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How much to invest? Nibbles, gobbles, values and prices.

Tuesday, January 13, 2015

I have blogged about my nibbles and gobbles in the stock market before and although it might be quite intuitive to us, what exactly is a nibble in terms of numbers? I received an email from a reader asking if I could blog about this in greater detail. So, this is my attempt to give some notable form to the concept of nibbling in the stock market.

When I have identified a business I would like to invest in, I should also decide how much money I want to invest in it. Now, how do I do this? Hint: Remember the pyramid? Cannot remember? Go to related post number 1 at the end of this blog post.


So, based on my own unique pyramid, I would be able to estimate (yes, it is always an estimate for me) how much I want to invest in the business. If it was an investment for income and growth and if I had allocated, say, $200,000 for that kind of investments in my portfolio and if there should be $50,000 left in unused funds earmarked for the same, then, that should be the upper limit of my investment in the business.

Of course, we can have variations. So, if I had decided that no single investment in this layer of the pyramid (i.e. my portfolio) should exceed $25,000 in size, then, that $50,000 left in unused funds for this layer would have had to find at least two businesses to invest in, not one.

Now, let us say that I had decided that $50,000 was a good amount to invest in a business I had researched that had a PE ratio of 12x under more normalised circumstances and generated a dividend yield of 3% based on a pay out ratio of about 35%, I might start nibbling at a PE ratio of 12x. Pay a fair price for a wonderful business? I can accept that.


To me, a nibble should be a single digit percentage of the total amount earmarked for the investment. So, in this case, it would be under $5,000.

In a reply to a reader's comment in a recent blog post on SCI and SMM, I said I was done nibbling and that I would wait to see if prices should go lower, paying attention to key support levels. Now, when do we stop nibbling? My take? When we have already invested a third or so of the funds earmarked for the purpose.

Then, what about the rest of the money? The rest of the money is reserved for gobbling. What is a gobble? A gobble is bigger than a nibble. 50% bigger? 100% bigger? Well, I am not prescriptive.


One instance in which I would gobble is when I feel that the stock has become too undervalued. So, for example, if a stock which usually traded at a PE ratio of 11x to 13x should be offered by Mr. Market at a price that translated to a PE ratio of under 10x, to me, that would be undervalued. 

Then, the closer the PE ratio declines to crisis valuation, the more undervalued the stock becomes, all else remaining equal.

Now, this is just me talking to myself. Definitely, there is nothing sacred about the numbers. They are just examples. The philosophy that is the foundation of this blog post is, however, quite timeless. I hope this blog post has thrown some light on the matter of nibbles and gobbles.

Specific numbers and percentages? You know your circumstances best. That is your job.

Related posts:
1. Investing for income and position sizing.
2. AK went shopping in the (stock) market. (Nibble.)
3. Saizen REIT: Why did I buy? Buy more? (Gobble.)

29 comments:

Singapore Man of Leisure said...

AK,

Talking to yourself on the art of money management I see ;)

Position sizing, building a core position, and other fun stuffs on risk management...

Is it me or did you notice these concepts and techniques are more readily found in trading books than in investing books?

Strange huh?

I would have assumed this is basic investing 101 for "investors"...

Must count our lucky stars for being omnivores?

AK71 said...

Hi SMOL,

Really? My memory is getting worse by the day liao. Very cham. -.-"

Some people say I keep rehashing old ideas these days but how many new ideas are there when it comes to sticking to my philosophy? In fact, people should be worried if my philosophy keeps changing. LOL.

OK, I better go count my lucky stars now. Haven't done that in a while. ;p

victorlsl1 said...

Hi Ak, can u blog abt your approach to the "everyday" medical conditions. for example, what do u do if you had caught a flu bug? do u have existing medical conditions that require daily medicine. what do u do abt this?

AK71 said...

Hi Victor,

I am a firm believer of prevention when it comes to illnesses.

I try to keep away from people who are sick.

I take my daily supplements: a good multi-vitamin and 500 mg of Vitamin C are standard for me.

I haven't had a flu attack in a very long time. The last one was maybe 3 or 4 years ago?

I am asthmatic. So, I do need a puff of salbutamol once in a blue moon.

Why the sudden interest in this topic?

Machi said...

Hi AK,

It never seems to amazed me at your dedication to blogging, and almost daily with good nuggets of information. Even your humble 'what you ate today' offers some education to people about keeping life simple and thrift and spend your money wisely on things which are of value.

Also I'd like to really applaud you for sharing your knowledge freely, it is truly very inspirational to people who are beginning their investment journey and also to veterans.

Thank you again for your wisdom AK, keep it up!

Chua Poh Huat said...

AK,

This is a very good method of investment provided the company or business you invest in are a i) good company/product, ii) good management, iii) Low PE and 35% discount NAV. Just my philosophy...

AK71 said...

Hi Machi,

Thank you for the encouragement. :)

I am happy to share but all of us have different circumstances and beliefs. So, it is important to bear these in mind too. There is no one size fits all solutions. I am not dogmatic. ;p

AK71 said...

Hi PH,

Always good to have a set of guidelines we can fall back on. Keeps us from straying. :)

A 35% discount to NAV? I think this might not apply to companies like SCI, SMM and STE, for examples. ;)

Chua Poh Huat said...

Ak,

So how do you evaluate and value SCI, SMM and STE...Please enlighten all readers with rgd to NAV. if possible lah......

PH

victorlsl1 said...

Ak, trying to get some useful tips that readers can also benefit from

yeh said...

Ak
SMM and SCI drop again. Are you nibbling?

AK71 said...

Hi PH,

To me, NAV is an important consideration for businesses that depend heavily on their assets to generate revenue. So, questioning the NAVs of real estate investment trusts' is prudent, for example.

For businesses that generate revenue by providing services or through some kind of value adding process such as manufacturing, NAV could be a less important consideration.

So, for example, ST Engineering's NAV per share is only about 65c, IIRC. When I bought my first lot of ST Engineering's stock many years ago at $1.55 a share, I remember the NAV per share was a bit more than 30c.

For a steady performer like ST Engineering, therefore, using PE ratio as a guide is actually not too bad a method, I feel, and I blogged about it not too long ago:
AK went shopping in the stock market.

Hope this is helpful to you. :)

AK71 said...

Hi yeh,

I am thinking of taking my first gobble, to be quite honest. ;)

Now, I want to see if the lows would be tested or not. If they should be tested, I want to see how the momentum oscillators behave. In short, I am looking for a positive divergence.

If you don't understand what I am talking about, it's OK. Just some TA talk. ;p

Chua Poh Huat said...

AK,

Thank you for sharing with us your NAV theory.

PH

AK71 said...

Hi PH,

You are welcome. Always happy to share my little ideas. :)

yeh said...

Why you not consider keppel corp.
Ak

AK71 said...

Hi yeh,

All investments are good at the right price. KepCorp looks attractive. :)

However, I prefer SembCorp because of its utilities business. I am not too sure about KepCorp's real estate business in an environment of rising interest rates.

yeh said...

AK,

you buying more semb marine and marco polo?

AK71 said...

Hi yeh,

If their share prices go much lower, I would be buying much more. ;)

yeh said...

ak

mind sharing what price you are buying?
:)

AK71 said...

Hi yeh,

Eh, I shared before. They are somewhere in the blog. If you really want to know, you can use the search function in the blog. ;p

I very scared to share my target prices now because of... aiyah... you know lah. I don't want people to just follow me blindly and later say they followed AK and lost money again (if it happens). -.-"

cindy tan said...

AK,

How about Yongnam? Is 18c coming? Safe to add more?

AK71 said...

Hi Cindy,

I would carefully avoid answering this question. Hahaha... Safe? ;)

I know that Yongnam is trading at a huge discount to NAV. I know that the consortium that Yongnam led got the US$1.4b contract to build an airport in Myanmar. This is likely to lead to better results over time but maybe not in this year.

So, in the meantime, could we see Yongnam's share price go lower? 17c? Technically, it is possible. It might or might not happen, of course. :)

boonchin.ng said...

Hi AK,

For Yongnam, would ROA a better valuation metric than P/B and P/NAV? Since we would like to see the effectiveness of the company utilising the asset to generate revenue and profit? Thank you! ;)

AK71 said...

Hi boonchin,

Yongnam's assets were not fully utilised for many moons but they maintained their level of operational readiness (sounds so SAF), incurring costs in the process, as they seemed to be sure that they would have the jobs to make full use of the assets again.

With recent project wins, it seems that they were right in their expectations. So, we could see these assets being more fully utilised once more.

If we were to look at recent ROA which I believe to be dismal, we could be missing the full picture as their future could look quite different. I believe that things would turn positive.

That is one of the problems we have to grapple with when investing in a company whose business depends on projects. Performance could be quite bumpy and earnings lumpy.

With order book replenished, I like to stay invested and see if the management is able to deliver better results in the next 2 years. Yes, I am prepared to wait.

qook said...

Nibbled more on the oil & gas and metal & mining sectors. Just wondering if we might be seeing a repeat of 2009? Commodities crashed first, followed by everything else about 6 months later?

AK71 said...

Hi qook,

I would like to buy more of SCI and SMM if they should test their lows. I was buying silver on weakness too.

Now, with Switzerland's shock decision to remove the cap on its currency spread still affecting the markets, we are reminded of how unpredictable things could get.

I recently said on my FB wall that when we lease expect a crash, that is when it might happen. -.-"

Always have an emergency fund. Always have a war chest ready.

SOLIDCORE said...

Hi AK,

Looking at how MAS has decided to weaken the SGD, two thoughts come immediately to mind.

1. It's another red flag to investors that 2015 is going to be a rocky ride. (Along with all the other red flags coming from the EU, commodity rote, slowing development in China, etc). This is a cause for all investors to really take stock of their current portfolio and think of future actions in all possible scenarios.

2. Would that make DPU from Saizen go up? :) (Yes, I'm jumping the gun and didn't do enough homework on Saizen's hedging policy. I can always dream and hope right?) But in the long term, the sensing I get is there is going to be more downward pressure than up.

Any thoughts on the potential weakening of SGD?

AK71 said...

Hi Solidcore,

I feel that the government is being on the ball here to ward off deflation. Their latest action is to make sure we have healthy inflationary pressure overall.

This is going to be good for people who are invested in Saizen REIT, Croesus Retail Trust and Accordia Golf Trust which receive income in the Japanese Yen.

Saizen REIT hedge their currency risks every 6 months. So, even as the Yen rises against the S$, the benefit to us in Singapore won't be immediately apparent.

Accordia Golf Trust, on the other hand, does not hedge currency risk. In a situation where the Yen strengthens against the S$, we in Singapore will benefit. :)

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