Tuesday, April 3, 2012

6 Months Later

It has been slightly more than 6 months since I have started investing and I am still holding on to one of the two stocks that I first bought on 22th of September 2011. One is a success (VICOM) while the other was a lesson learnt from blindly following Peter Lynch (Eratat Lifestyle). 9 out of my first 10 trades resulted in realised loss and this prompt me to become serious about investing. I did started reading The Intelligent Investor before that but to be able to internalize it and maintain one's emotional stability is another issue.

I am pretty satisfied with the progress that I have made thus far, of course not before the various trip and fall that I have suffered. From getting very excited about the intra day up-tick and down-tick , I am now able to control myself to look at the stock prices only at the end of the trading session. The more one does not look at it, the easier it is not to get affected by Mr Market. Hopefully, I will be able to reach the stage where I will only be looking at the price once every month instead.

Accounting wise, I am now able to decipher and interpret financial report of most companies, other than those unusual terms that may come out once in a while. I have also gained an understanding of what FCF and ROE are really all about as well as the difference between economic profit and accounting profit. This understanding has allowed me to build my screen and modify it along the way. There's no easier way to learn about these other than to practise analysing the various annual report. I will be focusing more on valuation techniques next though I do understand that they are meant to serve as a guide as they can never be a precise valuation. However, without having an estimation of the intrinsic value, how can I be following a margin of safety?

For business fundamentals, the more I learn, the less I know. Whereas profit is all about revenue minus cost, business is often another issue. While cost management is important, focusing overtly on it is akin to being a short-term looking manager and not being an owner. For e.g., in The Hour Glass, staffs are being "very, very well-compensated" so as to keep staff turnover very low. This is because it often takes years to make sure that they are knowledgeable about watches and adequately trained. Reading "What I learned before I sold to Warren Buffett" by Barnett C. Helzberg, you will know that he is the classic owner-manager and how he goes about building the Helzberg Diamonds to what it is today.  In such relationship-type of business, customer satisfaction and quality of products are more important than cost. As buying a stock is the same as buying a business, understanding how business operates will be a key priority. I will also be exposing myself more to stocks outside my area of competence like finance, property, offshore and marine and manufacturing. By the end of the year, I hope to be able to do a write-up on who's the strongest bank in Singapore through analysing their financial statement.

2 events of great significance happened during this 6 months journey. The first was joining Value Buddies forum in December. Value Buddies is a great place where you have lots of veterans there sharing their experience and knowledge. Serious questioning and debates help to challenge and train the mind, in applying the same rigorous thought process in stock selection. Positive peer pressure also helps to keep one in check in exercising control over Mr Market as well as Greed and Fear.

The second was the decision to start this blog at the end of December 2011 when one of the blog that I have been following was discontinued. I am surprised that total visits have exceeded 10,000 in less than 3 months and I will like to thank all the readers for the support. This blog has allowed me to rationalise and structure my thought process as well as honing my equity research analysis skill.

Going forward, I will like to focus more on doing shorter company write-up than doing equity research report as the latter involves a lot more time wasted on compiling and writing than the actual analysis. Given that my basic has been more firm, I will also be starting to venture out of my circle of competence and these shorter company write-up will be useful. As for equity research report, I will likely be doing one again in either June or July.

Company analysis aside, Young Investor Series will also be part of my focus as I feel that financial knowledge and investment know-how are seriously lacking in our mainstream education. Of course, I must make sure that I am capable and knowledgeable before I can teach others, thus this will be done at a slower pace. And one last focus will be for me to pen down my thoughts and philosophy on investing , be it regarding business model, financial statement analysis or value investing principles.

With all these in mind, I shall continue on the next 6 months of journey where I will reach the 1 year mark. I do hope that VICOM will stop spiking up so that I can reach the milestone of holding a stock for more than a year.


  1. Hi,

    Within 6 months, you have come a long way! Keep it up! Your analyses are thorough and your thought process is good. How come you managed to learn so much within such a short time?

    1. well, when you can align learning with making profit as well as passion, pace of learning can be very fast. The first 2 months, I was inside the army which gave me a lot of time to read up. Currently, I am doing part time, which means no homework or job to do when I reach home. I have until august to enjoy my free time :)

      There's really no better way to learn than to put your skin in the game. At the start, I realised that I need to master financial accounting. So i pick up the book and practise it by analysing those of the listed co. Then, you will encounter many funny ways that are not found in the textbook.

  2. Hi Young Investor,

    I applaud you for your growth - both on the investing front and on your site. I too adhere to Lynch and Buffet teachings but I never seem to grasp it correctly. It would be beneficial for me and like minded readers to read about your analysis.

    I believe it is Young Investor’s passion that has brought about the remarkable growth over this short time.

    1. thank you for your support :) indeed its passion that drive the learning. Many will have thought that stock picking will be purely for the sake of growing your asset. There is no doubt to that, but it is really the challenge and the fun that Buffett, Charlie Munger, Philip Fisher continue doing so until their brains stop functioning.

      Personally, I have to admit that I am more towards Buffett and Lynch because I know that I will never be able to predict what the PE will be in the future. Expectation is not something that I can control. However, if the company has a good business model, earnings is likely to improve, book value will continue to grow and with that stock price will grow to reflect the business fundamental.

      I am still far far away from being there. Business is definitely not something that can be grasped on the paper. There's so many functions (HR, marketing, sales) as well as the individuals working together. Competition is everywhere and new technology can threaten to make your product obsolete. But no matter what it is, stock-picking is at its best when it's most business-like.

  3. Always follow your passion, belief and core values..
    Keep the good job!! you are awesome..

    1. thank you. I have to say that I am pretty lucky to have been directed to the right path. Imagine that I have started in a bull market, I will definitely become a speculator with the "Midas touch" instead of becoming an investor.

  4. Hi,

    So based on your current knowledge and understanding of investment analysis, do you think you can outperform the STI going forward?

    Any good book to recommend for Financial Statement Analysis? Intermediate to advanced level.

    1. Outperforming the index seemed to have always been the top priority of portfolio manager and retail investor alike as if you can't beat the index why not just buy the index.
      However, it should not be the top priority. Firstly, when it comes to beating the index, is one's goal to beat it daily, monthly, quarterly, yearly or every 5 years? From my little 6 months experience, I can say it's impossible to be beating the market consistently even when you are talking about yearly. Market expectation is not something that can be controlled nor can you expect a company to achieve its maximum potential growth in a year.

      Making it your top priority is very very dangerous as there is really no difference with you and the CEO who's trying to beat the analyst's quarterly earning estimate. Imagine you are in the tech bubble in the US in late 90s, to beat the market, obviously you have to buy the tech stock else you are going to lose to the market by a big margin. However, if you peg your performance to the average 5-years gain, you are probably not going to buy the tech stock.

      Currently, I think the best performance to peg to will be to compare your gain from the lowest point of a bear (AFC, GFC 2008) to the lowest point of another bear. This will be going through 1 whole business cycle and I think that will be the best KPI.

      Will I be able to beat the index then? At this stage, I will not dare to say yes. I have not experienced the full-blown bull and bear market yet, and I do understand the possibility of me falling into the Greed and Fear trap. It's certainly hard to resist Mr Market's temptation, let alone when everyone around you is busy earning from the stockmarket or when everyone thinks you are crazy to be buying in. I am seriously lacking in experience.

      Most importantly, I am still lacking of the scale and cashflow that's necessary to beat the index. What do i mean here? Scale refers to the size of my portfolio. I believe that a portfolio need to be worth at least 80k not just for the mere sake of reducing your transaction cost. If you reach that amount, you can easily manage a stock-bond portfolio while ensuring that your stock portfolio is of sufficient size.

      This is very important as to take advantage of a bear market you need to have backup resources that is able to be allocated to the stock portfolio. Else, much of your savings will be trapped in the stock and it will be hard for you to pump in more cash.

      This is where cashflow comes in and is something that's crucial to Warren Buffett's success. During a bear, Buffett's holding like GEICO, See Candy, Nebraska Furniture and many other fully owned companies can continue to provide Buffett with the war chest to buy up the most undervalued company out there. For retail investor, the only thing that we can depend on is our savings and monthly wage. As for me, it's going to be another 5 years before I start working, thus I will then have to try to time the market as that's the only mean of which I am going to get enough cash for the big swing.

      For financial statement analysis, I will recommend a beginner book called A Step-By-Step Guide to Understanding and Creating Financial Reports. It let you go through more than 50 exercises like the company is buying a jam production machine for 500k where it will be paying 50k as deposit. You will then work out the changes in the income statement, balance sheet and cashflow statement.

      For an intermediate to advance guide The Essentials of Finance and Accounting For Nonfinancial Managers is all that's enough. it goes into sufficient depth for one to analyse most financial statements.

      After that, that will be really to keep practising it again and again. You will slowly learn as you come across new terms and new ratios. Understand your investment philosophy as that's going to define what you are going to look for in a financial statement - Growth, Dividend or Value

    2. Thanks! Will have a look at these books.