Framework 1: company - financial statement analysis checklist, competitive advantage, valuation, margin of safety, reverse DCF, PE, growth rate etc. - from financial shenanigans, Fisher book,
Framework 2: industry - competitiveness, predictability, stock price changes- indicators.
Framework 3: Country - macro- inflation/ deflation, interest rates, indicators, financial history
Framework 4: Psychology- buying and selling at what market price?
All should have checklists
How much time should one spend? -- One should spend more time on macro at turning points, say 50%, whilst most of the time it should be 10/20 %.
Company should occupy most time - 70% minimum except critical period-- when price falls through the floor, should have done enough preparation to know which stock will do well.
Industry- which is most attractive in long term? and what factors are discounted in price?
Time spent on books/ blogs/ news -- minimum 1 hour on news, and 1 hour on blog?
Tuesday, July 27, 2010
Monday, July 26, 2010
Value Investing with technical indicators
Is it possible to marry technical analysis and value investing? Almost most hard core value investors detest the idea that momentum investing has any merits, and that timing the bottom and the top is neither wise nor practical.
As Mr Graham wrote in the Intelligent investor on page 191, "that timing is of no real value to the investor unless it coincides with pricing- that is, unless it enables him to repurchase his shares at substantially under his previous selling price" on page 191. I agree with that but catching a falling knife, or when there's so much momentum of a stock falling and with no end in sight, wouldn't it be a bit wise to wait a bit and then buy when it at least stops falling in price?
Not that you are afraid of a continuous fall in price - you are happier because you will be buying it at a cheaper price just like anything you normally buy in life, like you would prefer cheaper hamburgers as Mr Buffett wonderfully put it - but unlike Mr Buffett who bought shares of Coca Cola in the late 80s like everyday because he had so much money and didn't want to change the supply and demand of a particular stock too dramatically and pay a higher price if he had bought it in one go, surely for the small and nimble investors it is wise to wait for one of those optimum time, like using some technical analysis to at least know what trends we are in.
The pre requisite for bottom fishing on stocks would surely be the level of certainty that one has for the calculation of intrinsic value, and if the range of the intrinsic value is huge, e.g from $3 to $13, and if current market price is at $1.8 from its low of $0.7, then is it always wise to buy at $6 previously when the price was falling hard from $24 just 12 months ago?
From the value investor's point of view, usually a stock that had lost 50% from its peak should be a good stock if it's still earning profit, but it appears that the market in Hong kong becomes fairly inefficient every 4 to 5 years as mutual funds seem to be forced to sell stocks after the collapse of Lehman brothers.
To Mr Buffett, Mr Klarman, Mr Tilson and many asset managers it's obviously nonsense to time the market, wait until the bottom is reached because most stocks soar so much after that and they are huge players in the market. But for small investors, surely it is still wise to buy stocks that for example still have more than say 80% of margin of safety after the stocks have gone up say 30 or 40%. Clearly this example is a bit extreme as only companies that have high leverage and the possibility of going bankrupt would be this cheap.
If readers are familiar with the HK market, they might be aware of a company called Nine Dragons paper hld (2689.hk), and the above description of a stock falling 80% and fell more than 80% in price again before reaching the bottom. When a stock fell more than 95% from its peak in 12 months (- it lost 70% of its earnings growth but still producing earnings!!), only to bounce back and become a "20 bagger" in the next 12 months is just sensational.
I am therefore advocating in addition to substantial margin of safety (e.g 50% minimum for most stocks), we should use technical analysis to assist in our bottom fishing for parts of the positions of stocks.
Clearly to my knowledge most useful technical indicators are lagging, and so we won't be able to bottom fish very well if we solely use it them. The rule of the cheaper the stock, the more you should buy still applies. For example, if you want to use $100,000 to buy one stock, you could use 10% of that to buy it when the stock is falling but gives you a 50% margin of safety.
In 3 months time, it falls another 25%, so giving you even greater margin of safety! Clearly you want to put more than 10% of your $100,000 or say put 20% this time. Then in 6 months time it falls another 40% again! Wow -- it's a bargain now! shouldn't you put all your money in?
No! because we might be overconfident and the stock might fall further. So there 's a trade off between not having enough money to invest because we invest too early versus invested too late and missed the opportunitiy of bottom fishing (say the stock had more than doubled already even though it's still cheap)
I wonder if any successful mutual fund managers like Mr Anthony Bolton are using these techniques or if it's common practice in value investing funds, because I have never read anything like this in any books related to value investing, though there were mentions of using technical anlaysis such as in his book
I think depending on the margin of safety, the certainty of the stock achieving a substantial level of out-performance over say next 3 years, one should choose the percentage of money used for technical analysis to determine the positions of stock. e.g having 30% - 60% of money determined by technical analysis: e.g a 70% margin of safety from working out the intrisic value of the stock should give less weight to the positioning using technical analysis, though this is countered by the level of certainty and the predictability of growth in sales, earnings in next few years.
All I am saying is that even Buffett isn't perfect, and so our fundamental understanding of the industry, the business, and the calculation of the intrisic value might be wrong. Clearly we should buy stocks that are within our circle of competence but the most dangerous thing is to assume we are competent in something in theory when we are not in practice.
So to hedge ourselves from buying too early and running out of cash to buy stocks when they are super cheap, we should have some money reserve for buying stocks when there are buy signals that are determined by MACD or bolliger band. I will give more examples in the future entries about the practicality of using technical analysis from long term investors' perspective, on signals that happen only once every few years.
All the rules of margin of safety, rules applied to value investors should still hold true, and of course this method probably would only work in extreme markets where there is still tremendous amount of margin of safety say more then 60-70% despite the huge rise in price from the bottom. Having clear trend also helps as technical indicators would work.
It obviously would only be suited to patient investors who might have to wait for years for stocks to get that cheap before buying. Mr Graham said technical analysis doesn't have margin of safety and that "people in Wall street focus on price first, then value". So as long as there's still substantial margin of safety in stocks, technical analysis should aid value investors and give the signal for the less patient value investors to buy instead of waiting for a catalyst to occur.
Simple bolliger bands, MACD, would give us an indication and provide investors a higher level of awareness of what to expect in extreme situations such as the ones we faced in the financial meltdown in 2008. Again most of the time these indicators are useless, but in extreme markets they do provide a different perspective.
As Mr Graham wrote in the Intelligent investor on page 191, "that timing is of no real value to the investor unless it coincides with pricing- that is, unless it enables him to repurchase his shares at substantially under his previous selling price" on page 191. I agree with that but catching a falling knife, or when there's so much momentum of a stock falling and with no end in sight, wouldn't it be a bit wise to wait a bit and then buy when it at least stops falling in price?
Not that you are afraid of a continuous fall in price - you are happier because you will be buying it at a cheaper price just like anything you normally buy in life, like you would prefer cheaper hamburgers as Mr Buffett wonderfully put it - but unlike Mr Buffett who bought shares of Coca Cola in the late 80s like everyday because he had so much money and didn't want to change the supply and demand of a particular stock too dramatically and pay a higher price if he had bought it in one go, surely for the small and nimble investors it is wise to wait for one of those optimum time, like using some technical analysis to at least know what trends we are in.
The pre requisite for bottom fishing on stocks would surely be the level of certainty that one has for the calculation of intrinsic value, and if the range of the intrinsic value is huge, e.g from $3 to $13, and if current market price is at $1.8 from its low of $0.7, then is it always wise to buy at $6 previously when the price was falling hard from $24 just 12 months ago?
From the value investor's point of view, usually a stock that had lost 50% from its peak should be a good stock if it's still earning profit, but it appears that the market in Hong kong becomes fairly inefficient every 4 to 5 years as mutual funds seem to be forced to sell stocks after the collapse of Lehman brothers.
To Mr Buffett, Mr Klarman, Mr Tilson and many asset managers it's obviously nonsense to time the market, wait until the bottom is reached because most stocks soar so much after that and they are huge players in the market. But for small investors, surely it is still wise to buy stocks that for example still have more than say 80% of margin of safety after the stocks have gone up say 30 or 40%. Clearly this example is a bit extreme as only companies that have high leverage and the possibility of going bankrupt would be this cheap.
If readers are familiar with the HK market, they might be aware of a company called Nine Dragons paper hld (2689.hk), and the above description of a stock falling 80% and fell more than 80% in price again before reaching the bottom. When a stock fell more than 95% from its peak in 12 months (- it lost 70% of its earnings growth but still producing earnings!!), only to bounce back and become a "20 bagger" in the next 12 months is just sensational.
I am therefore advocating in addition to substantial margin of safety (e.g 50% minimum for most stocks), we should use technical analysis to assist in our bottom fishing for parts of the positions of stocks.
Clearly to my knowledge most useful technical indicators are lagging, and so we won't be able to bottom fish very well if we solely use it them. The rule of the cheaper the stock, the more you should buy still applies. For example, if you want to use $100,000 to buy one stock, you could use 10% of that to buy it when the stock is falling but gives you a 50% margin of safety.
In 3 months time, it falls another 25%, so giving you even greater margin of safety! Clearly you want to put more than 10% of your $100,000 or say put 20% this time. Then in 6 months time it falls another 40% again! Wow -- it's a bargain now! shouldn't you put all your money in?
No! because we might be overconfident and the stock might fall further. So there 's a trade off between not having enough money to invest because we invest too early versus invested too late and missed the opportunitiy of bottom fishing (say the stock had more than doubled already even though it's still cheap)
I wonder if any successful mutual fund managers like Mr Anthony Bolton are using these techniques or if it's common practice in value investing funds, because I have never read anything like this in any books related to value investing, though there were mentions of using technical anlaysis such as in his book
I think depending on the margin of safety, the certainty of the stock achieving a substantial level of out-performance over say next 3 years, one should choose the percentage of money used for technical analysis to determine the positions of stock. e.g having 30% - 60% of money determined by technical analysis: e.g a 70% margin of safety from working out the intrisic value of the stock should give less weight to the positioning using technical analysis, though this is countered by the level of certainty and the predictability of growth in sales, earnings in next few years.
All I am saying is that even Buffett isn't perfect, and so our fundamental understanding of the industry, the business, and the calculation of the intrisic value might be wrong. Clearly we should buy stocks that are within our circle of competence but the most dangerous thing is to assume we are competent in something in theory when we are not in practice.
So to hedge ourselves from buying too early and running out of cash to buy stocks when they are super cheap, we should have some money reserve for buying stocks when there are buy signals that are determined by MACD or bolliger band. I will give more examples in the future entries about the practicality of using technical analysis from long term investors' perspective, on signals that happen only once every few years.
All the rules of margin of safety, rules applied to value investors should still hold true, and of course this method probably would only work in extreme markets where there is still tremendous amount of margin of safety say more then 60-70% despite the huge rise in price from the bottom. Having clear trend also helps as technical indicators would work.
It obviously would only be suited to patient investors who might have to wait for years for stocks to get that cheap before buying. Mr Graham said technical analysis doesn't have margin of safety and that "people in Wall street focus on price first, then value". So as long as there's still substantial margin of safety in stocks, technical analysis should aid value investors and give the signal for the less patient value investors to buy instead of waiting for a catalyst to occur.
Simple bolliger bands, MACD, would give us an indication and provide investors a higher level of awareness of what to expect in extreme situations such as the ones we faced in the financial meltdown in 2008. Again most of the time these indicators are useless, but in extreme markets they do provide a different perspective.
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