Identifying trends and value: FA and TA.

When someone looks at a company's financial statements and says he thinks a company is worth $X, he is arriving at a value that the books tell him. This kind of FA is useful if we are doing comparison within the industry or just looking at how well the company is doing stand alone. It helps to determine if the company is a worthwhile investment in itself and if there are better companies to invest in within the same industry.

Now, if we wanna find the next big thing, FA alone is not enough. We need knowledge which is very insider in nature. Now, this does not mean necessarily being on the inside of a company but we have to be inside an industry or know the industry very well. There are also some very broad trends in the economy which are identifiable if we are in tune with the economic currents. All these are beyond standard FA.

For example, a friend of mine is thinking of selling their family business and they have had a couple of offers so far. Offer number one came from a business professional but the person looked at the books and gave a value which was considered too low. Offer number two came from a person in the same industry and was willing to offer twice the value!!! Offerer number two saw value which could not be seen in the books.

Basic FA can be quite easy once we get the hang of it, just like basic TA. But to go beyond the basics, that is a different ball-game. I would be very contented if FA constantly finds me good value and TA constantly helps me find good entry and exit prices.

A trade or an investment?

If a counter we'd bought into moved up within the first three days, should we do a contra and sell off or should we hold on? The answer would depend on many things. One is whether we'd bought into the counter as a trade or as an investment.

If it was meant to be a trade, we should sell and, actually, what we would receive is free money! We did not pay a single cent and we would just receive an angpao for buying the right stock at the right time.

If it was meant to be an investment, then, it usually means we should be prepared for a longer holding period. It usually means that we saw value in a stock (i.e. it was a bargain). Usually, we would form a fair value for the stock in our minds and would not liquidate (not 100% anyway) unless the fair value was hit.

So, if we sort out our motivations each time we buy into a counter, our strategy would become clearer.