cover the Asian Crisis (STI went to 800+) where stocks were even cheaper. what I mean to say is that at these levels, I would use about 50% of my cash, which I did not need for 5 years, to buy and monitor them for the long term, with the expectations that some of them will double or triple in years to come. (The other 50% cash I will use for speculation).
Buffet once said in dealing with the 1970s crash, "I feel like an oversexed guy in a whorehouse". I felt like that in 2001. I don't feel that yet. Close, but not yet.... we are getting there. I will detail my search for undervalued stocks in future posts.

Sunday, August 24, 2008

Back to doing nothing....

Its very important to take losses as quickly as possible. And not let it get to you. In a bear market, my number one aim is to preserve capital. I am waiting for either:
  • the market to turn (which could be any time from now to 12 months later), or else
  • for stocks to become so undervalued that they are a screaming buy (like in the Asian crisis or SARS). With the exception of pfood, I do not see great quality companies trading at bargain prices. There is no blood on the street yet. Maybe if we get a recession....
Back to doing nothing.....


Cat photo from http://www.freephotos.se

"One of the best rules anybody can learn about investing is to do nothing, absolutely nothing,unless there is something to do. Most people always have to be playing; they always have to be doing something. They can't just sit there and wait for something new to develop. I wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime. Even people who lose money in the market say, 'I just lost my money, now I have to do something to make it back.' No, you don't. You should sit there until you find something."

Jim Rogers