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Where did I go wrong? A letter from a reader.

Monday, June 3, 2013

Hi AK,

This is JB here. I hope I am not too much to ask for your guidance and pointers. In terms of TA and FA , I am far from you and hope you can 'unknot' some of the questions I have in my mind for the last few years.
 
A little background of my stock investment journey.
 
 
I started off as an ignorant stock investor or so call punters in 2006 with some motivation from a friend that Mr market  is like Fortune God who gave out money every other days. In hindsight , it was the crazy euphoric market then. Subsequently, I attended a course that taught us about trend is your friend and when stock break resistance is a good sign. Buy high, sell higher. And when market drop, must cut loss. Again, I only cut after the stock has plunged like 50%. :(
 
 
Of course, this whole episode ended sadly with losses that pain me till today.
But I am not a gambler, I know I have to learn so i went back to books to learn. After reading numerous books, and looking at charts, I realised there were so much to learn about Mr Market than just the 2 day course. The course is just a tip of the ice berg. (felt so cheated)






Nevertheless, I learnt about FA and TA. First to use FA to choose the company to invest , then use TA to enter. That started part 2 of my stock investment journey in 2009. Looking back, I guess most stocks you buy then can make money if hold till today.
 
 
But sometime in nov2010, instead of diversifying into a few blue stocks, I thought if I can do some due diligence in FA, I can channel all funds and buy a good stock that is cheaper and hold. After some research then, I found this company China Taisan.
 
 
FA China Taisan in Nov 2010:
1) Continuous growth for the last 3years. with QoQ 10-25%. EPS also grow. P/E4 or less ,  dividend 2%
2) Textile industry start to rebound with asian games in guangzhou in the pipeline
3) Just had TDR listings , alot of cash
4) Managment buy in and company share buy back.
5) broker AM fraser indicated TP25cents
6) Singapore adviser to management- DR Felix Ong (who was the boss of Enporis )
 
 
I bought alot at 0.195 and continue to average down to 0.17 till the scandal for China Gaoxian happened. It affected the general sentiments.

Attended AGM meeting in April2011. They assured us company will be profitable for the year amid unforseen circumstances.

 
But the share got shot down further until i got to admit defeat that perhaps I have spotted the wrong one. Hence, I sold off at 0.10. I have loss money and my confidence too.
 
 
Even until today, given the same circumstances, I always ask myself what would  I do differently? Or are there some areas I need to improve myself.

 
From the checklists that I have mentioned above, Ak, are you able to help me identify where I go wrong?
 
 
Your insights are greatly appreciated.
Thank you.
Await your reply.
Warm regards,
JB

The next blog post will be my reply to JB: read it here.

11 comments:

sillyinvestor said...

I have my fair share of roller coaster ride with the stock market, and a love hit relationship with s-chips. I made good money from Hu An, gaoxian, and chinafibretech, and lose more than I earn on hu an chinafibreT and anchun and foreland. I face the same questions, and many many more and the books i read, provide as many questions and some than more questions than answers.That is until i read the "intelligent investor", I am not booasting when i say its the one book that answered all. Enjoy reading... BUy the book although you can borrow it for free, it will take months, and perhaps years if you revisit the concepts with the application of stocks

Garfield75 said...

Haha...sounds like me... Will be better off buying blue chips if cutting loss is difficult;)

AK71 said...

Hi sillyinvestor,

I too have my successes and failures with S-chips. :)

The book you mentioned is a classic and perhaps watching a video will inspire readers to pick it up: Why is Warren Buffett the world's greatest money maker?

AK71 said...

Hi Garfield,

We are only human. ;)

Best is to try and be more rigorous in our research and avoid making mistakes. Of course, even blue chips can become blue black. Yikes!

la papillion said...

Hi to whoever is writing the letter to AK...I think if you want to invest in small companies like these, you shouldn't put in a lot in these stocks. Instead of following Warren, you should follow Graham and diversify the risks by betting a small amount across many stocks. Don't make the mistake that once you've read a few books on FA, then you're well trained and can start following their advice on concentrating your portfolio. It sounded harsh, but it happened to me as well. For most people, diversifying is the most practical advice (if you want to invest in small caps, unless you've good temperament). If you want to concentrate, 'practice' on blue chips first. A few blue chips might be equivalent or better compared to a basketful of smaller caps. Maybe out of 10 stocks, 7 will be neutral, 2 will be very bad and 1 will be very good. You just have to make sure that the good outweighs the bad and the neutral.

Good luck!

AK71 said...

Hi shi gong LP,

Words of wisdom! Thank you so much for taking the time to share your experience and methods with us here. Much appreciated. :)

Kenji Tay said...

Hi JB,

I am sorry to have hear your losses.

While I am not exactly any expert in the field, I do hope my point here can help, at least minimize some of the misconceptions and mistakes many make.

Actually, if you are looking into FA, I think one of the key you have to take note is the business model of the company and how are they generating their profits from instead of just solely relying on the numbers.

Numbers are just one part of the story. It can sometimes be manipulated. In fact, you might even want to consider what is classified as "assets" in their books.

Particularly S-chip companies, all the more you should be careful. Unlike AK, I didn't touch them because I don't know much about their business and am unable to verify if their numbers make sense.

Of course we invest our money to beat inflation and grow our wealth. But in our midst of doing so, it is always better to be 'safe', aka knowing what you are putting your money in than letting greed take over.

Opportunities come and go. You can't capture every one of them =)

just my 2 cents...

Best,
Kenji

AK71 said...

Hi Kenji,

Indeed, we cannot make all the money in the world. If there should exist even a shred of doubt in a potential investment, best to avoid. You are right.

For sure, looking at numbers or quantitative analysis is only one half of the research we have to do. The qualitative aspect is equally important. :)

Matthew said...

Hi JB,

I'm no guru but here are some of my honest opinions.

Your methods seems to be more for investing in growth companies and trading where the hype is to "buy high sell higher".

You have to first determine whether you are more a trader or investor. If you think you would want to be a trader, then determine if your mental/emotional state and your availability of time is more skewed for day, swing, or positional trading. If you would want to be an investor, then there's dividend, value and grwoth investing to think about.

*I'll assume that you are an investor since you used the word invest and not trade in your letter.*

Many people decide the amount to invest in XXX without first determining the maximum amount they are willing to lose.
You should first decide how much you would be willing to lose. Then decide on the stop loss... a stop loss of 50% is too much. If the price falls 50% then either the economy is gloomy or your analysis is wrong, and I wouldn't want to lose 50% before accepting my mistake in analysis.

Couple the stop loss and your maximum loss allowed to determine the quantity to buy in the following equation:

Quantity = maximum loss / price change (Stop loss)

For example you have determined that a loss of $500 is the maximum you can accept, the Stop loss for XXX (currently trading at $10.00) is $1.

Then the amount of XXX to buy would be: $500 / $1 = 500 units.

In this way, when your stop loss is actually hit, you only lose $500 which was what you have first accepted.

On top of TA and FA, you also have to understand the business and whether the company has a wide economic moat (a.k.a. competitive advanage). Companies with wide moats have “something” that keeps competitors at bay and allows the business to earn supernormal profits. However, not all companies with wide moat actually lasts. When analysing companies before purchasing, we have to look if technology can make the company we are about to invest in obsolete. (See how Kodak and Borders are wiped off due to technological advances)

After purchasing the company, we still have to monitor it by looking at the net profit margins and returns on equity (ROE) every year. We have to ensure they are consistent and preferably rising and not dipping year after year. If the margins and ROE are coming down significantly, we know that the competitive advantage is being eroded and we have to look further to determine why this is so.

ozxinvest said...

Hi JB,

I think most of us here have been hit hard and bad before if we stayed long enough in the market during past crises.

I left myself barely a few hundred bucks in my bank after the 911 and sars crisis for excessive punting, and in debts. Practically, I was broke.

I had to find myself a new lower paid job and lived frugally and prudently to repay my debts as soon as possible and saved up as much as possible.

During the GFC, I started buying bank stocks with all my savings (which I thought was a no brainer, no need FA or TA), when all my friends were shunning away from stock market. I recovered all my losses.

So crisis can actually make or break a person.

We can't catch the bottom but sometimes we created them ourselves.

I think not overstretching one's finance is an important key.

Understanding yourself, your strengths and weaknesses, is another.

I wish you all the best!

AK71 said...

Hi Matthew and ozxinvest,

Thanks for the high quality comments which I am sure will benefit all of us who are reading and not just JB. :)

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